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Niall Carson

Why a difference in valuing buildings is causing many credit unions trouble

Value in use. Three very important words.

THIS YEAR HAS seen major upheaval for a small number of credit unions.

Some have been forced to close, merge or been handed to banks. Of course, the majority of the 400 or so credit unions in Ireland are trading normally.

But what is affecting credit unions?

Because the movement is made up of credit unions, the answer to that is hard to quantify. There are governance issues, regulatory concerns, economic realities and genuine money problems.

But there is another reason why a number credit unions may be falling below their statutory reserve figure: their buildings.

All credit unions are required to have at least 10% of their stated assets held in reserve at any time.

Part of this reserve can be made up of the value of buildings. However, the Central Bank has over the last number of years changed the valuation method.

In what they say is a move of standard accounting practice, the Central Bank wants credit unions to value the buildings at current market value, even if they are not looking to move the asset.

This means that when credit unions’ buildings are revalued, they are forced to write down large amounts in one go.

This can mean a massive loss shows up in accounts, even though the institution may be trading profitably.

To get around this, credit unions wanted to use the value in use calculation. This figure allows businesses calculate the value an asset provides for its owner as long as it is in use.

Using this valuation, credit unions can ask their auditors to project forward 20 years of accounts to give a calculation of how much surplus the building will help the institution generate, as well as giving an idea of how much it could raise if it had to be sold immediately.

However, as soon as a value in use calculation shows a loss, the credit union has to take the loss on the building and write it down to market value.

This generally wipes out any surplus a credit union has and depletes capital reserves. Any credit union who falls below 10% in their capital reserves is immediately placed on a Central Bank watchlist. Those who drop below 7.5% are considered in jeopardy.

The only way to plug this gap is to hope for a bettering economic climate and a massive upsurge in demand for lending, which is unlikely in the short term or apply to the Irish League of Credit Unions savings protection scheme to plug the gap.

In the case of Newbridge, it was not possible for the ILCU to plug this gap as Newbridge had left the league. In the Howth-Sutton case, the Central Bank agreed to a €2.1 million payout from their resolution fund.

While the Central Bank says that this is just standard practice, credit unions argue that there is no reason for this immediate write down. They would rather an accelerated depreciation because they have no intention of selling their building. Some in the movement have begun examining the feasibility of selling their buildings to property management companies on long term leaseback deals.

However, even that may not soften the impact on reserves.

Read: Nearly 60% of Credit Unions are subject to lending restrictions

Read: Berehaven Credit Union to be liquidated after ‘poor governance and lending practices’

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20 Comments
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    Mute Swanky Joe
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    Aug 9th 2014, 7:27 AM

    Its a pity that the useless gombeens on big bucks running the show in the Central Bank in the naughties weren’t as vigilant in doing their jobs.

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    Mute Niall H
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    Aug 9th 2014, 7:58 AM

    Watch how the credit unions get attacked by banks inc. in January when they try to bring in ATMs and online banking.

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    Mute Michael Byrne
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    Aug 9th 2014, 8:39 AM

    @Brian H. A significant number of CU’s already are providing online banking and smartphone app (check out cuAnwhere app for android and iPhone). ATM’s are probably not on the way but debit cards(visa/MasterCard) should be. One difficulty is that even though EU legislation allows CU’s provide cards each credit union will have to get permission individually from the central bank.

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    Mute Niall H
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    Aug 9th 2014, 8:55 AM

    Wasn’t aware of that. Thanks James!

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    Mute Frank O Regan
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    Aug 9th 2014, 8:59 AM

    Debit cards are an exempt service for credit unions under SI 838 of 2007.

    Credit unions are still required to notify the central bank of their intention to bring in the service.

    There are a number of credit unions around the country already providing or in the process of providing debit cards to their members.

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    Mute Michael Byrne
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    Aug 9th 2014, 9:02 AM

    :)

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    Mute Nydon
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    Aug 9th 2014, 10:21 AM

    The central bank has behaved like a bad parent of delinquent kids who wrecked the entire neighbourhood and is now kicking the dog for chewing a slipper.
    The due diligence that CUs are now being forced to impose on loans that wouldn’t have paid for a banker’s wine bill in the tiger years is so harsh that it stops CUs from being able to perform their primary function – loan out small amounts to members who require them – if they have a history of saving a bit every week.
    Now a CU member almost needs to prove they don’t need a loan before the central bank is satisfied that it can be given one.

    27
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    Mute John Clarke
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    Aug 9th 2014, 11:28 AM

    The Central Bank do not want traditional Credit Unions. They want to merge local credit unions together to form larger, yes, you have it, banks.

    The Central Bank are pushing lay people and volunteers away in favour of full time, so-called professional employees. The are systematically stripping credit unions of their community and social ethos. They are destroying our local credit union.

    The credit union got many families through hard times in the past. Through trust and a genuine understanding of individuals based on local knowledge and community. They took many people from the grasp of illegal money lenders and supported them through hard times. The central bank is now eroding the discretion of the credit union and it’s local volunteers and the result will only be another win for the big bankers to the detriment of communities and ordinary people.

    Leave out credit unions alone.

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    Mute Bull Mick
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    Aug 9th 2014, 9:40 AM

    Giving out loans to would be property developers didn’t help either.

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    Mute Conor
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    Aug 9th 2014, 8:37 AM

    Actually the biggest problem with the credit unions was that they were trading outside their remits with speculative borrowing…..

    The actual standard accounting practice, obviously apart from credit unions is to value assets at current market value. You can’t just have a theoretical value on an asset because it can never be realised if sold. This would defeat the purpose of counting the valuation as a “reserve”.

    The biggest problem that I would see was that credit unions were essentially lending to themselves to build these grandiose buildings, and were actually allowed to place a theoretical value on them and essentially create reserves out of thin air. Why the hell did Newbridge need a credit union that had a building the size of the headquarters of a multinational?

    No wonder some of them are up sh!t creek without a paddle.

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    Mute Michael Byrne
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    Aug 9th 2014, 8:55 AM

    @Conor – Bit of a stretch assuming cu’s were trading outside of their remit…. 100% of the Irish banks have failed. 0.5% of Irish Credit Unions have failed. Some cu’s have been experiencing difficulty but collectively the Irish CU movement has posted surpluses each year during the financial crisis and the majority have also being paying dividends with the average dividend be just less that 1%. It’s time for people to study the CU business model to learn how it has proven to be robust during the worst financial crisis we have seen

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    Mute Conor
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    Aug 9th 2014, 9:44 AM

    I’m not saying that all credit unions were trading outside their remits.

    For example Newbridge as pictured above built a massive “corporate headquarters for themselves”, engaged in speculative property lending, gave out multiple 6 figure loans. This is trading outside its remit and that is why it failed.

    The CU business model is essentially to give small non speculative loans to normal people. Normal people pay back small loans, this is why it’s robust. Once certain CUs stopped doing this, they failed like the banks.

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    Mute FlopFlipU
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    Aug 9th 2014, 8:08 AM

    Good governance ,I don’t think ,it will push people into the hands of the moneylender,s and have their money taken from them outside the post office when they are collecting the children’s allowance ,Dangerous Brian’s at work here

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    Mute Anne Marie Darby
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    Aug 9th 2014, 8:32 AM

    A number of inaccuracies here. The credit unions don’t ask the auditor to calculate. Value in use has to be down by the credit union themselves. The auditors role is to check it’s validity. It’s not just credit unions that use this method. It’s widely used by I dish companies. Also if a property is revalued it goes up not down so why would it wipe out the surplus?

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    Mute Anne Marie Darby
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    Aug 9th 2014, 8:33 AM

    Sorry typo. Irish companies.

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    Mute Niall Mullins
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    Aug 9th 2014, 8:54 AM

    No matter what is widely used or commonly accepted as standard practice the banks are and will do their utmost best to destroy the credit union movement. They won’t be happy until they are completely wiped out or taken over. Of course they have to do it under the remits of the “law” hence why the central bank is involved but in reality we all know that the law can be changed overnight on the whim of the banks.

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    Mute Michael Byrne
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    Aug 9th 2014, 9:01 AM

    @Ann-Marie – What goes up and also come down! Accounting policies should be implemented consistently across the board, and yes policies used by CU’s are used by all companies.

    A question I’ve yet to see being asked is why the level of bad debts provisions being carried in credit unions exceed the total write offs over the past 5 years. Maybe @Conor can explain this.

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    Mute Anne Marie Darby
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    Aug 9th 2014, 9:06 AM

    I know what goes up comes down. My comment was at the article referring to revaluation causing reserves to be wiped out. It’s not revaluation it’s devaluation or impairment. The bad debt reserve to be fair are often over estimated by the credit unions as they use a specific calculation to estimate and then the regulator always adds on to it before they can sign off accounts.

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    Mute Michael Byrne
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    Aug 9th 2014, 9:21 AM

    @ Ann Marie – Apologies, didn’t mean to come across as being a smart ar**. You are correct; many revaluations have led to a significant impairment of the building asset in some credit unions.

    Per the Central Bank report published re Howth-Sutton as mentioned in the article this is what appears to have happened to them. Purchased building near the top of the market, subsequent collapse of economy meant the value-in-use policy didn’t hold up and the impairment had to be booked wiping out reserves.

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