Credit unions may be able to invest in social housing providers, under new regulations being considered by the Central Bank.
However, the acting Registrar of credit unions has warned of the need for "realism" about how much money credit unions could provide for social housing, and says the sector will have to greatly improve the way it is run if it is to take on the extra risk burden.
In a statement to the Oireachtas Housing committee, Ed Sibley said standards of regulatory compliance among credit unions are "still well below those required to consistently safeguard members’ funds".
He said the regulator was still seeing "an unacceptable number of credit unions failing to display strategic understanding and good governance".
Painting a picture of widespread management weakness in the sector, Mr Sibley said "in too many cases we have encountered limited financial skill sets, poor systems of control, weak risk, compliance and internal audit functioning, and weakness in lending practices".
The regulator called for significant further improvement in the running of the country's 281 existing credit unions.
This number is well down from the peak, following 116 mergers among credit unions, which have reduced the number of weaker credit unions, and reduced risks across the sector as a whole, according to the Central Bank.
But cost savings from the mergers have not been realised to a significant extent.
As well as management weakness, the credit unions are facing a major business model challenge.
Simply put, not enough people are taking out loans to grow income from lending, while investment income has fallen significantly.
This is despite the amount of money members have placed on deposit at credit unions growing sharply.
Between 2012 and 2016, the amount of member's funds that credit unions hold in investments has risen from €8bn to €11.4bn.
But the amount of money the credit unions have earned from those investments has plummeted - from €299 million in 2012 to €174m last year.
The drop in returns is mainly due to the fall in interest rates on bank deposits and yields on government bonds, and a fall in the amount of loans being taken out by members.
The Central Bank says that if current loan, investment and cost trends continue "a growing number of credit unions could face serious viability issues in the future".
The Credit Union has been seeking to deploy its surplus funds, the members’ money not loaned out, but left in bank deposits or government bonds, in order to support social housing and attract a higher rate of return.
Under the Credit Union Act of 1997, credit unions can only lend to members in what is known as the "common bond" - a link between the members of the Credit Union based on, for example, geography or workplace.
This stops credit unions making loans to social housing providers. However they could put money into social housing through the investment route.
Credit unions are limited by regulation in the type of investments they can make.
The Central Bank says it is supportive of increasing the range of investment options open to credit unions, and says the law allows it to make regulations enabling investment in social housing -provided it is through properly structured lending vehicles.
The Central Bank opened a consultation on the topic in May, and expects to publish recommendations in the fourth quarter on how to proceed.
The consultation looked at allowing credit unions to invest in bonds issued by supranational entities (such as the European Investment Bank), through corporate bonds, or in "Tier 3 Approved Housing Bodies (AHBs)". The latter are large scale providers of social housing, which attract a higher level of oversight form the Housing Agency Regulator, and have a large stock of collateral to protect loans.
The consultation paper, which attracted 70 responses, warns that credit unions will have to be careful about "maturity considerations" - the fact that financing housing will tie up members’ funds for much longer periods than the sector is currently used to, in what are likely to be illiquid assets; ones which are not easily converted back into cash.
This would increase the "maturity mismatch" between the long-term financing of homes, and the short-term needs of members who can take their money out at any time.
Managing this "maturity transformation" is the core business of banks, which are much larger entities than credit unions.
Under current regulations, dating from last year, credit unions can lend out up to 30% of their loan book for up to five years and 10% over ten years - up to a maximum maturity of 25 years, and these limits can be slightly expanded with permission from the Central Bank.
Currently for the overall sector gross loans of over ten years duration amount to about 3% of overall loan books.
Although the amount of money potentially available for investment seems significant, the Central Bank warns that this is an aggregate sum for the sector - each of the 281 credit unions would have to make its own investment decisions on how much of its individual balance sheets it would be prudent to commit to a long-term, illiquid asset class such as social-housing finance.