Credit Union Investment in Social Housing
Department of Finance Paper for the information of:
Joint Oireachtas Committee on Housing, Planning, Community and Local Government
Wednesday 5 July 2017
I would like to thank the Committee for inviting the Department to attend this meeting to discuss credit union investment in social housing. My name is Des Carville, and I am Head of Shareholding and Financial Advisory Division in the Department of Finance. I am accompanied today by Brian Corr, Principal Officer equivalent and Deirdre Aherne, Assistant Principal in Credit Union Policy Section within the Division.
The role of the Department of Finance in relation to Credit Unions
As the Committee is aware the Department’s role is the provision of high quality information, advice and analysis on credit union policy matters to the Minister and to oversee and implement policy and legislation relevant to the credit union sector.
The credit union policy team within my division is well resourced reflecting the importance the Minister and the Department attach to the sector. It is headed up by Brian Corr. Along with Mr Corr and Ms Aherne, the team also has a Higher Executive Officer, Tom Byrne and an Executive Officer, Joan Finnerty. In addition, the credit unit team can freely draw on the resources and expertise within my division and indeed the wider Department.
In order to assist our work we have ongoing communication with credit union representative bodies, the Central Bank and other credit union stakeholders on a wide range of matters both formally and informally and we regularly attend at sectoral events. The matter of credit unions investing in social housing is one area around which we have had good engagement with the credit union representative bodies, the Central Bank and our colleagues in the Department of Housing, Planning, Community and Local Government.
Credit Unions are currently looking to diversify into other areas. This, in part, reflects the changing business environment in which they operate and therefore such diversification should be welcomed. One area, where for a number of years both representative bodies, ILCU and CUDA, have indicated a willingness of their members to invest some of their investment portfolio, is in the area of social housing. This is a new departure for credit unions. Discussions have taken place in a variety of fora to try and progress these interests and, although our role is limited, the Department of Finance has been engaged in some of those discussions.
While the concept of credit unions providing funding for social housing would appear on the surface to be a straight-forward, it is not without challenges.
There are two main potential avenues to provide such funding, one is by lending and the other is by investment.
Firstly, from a lending perspective, credit unions are restricted in that they can only lend to their members. This is set out in section 35 of the Credit Union Act 1997. A member, effectively a customer, must belong to the credit union’s common bond. The common bond is based on a pre-existing social connection, such as belonging to a particular community, industrial or geographic group. This is an integral part of a credit unions ethos.
The Credit Union Advisory Committee (CUAC) is a statutory body established by the Minister under section 180 of the Credit Union Act 1997, primarily to advise the Minister on credit union matters. In July 2016 CUAC published its Review of Implementation of the Recommendations in the Commission on Credit Unions Report. The Department is currently actively working with CUAC on implementation of those recommendations in a number of areas, including that of the common bond where CUAC recommended that a policy paper be prepared by September 2017. I do not wish to prejudge the outcome of this policy paper other than to note that there are currently no proposals to make any change to the common bond and any such change, if proposed and agreed, would require primary legislation.
Secondly, credit unions are restricted by regulations introduced by the Central Bank as to the type of investments they can make, counterparty exposure and maturity limits. A consultation paper, CP109, was published by the Central Bank on 11 May 2017 on the credit union investment framework with a closing date for receipt of submissions of 28 June 2017. We have seen ILCU’s detailed submission to this consultation paper. The consultation paper proposes that credit unions be allowed to invest in Tier 3 Approved Housing Bodies which currently borrow primarily from the HFA, assisted by the EIB, at a low cost. An investment in social housing would bring differing risks to those risks inherent in their loan book and current investment portfolios, and these risks – primarily low fixed yield for a long maturity and with limited liquidity – would need to be appropriately managed to ensure the protection of credit union members’ savings. This is a matter for the credit union sector and the Central Bank as regulator.
The Department recognises that the credit union sector could play an important role in the funding of social housing. The establishment of a vehicle to pool resources and expertise would appear to be a sensible approach, provided of course that the underlying economics work for all stakeholders. We understand that the Department of Housing, Planning, Community and Local Government recently announced funding to support a sector-led financial vehicle, involving investors which could potentially include credit unions. We would encourage the credit union sector to continue to investigate becoming involved in such a vehicle but recognise that the sector is free to pursue alternative avenues.
CUAC Report: Implementation Group
As a Department we are actively focussed on implementing the recommendations in CUAC’s report which cover seven topics, the most relevant of which today is the recommendation for a full review of the Central Bank Section 35 lending regulations. An Implementation Group, chaired by this Department, meets monthly to progress these recommendations. To date the Implementation Group has spent by far the largest proportion of time on issues related to credit union lending regulations.
We recognise that the loan to asset ratio in the credit union sector is currently too low, placing a burden on investment income in a very challenging low yield environment. However in the year to 31 March 2017 credit unions increased their gross lending by c 6% which is a positive development.
We are hopeful that further lending growth can occur and that a review of the lending restrictions in due course would assist prudent loan book growth which could be complemented by income from a diversified investment portfolio, which could include an element of social housing.