Cash flow (Newbridge edition)
By Economics Correspondent Sean Whelan
Hourly reporting. That’s what the Central Bank imposed on Newbridge Credit Union back at the end of July. The regulator wanted to know how much cash was leaving the credit union every hour.
Why? – because the members had started pulling their savings out, and hourly reporting would give the Central Bank a head start on knowing if a run was underway.
Every business hour, the Special Manager sent a note of Newbridge Credit Unions liquidity position to the Central Bank.
This was circulated within the Central Bank and, at the end of every working day, an email report on the Credit Unions closing position was sent to the Governor Patrick Honohan and to the Department of Finance. One Credit Union!
The trigger for this regulatory activity was a report in the Sunday Business Post that Newbridge was involved in merger talks with Naas Credit Union.
In the week following that report – which appeared on 29 July – members withdrew €3.2 million from their share accounts. Between the end of July and the start of this month the average weekly withdrawal was €1.4 million. The total withdrawal was €20 million.
A report to the Governor of the Central Bank dated last Friday (8 November) summed up the situation:
“SRU [The Special Resolution Unit] has serious concerns relating to the financial stability of NCU [Newbridge Credit Union]. As at 30 September 2013, based on its management accounts, NCU had an excess of total liabilities over total assets of approximately €8 million.
As such, NCU had a regulatory reserve ratio at that date of -10.9%. Accordingly, NCU remains in breach of the requirement to maintain a regulatory reserve ratio of 10% pursuant to the Credit Union Act 1997 (Section 85) Rules 2009 (S.I. No. 344 of 2009) (the “2009 Rules”).
In addition, NCU is balance sheet insolvent. In addition to the deficiency NCU has in relation to its reserves, NCU’s liquidity buffer is currently depleted with a liquidity ratio (representing liquid resources divided by unattached savings) of 8.68 per cent as at 30 September 2013.
SRU considers that if the current level of withdrawals of members’ savings from NCU continues (representing an average daily net cash outflow of €76,000 since 28 July 2013), it would be recommending to the Bank that it petition to have NCU liquidated by 10 November 2013”.
Later the report details how the Central Bank and the Special Manager (appointed by the regulator in January 2012 to run the Credit Union) had calculated a “Liquidation Trigger Point” – the point at which the Credit Union would have so little cash available to it that the Central Bank would have to move to liquidate.
By their calculations, Newbridge was down to its last €2.3 million in liquidity “headroom”.
With an average daily net outflow of €76,000, the Central Bank put the trigger point at 8 December. But if the outflow returned to the level it was at in the last week of July – €536,609 per day – then the trigger point would be reached in just four days.
The Central Bank feared that the discovery that Naas had backed out of the merger plan would prompt an upswing in withdrawals – there was a pattern over the previous four months that saw an upswing in withdrawals when the credit union’s affairs were discussed in the media.
That’s why the Central Bank was adamant that the transfer of the credit union’s affairs to Permanent TSB had to happen on Sunday night – any delay would lead to publicity, and if past form was any guide, to a run on the institution.
The Central Bank would then be faced with having to close the credit union, with all the bad publicity that would generate. In the report to the Governor, the Special Resolution Unit writes:
“Throughout the financial crisis in Ireland, no credit institution closed its doors as a result of elevated levels of withdrawals. If NCU closed its doors, it could lead to widespread concerns not just in relation to NCU, but in relation to the credit union sector as a whole. This is because, given the widespread publicity in relation to NCU, this could undermine confidence in the Bank’s resolution tools and therefore, lead to contagion. Members of other credit unions are likely to be concerned that their credit unions’ doors may also be closed. In addition, the public may not differentiate between such a direction being issued in relation to a credit union and that of other financial institutions. There is a concern therefore that this could have a contagion effect and could have an adverse impact on all deposit-taking institutions in Ireland.”
The timing was also particularly bad, just weeks from the formal end of Ireland’s bailout programme with the Troika.
Then there were the lending practices in Newbridge Credit Union.
In an affidavit to the High Court on Sunday evening, Patrick Casey of the Special Resolution Unit stated that one of the concerns that led the Central Bank to appoint a Special Manager to Newbridge was a December 2011 report from the Credit Unions own auditors which
“…highlighted that there were 603 loans (7.7% of the total number of loans outstanding) that were classified as “special examination loans”, totalling €40.3 million (29.8% of total gross loans outstanding at an average of €67,000 each).
Special Examination Loans were identified as non-standard loans, i.e. loans identified for write-off, loans with non-standard/bulk repayment terms (bullet-type loans). Such loans are not common in the credit union sector.
Twenty six of the 603 Special Examination Loans, or €14.3 million (out of a total of €40.3 millin of such loans), were identified as business development mortgage type loans. These 26 loans equated to an average loan size of €550,000.
At that time, it was identified that these Special Examination Loans were seriously distressed and required approximately €24.6 million of loan provisions”.
One of these loans was for €3.2 million, an amount which – when it was issued – exceeded 1.5% of the total assets of the credit union.
This is in contravention of article 35(3) of the Credit Union Act 1997, which imposes a limit on the size of individual Credit Union loans of 1.5% of assets.
Last Friday the Special Manager confirmed to the Central Bank that €2.8 million is outstanding on this loan, which is equivalent to 3.7% of assets, and so still in contravention of section 35(3) of the Act.
The regulator also stated in the affidavit that “inadequate governance structures and practices” in the credit union led to an increase in provisioning and a deterioration in the loan books.
The common problems included “a failure to properly ascertain borrowers’ financial positions, and a failure to adequately analyse borrowers’ ability to repay or service a loan… a failure to consider borrowers’ overall exposure to NCU… and inadequate and deficient documentation”.
In other words, Newbridge Credit Union was being run just like a bank.