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4 th Biennial International Conference on Business, Banking and Finance Views expressed are those of the speaker alone and should not be reported as representing.

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Presentation on theme: "4 th Biennial International Conference on Business, Banking and Finance Views expressed are those of the speaker alone and should not be reported as representing."— Presentation transcript:

1 4 th Biennial International Conference on Business, Banking and Finance Views expressed are those of the speaker alone and should not be reported as representing the official position of the International Monetary Fund. Yu Ching Wong International Monetary Fund June 22, 2011 Credit Unions in the ECCUOpportunities and Challenges

2 Outline Recent developments of credit unions in the ECCU Are credit unions different from commercial banks? Challenges in reducing vulnerabilities Policy recommendations and conclusions 2

3 Key questions/motivations Small as a percentage of assets in the financial system, the credit unions have been expanding steadily in recent years, providing important financial intermediation, particularly for middle and lower income groups Increasing overlapping of financial services with banks butcredit unions are not banks? Challenges faced by credit unions Spillover effects of the global financial crisis and economic downturn and the BAICO/CLICO collapse on financial sectors in the ECCU? Improving data disclosure; operational efficiency; corporate governance What needs to be done in terms of strengthening regulation and supervision to reduce vulnerabilities? 3

4 Credit union membership in the ECCU is very high in global comparison 4

5 Membership increased steadily in most ECCU jurisdictions despite a decline in the number of credit unions 5

6 Steady growth of assets, deposits and loans Total assets size of the credit union sector almost doubled… …similar upward trends in deposits and loans 6

7 Large variations in concentration and size The lack of timely data (e.g., capital, NPL level, provisioning, liquidity) for individual credit unions, in particular for the smaller ones, prevents us from conducting empirical analysis at the firm level From aggregate data Dominica, St. Lucia, Grenada, and St. Vincent and the Grenadines represent 80 percent of credit union concentration (assets size) in the ECCU Dominica has the largest credit union sector-1/4 of the regions total assets and 40 percent of its GDP 7

8 8

9 The largest three credit unions account for about one- third of the total credit union asset size …comparable in size to some of the indigenous banks 9

10 Are credit unions different from commercial banks? Proponents of the credit union movement have long viewed that credit unions are better suited in providing smaller value uncollateralized consumer loans at lower interest rates Credit unions are not-for-profit financial institutions; tax exempted, owned by members from a restricted customer base, focus on small consumer loans, source their funding from member savings, and share their dividends among their member shareholders Commercial banks pay taxes on profits, owned and controlled by stockholders, open to the public, focus on lending to businesses and consumers with collateral, and distribute their dividends to their shareholders 10

11 In comparison with commercial banks… 11

12 ECCU: Credit Unions versus Banks Despite these differences, credit unions and commercial banks compete in the market for deposits and consumer loans Remarkable expansion of the ECCU credit union sector exceeding the growth of assets, loans and deposits in commercial banks Credit unions absorb close to 12 percent of total private sector deposits and provided about 10 percent of private sector deposits 12

13 Challenges: Strengthening Regulation and Supervision Responsibility for the oversight of cooperatives are under the purview of the registrar of cooperatives Suffers from resource constraints More focus on promotion than supervision Supervision of credit unions has been less than effective compared with banks (which compete in deposits taking and lending) Contingent liabilities to the government (i.e., the lack of deposit insurance) represent a serious challenge given the limited fiscal space and high debt public levels in the ECCU 13

14 Inadequately regulated credit unions could potentially undermine financial stability Growth in membership and market share clearly indicated that credit union supervision needs to be integrated from a macro-prudential perspective Recent global financial crisis has shown that threats to financial stability can emerge from any parts of the integrated financial system and all financial services should be adequately regulated to minimize spillover The lack of timely and detailed financial data on credit unions activities together with insufficient supervision would also rule out the opportunity to implement timely remedial measures 14

15 The Caribbean financial crisis of 2009 caused by the failure of the CL Financial Group exposed weaknesses in the regions regulatory framework for nonbank financial institutions Question on the extent of the adverse impact of BAICO and CLICO on individual credit unionexposure and provisioning Risk of spillovers to banks and other countries (e.g., impact on banks through linkages with affected credit unions) How to recapitalize or provide liquidity support to credit unions? 15

16 The BAICO and CLICO debacle has helped accelerate the proposed prudential reforms of the ECCU credit union sector Prudential supervision aims to protect the savings of the general public and to maintain financial stability The new cooperative societies legislation aim to enhance licensing requirements, establish prudential standards, enhance reporting requirements and strengthen enforcement actions Capital adequacy requirement Some progress is made in establishing a single regulatory unit (SRU) within each ECCU member to regulate non- bank financial institutions and harmonizing NBFI legislations 16

17 Progress in enacting new harmonized legislation 17

18 Some further considerations To transfer systemically important credit unions to the ECCB Supervision by bank supervisory authority would have the advantages of integrated supervision thus reducing information arbitrage and making use of existing expertise in the supervision of deposit-taking institutions Within the Caribbean, Belize, Bermuda, and Haiti have integrated, whereas Jamaica and Trinidad and Tobago are in the process of integrating the supervision of credit unions under the central bank/regulator of banks For the ECCU, considerations including the large number of credit unions may not be feasible for the ECCB to resume this role Nevertheless, consideration should be given to transferring lead responsibility to the ECCB of systemic important credit unions with significant membership penetration and balance sheet size 18

19 Some further considerations Overcome the capacity bottlenecks the establishment of a center of excellence for the sharing of human resources creation of a regional regulatory authority for NBFI over the medium term 19

20 Challenges: Reducing vulnerabilities Need to include the adaptation of international standards and international best practices including PEARLS and enhancing the scope and frequency of data reporting PEARLS as a toolkit to improve operational efficiency for credit union managers and as a supervisory tool by regulators. Timely publication of these PEARLS indicators would also facilitate data comparison and performance assessment in comparison with the banks 20

21 Selected PEARLS Indicators Key PEARLS IndicatorsStandards of Excellence P1. Allowance for Loan Losses/Delinquency > 12 months100% P2. Net Allowance for Loan Losses/Delinquency of 1-12 months35% E1. Net Loans/Total Assets70%-80% E5. Savings Deposits/Total Assets70%-80% E6. External Credit/Total AssetsMaximum 5% E9. Net Institutional Capital/Total AssetsMinimum 10% A1. Total Loan Delinquency/Gross Loan Portfolio<= 5% A2. Non-Earning Assets/Total Assets<= 5% R7. Total Interest (Dividend) Cost on Shares/Average Member SharesMarket Rates>= R5 R9. Total Operating Expenses/Average Total Assets5% R12. Net Income/Average Total AssetsLinked to E9 L1. ST Investments + Liquid Assets – ST Payables/Savings DepositsMinimum 15% S11. Growth in Total Assets> Inflation 21

22 Conclusions To reduce the risks of spillover to the financial system in the event of shocks, there is an urgent need to strengthen the regulation and supervision framework by making operational the SRUs greater information exchange and collaboration between the ECCB, SRUs, and other regulators In the short-term: supervision of systemically important credit unions should be integrated with bank supervision Merger and consolidation of the smaller institutions would offer benefits To make available comprehensive and timely data on credit unions Continued technical assistance from the IFIs, regional and development partners, CARTAC 22

23 Thank you 23

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