A Co-operative Banking Strategy for Ireland: Creating a National Federated Network Amongst Credit Unions

August 2011

A CO-OPERATIVE BANKING STRATEGY
FOR IRELAND
Conceptualising a Strategic Network

Amongst Credit Unions

Creating a national, community focused, citizen owned and governed federated
co-operative banking system.

"The way we see things is the source of the way we think and the way we act"
Stephen Covey

A personal submission by Bill Hobbs to the Commission on Credit Unions, 25th August 2011.

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A CO-OPERATIVE BANKING STRATEGY
FOR IRELAND

1: Introduction and Summary...................................................................................... 3
2: Background to credit co-operative banking............................................................. 7
Credit Unions and Credit Co-operatives Internationally .......................................... 7
International Models for Centralised Co-operative Banking ...................................10
Structuring Irish credit unions as a modern co-operative banking system .............12
3: Network Rationalisation and Configuration............................................................13
4: The New Model Credit Union.................................................................................16
Savings Products ...................................................................................................16
Lending Products ...................................................................................................17
Operational Model..................................................................................................18
Governance Model & Strategic Orientation............................................................19
5: A Federated Network of Credit Unions ..................................................................22
A Federated Network .............................................................................................24
The Federated Alliance – evaluation criteria ..........................................................26
A proposed federated structure..............................................................................28
Anticipated business advantages...........................................................................30
Anticipated business disadvantages and obstacles ...............................................32
Government support ..............................................................................................32
6: Conclusion.............................................................................................................32
Appendix 1 : Note on Federated Co-operative systems ............................................33
Useful Referent Documents.......................................................................................37

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1: INTRODUCTION AND SUMMARY
This submission considers the concept and high level strategic business case for creating a national
co-operative full service banking alternative for Irish consumers and small business owners through a
strategic network alliance of consolidated credit unions.

The credit union sector should adopt a federated strategic network as its core infrastructure for
ensuring individual credit union financial stability and sustainability and strengthening the sectors
financial stability.

Such a network would be modelled on successful designs for centralised co-operation that have been
key to the success of other co-operative banking systems globally – but which have not yet been
considered or implemented in Ireland.

Given the success of federated credit co-operatives elsewhere and proven resilience of their business
model during the recent global crisis, it would be unwise not to consider this viable and robust form
of co-operative banking in the Irish context.

Envisaged is a citizen owned and governed federated financial co-operative system, guided by credit
union philosophy, values and ethos, offering a full range of consumer and small business banking
products and services.

Such a system would be modelled on the European style federated network, have a customer base of
over 2m ordinary citizens who would also be its owners.

Initially, excelling at providing savings and loans, it could in time provide full banking services through
a national network of enlarged, consolidated credit unions and their jointly owned electronic,
internet and call centre service delivery channels and special purpose subsidiaries.

The shift to a federated model would require three important steps:

1. Network rationalisation through consolidation to realise scale economies
2. Transition to a new model credit union - the “savings and loans” model
3. Strengthening the financial infrastructure through contractual solidarity and cross
guarantees, to be effected by the establishment of a central finance facility

For many reasons the Irish credit union “finance company” business model and network
structuration, with its emphasis on the independent, autonomous credit union and loose form
League associational system, is inappropriate for the future development of the sector.

The movement has not transitioned to the “savings and loans” model nor developed the cohesive
centralist finance systems found in every other credit co-operative sector in mature financial service
marketplaces. It also utilises a model of governance rooted in legacy part-time volunteerism that
confuses non-executive director with executive management roles.

It’s proposed that a new model credit union be defined and credit unions required to transition to it
within a defined period of time.

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Credit unions should focus on excelling at their core business and offer a wider range of updated
savings and lending products that meet the needs of modern consumers. They should 1augment
these core products with related fee earning products and services.

The large scale now required for banking services to be competitive means that smaller players like
credit unions must specialise to survive. It is just not possible for credit unions to be all things for
their customers and still give them the best deal. However their basic business of consumer savings
and lending can achieve scale economies at the size presented by the configuration of consolidated
larger credit unions, an example of which is set out in this submission.

To succeed in the future credit unions will have to excel at delivering low cost, high quality savings
and loans products and services to ordinary people. In short they have to be the best at delivering on
generic category benefits which include choice, service and price elements. They will have to adopt
market-based principles of pricing to ensure better rates and terms for customers. To do this they
will need to upgrade their IT, operational systems and internal controls to achieve greater efficiency
and safety. However in the absence of consolidation to realise scale economies and build human and
operational resources competencies, credit unions will be unable to truly deliver on their economic
and social objectives.

Complexity requires scale economies to spread the costs of the more sophisticated technologies
required to deliver modern financial services and products. The current operational model is one of
high-cost, low-value transactions, mainly handled through manual processes. The costs of operating
a manual delivery and service processes are unsustainable as they have eroded profits in many credit
unions to a point where operating costs exceed core interest income. Routine transactions must be
automated to keep down costs. People now want 365/24/7 service and their lives are too busy to
stand in teller queues. ATM and internet delivery channels are now a given service feature required
by almost all consumers.

Furthermore the heterogeneous aspect of credit union operations, their varying size and restrictive
common bonds prevents the best from expanding their operational footprint, allows poorly
governed and managed operations to continue and inhibits the type of competitive merger activity
that has been a positive aspect of other movements for at least two decades.

The credit union sector of c409 independent credit unions should be rationalised to a size where its
constituents would be of size capable of realising scale economies and participating in a federated
network. I refer to these larger credit unions as “consolidator credit unions” in this submission.

On their own credit unions will struggle to deploy the technologies required to provide low cost, high
quality services. Even when consolidated they would remain quite small operations with limited
financial, IT and human resources.

A central facility as envisaged here would employ the expertise required to deploy the technologies
to enable credit unions transition to the new model credit union. More specifically the central entity
would facilitate the design and implementation of a new operations model including enabling
information technologies and management systems.

Credit unions should establish or source a joint venture and co-own such a 2“Central Finance
Facility”. It would operate as a corporate services centre and wholesale bank providing a range of
shared services which, amongst others, would include treasury, central liquidity, MMR

1
In so far as entering the “current account” market or providing “basic banking accounts”; it is not within the current organisational
resource, capacity or competence of credit unions, regardless of size, to fund the operational costs associated with these products. Any
consideration in this area should be secondary to the core objective of excelling at the savings and loans model for the time being
2
“Central Finance Facility” is a term used by international credit union trade body WOCCU to define central corporate entities owned by
constituent credit unions

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participation, capital funding, loan securitisations, risk management, compliance, audit, legal, HR,
IT systems and intermediated products and services.

This central entity might in time be granted devolved supervisory responsibility for its constituent
credit unions and would also provide a stabilisation mechanism based on contractual solidarity and
cross-guarantees. In essence the central entity would leverage off its constituent owners' combined
balance sheet. Such central facilities are found at the core of European credit co-operatives such as
RaboBank (Holland) and Oko Bank (Finland).

In a federated system, consolidator credit unions, whilst ceding some strategic and operational
autonomy, would retain independent legal status, local governance, with each one having its own
multi-branch network. Such multi-branch networks would be a consequence of the rationalisation of
non-viable credit unions and those that opt to consolidate through mergers. Furthermore, in line
with developments in other markets, credit unions would be likely to open new branches in
underserved areas.

Credit union network reconfiguration would be dependent on a number of variables including
governance and management competence, financial strength and sustainability, geographic location
and type (community, associational, employer based).

The diagram below is a stylised design for the federated network organisational structure envisaged
in this submission.

It is likely that the once dominant, cartel like, oligopoly of the two main commercial “pillar” banks,
Bank of Ireland and AIB will re-emerge leading to a reduction in competition and the mass captivity
of consumers and small business owners. It is unlikely that any new entrants will be attracted into
the Irish marketplace for some time to come and existing foreign banks will respond to the demands
of parent organisations having differing objectives. Pricing of products will be driven to repair their
balance sheets, rather than for the benefit of the customer.

The use of tax-payers funds to stabilise banking could have a wider economic and societal purpose of
enabling the creation of a viable co-operative alternative to commercial banking.

One of the intriguing opportunities to fast track the creation of a federated co-operative banking
system could have seen a joint venture between a building society and credit unions to establish a
central facility which would have incorporated the corporate support service capabilities and
resources of the building society. However, exploring this opportunity appears to be no longer
feasible.

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This submission proposes a movement strategy. Any further development would consider the
strategic rationale in detail including funding implications.

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2: BACKGROUND TO CREDIT CO-OPERATIVE BANKING
Credit Unions and Credit Co-operatives Internationally

Credit unions have historical roots in the credit co-operative movements that first appeared in 19th
Century Europe. During times of industrial development and social disruption, small groups of
people banded together to pool their savings and grant loans to one another. The primary economic
and social purpose of these co-operatives was to provide credit to people who were financially
excluded – unbanked because commercial banks were not interested in serving them on an
affordable basis.

Credit co-operatives spread throughout Europe, crossed the Atlantic to Canada, and in turn were
adapted in the U.S. in the form of credit unions. It was the U.S. credit union model that was
eventually established in Ireland in the 1950’s.

Today, in developed countries other than Ireland, most credit unions and similar credit co-operatives
have adopted the “fractional reserve banking model” and are regulated as authorised credit
institutions. Although they typically operate under legislation specific to their unique mutual
ownership and democratic governance, outside Ireland they are supervised under regulatory regimes
every bit as robust as those which traditionally governed commercial banks.

The evolutionary path common to all credit co-operatives has been a three stage process, which has
followed a different time line in each country. At first, the business model was that of a “finance
company” or type of “narrow bank” in which member’s accumulated savings by purchasing
withdrawable capital shares, thereby providing funds for making loans. Only after a member had
purchased some minimum amount of shares could he or she then borrow. Shares formed part of the
capital base and were exposed to the risk of the business. Tight common bonds of association acted
as collateral for members loans.

Lending was typically done at a simple interest rate of 1% per month on the unpaid balance
regardless of market conditions.3 Instead of receiving interest on their savings based on market
rates, members shared in the co-op’s lending profits by receiving a dividend declared at the end of
the year. Management was typically in the hands of unpaid volunteers. Initially credit co-operatives
banded together loose form associations e.g. credit union “Leagues”, establishing some shared
services and mutual stabilisation funds used to support growing balance sheets – in particular
providing early stage capital support.

In the second stage, they evolved into “savings and loans co-operatives”, thereby shifting to the
fractional reserve banking model, adopting market based pricing and offering a broader array of
deposit and lending products to their personal and small business customers. Those were typically
augmented with fee based services such as transaction accounts and simple insurance products, and
credit unions in this stage were managed by professional staff. This stage also saw credit co-
operatives establishing corporate central facilities through which they pooled excess liquidity,
accessed liquidity support from one another and the wholesale banking market. In some cases these
central facilities evolved into wholesale banking arms with devolved supervisory powers. Most
operated as lender of last resort for their constituent members. This stage also sees the
development of robust financial safety nets with developed legal frameworks, differentiated

3
The “1% per month” loan rate is still widely used by smaller Irish credit unions, which then may pay a year-end interest refund if earnings
are sufficient. Although it is seen by some as having its roots in credit union philosophy, the practice is actually an obsolete carryover from
the days when credit unions lacked even electronic calculators. On a paper-based system, even relatively untrained volunteers could
readily calculate the interest due on a loan each month.

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regulation and supervision and deposit insurance systems closely mirroring or integrated with wider
banking systems.

Although Irish credit unions have broadened their product range somewhat, they remain stuck in
transition between these first two stages of development. With deposit products largely limited to
the member share account, their savers are still paid an annual dividend out of net earnings at a non-
market-based rate. Lending is still done using the basic instalment credit loan first introduced in the
1950’s. While the larger ones have paid staff, many of the smaller ones are still operated largely by
volunteers. IT systems are relatively primitive, and Irish credit unions do not provide current account
and only very limited electronic transaction services. Nor are they full members of the national retail
payment system. Furthermore credit unions have not developed the central facility commonly found
today in developed credit co-operatives elsewhere.

In these countries, credit co-operatives have long since entered the third and final stage of
development. This occurred earliest on the Continent with the evolution of full service co-operative
banks offering a broad range of financial products. Credit unions in other major markets such as the
U.S., Canada, and Australia have likewise become “full-service consumer banks”, while still operating
as mutuals and governed on the basis of “one member, one vote.”

Credit co-operative evolution is illustrated in the diagram below:

The diagram on the next page illustrates the gap in product and services offered by Irish credit unions
when compared to their international peer group’s full service models.

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Ireland U.S. Canada Australia
Payments Services
Current account equivalent No Yes Yes Yes
Debit cards No Yes Yes Yes
EFT paym ents No Yes Yes Yes
Proprietary ATMS Yes Yes Yes Yes
Bank ATM network access No Yes Yes Yes

Savings and Deposits
Rates vary by type/m aturity No Yes Yes Yes
Certificates of deposit equivalent No Yes Yes Yes
Tax deferred or sheltered Yes Yes Yes Yes

Lending Services
Secured auto loans No Yes Yes No
30 Year 1st m ortgage Loans No Yes Yes Yes
Open-end, revolving credit No Yes Yes Yes
Credit cards No Yes Yes Yes
Sm business loans
all Yes Yes Yes Yes

Wealth Management & Insurances
Trust services No Yes Yes Yes
Pensions Yes(PRSI) Yes Yes Yes
Mutual funds No Yes Yes Yes
Life Insurance No Yes Yes Yes
General Insurance Yes Yes Yes Yes

Today, credit unions and other credit co-operatives provide affordable financial services to hundreds
of millions of ordinary people worldwide.

Across Europe, co-operative banking systems represent a major force through which 140 million
people, or one citizen in five, are customers and/or members. With over 4,500 individual banks,
720,000 staff and 60,000 branches, European credit co-operatives collectively have a combined
market share of 20%. In five European countries they represent 40% or more of local banking
services.

In the U.S., credit unions serve over 90 million consumers and have total assets exceeding US$880bn.
Their current share of the consumer savings and non-mortgage lending markets are 9.8% and 9.9%,
respectively. Credit unions in Canada and Australia enjoy comparable scale and market shares.

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International Models for Centralised Co-operative Banking

A key characteristic of these successful credit union/co-operative banking systems internationally has
been the existence of strong centralised support mechanisms. Development of these structures was
essential to achieving the scale economies and professional management systems required for credit
co-ops to exploit the savings and loans model and to compete as full service financial institutions.

For example, European evolution resulted in modern day federated networks such as Rabobank in
The Netherlands and Raiffeisen Banks in Germany and Austria. OKO Bank, a central bank for Finnish
co-operatives, has established a listed subsidiary for accessing equity markets. Some of the largest
co-operatives, such as Rabobank, have expanded beyond retail banking into corporate and
wholesale, and even international banking. In all cases, the European co-operative banks provide a
full compliment of consumer and small business financial products.

In Quebec, the Movement Desjardins followed the European model, whereas in the other Canadian
provinces, credit unions developed federated networks around central (wholesale) credit unions.
Two of the largest Canadian 4centrals have recently merged operations.

U.S. credit unions evolved a more fragmented model using a blend of “corporate” central credit
unions and credit union-owned service corporations for specialised functions such as IT, ATM
network administration, and support for shared branching. CUNA Mutual Group, the dominant
international provider of insurance services to credit unions, began life as a subsidiary of Credit
Union National Association (CUNA), the U.S. trade body. CUNA also created U.S. Central Credit Union
as a central liquidity and investment facility for state-level corporate CUs. Both CUNA Mutual and
U.S. Central are now completely independent from the trade association.

Australian credit unions receive central services from their national body, CUSCAL, which is itself an
authorised depository institution. Recently, CUSCAL amended its charter to allow membership by
building societies and friendly societies, and it also provides transaction services to superannuation
(retirement) funds5.

From their start-up in the early 1990’s, Polish credit unions adopted a hybrid integrated model under
the oversight of a central body, and they operate more like franchised branches than independent
entities. Based on a system of mutual cross-guarantees, the Polish federated system fulfils EU capital
standards by means of a consolidated balance sheet. Its central body provides payment system and
insurance services through listed subsidiaries, and it now has more retail outlets than any other
financial group in Poland.

4
British Columbia and Ontario “central financial facilities” merger in 2008 created Central 1. Serving 164 member credit unions having
CAD$70bn in assets and 2.9m members, Central 1 has 500 staff and CAD$14bn in assets.
5
The close association between Australian credit unions and building societies is illustrated in the merger between Maitland Mutual
(building society) and Phoenix (credit union) in New South Wales. Australia has also seen the recent establishment of ABACUS as the
combined national trade body for 99 credit unions, 8 building societies and 15 friendly societies, which collectively have AU$75 billion in
assets and 5.5 million members.

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In each of these cases, the functions and structure of the central system reflect unique local
circumstances of history, market environment, legal convenience, practical political compromise, and
so on. Conceptually, however, these international models which are defined by their degrees of
integration can be broadly categorised into the following basic types:

Atomised: A system of autonomous and independent credit co-operatives where particular
centralised services are provided on a contractual basis by specialised commercial firms owned by
credit unions. (E.g. corporate credit unions, IT providers, ATM networks, insurance and brokerage
companies in the U.S.) Typically credit unions or co-operatives remain autonomous in what’s called
an atomised system.

Federated Network: Comprehensive finance, liquidity, and other services are provided through a
federated structure led by a credit co-operative-owned central facility, which may itself be a
wholesale credit union (Canada) or a commercial bank (Australia, The Netherlands). This system is
referred to as a federated network.

Integrated/Merged: Credit co-operatives share a consolidated financial structure, in which local
outlets operate in practical effect, if not legally, as branches of a central co-operative bank (Quebec,
Poland).6 This system has been termed an integrated or merged system and is similar in almost all
respects to a branch banking system.

For the reasons discussed later, the appropriate model for Ireland is likely to be some variation of the
second category.

Critics of credit co-operatives have long argued they are inefficient pointing out they hoarded capital.
Those critics have been largely silenced since credit co-operatives proved the worth of their business
models as their longer term orientation and prudent focus on capital retention ensured resilience
during the global crisis. The evidence highlights the need for legislators and regulators here to
understand the difference between co-operative banking and commercial banking. That is to
understand how the longer term co-operative orientation, unique governance structures, inherent
focus on consumer value and capital retention policies differ from their publically quoted joint stock
bank competitors.

Whilst the co-operative model has evolved in many differing forms, they all have one thing in
common; they are owned and governed by their members who are also their customers and all
employ the empowering democratic principle of one member one vote. This defining democratic
principle, allied to embedded customer advocacy ensures co-operatives remain culturally and
operationally focussed on delivering affordable and valued financial services to meet their member’s
needs along with educating them in the wise use of money.

The inherent financial stability of the federated co-operative model has proven resilient during the
global credit crisis due to its prudent levels of capital and longer term orientation. It is for this reason
that many consider federated co-operative banking systems to be resurgent as regulators begin to
truly understand how their unique organisational form helped to underpin financial stability and
keep credit flowing when commercial banking had all but collapsed.

6
With the exception of the Co-operative Bank in the UK, the European and North American models do not involve consolidation of co-
operative banking into a single, legal entity. Even systems such as Rabobank fall more into the second category. While Rabo has the
outward appearance of an hierarchical bank, it is in fact a network of individual co-operatives. In that system, the emphasis is on local
control over product quality, which in turn creates pressure on the central to compete on quality and price. Thus, a local Rabobank may
offer the products of third party suppliers who compete with the Rabobank central subsidiaries.

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Co-operatives were maximising stakeholder’s interest long before commercial banking began to talk
of corporate social responsibility, triple bottom line or recognise a wider stakeholder responsibility
paradigm. In some respects the existence of co-operatives, their social contribution and successful
enterprise model is focusing minds on alternatives to the joint stock bank model of banking with its
singular focus on profit maximisation and shareholder value.

Commercial bankers and stock market analyst critique of cooperative bankers prudence and strong
capital positions has been silenced. In many countries, at national level, cooperative banking is seen
as a customer champion and a vibrant, safe alternative to commercial banking.

Structuring Irish credit unions as a modern co-operative banking system

The strategy would see credit unions restructuring as a European style credit co-operative system in
two phases.

The first phase would require the rationalisation of credit unions into a reconfigured network of
larger consolidator credit unions of a size large enough to realise scale economies.

The second phase would require these consolidator credit unions to transition to a new model credit
union focussed on excelling at savings and loans.

Consolidator credit unions would be required to be members of a federated network which would
establish a central finance facility along the lines proposed in this submission.

Alternatively such a central facility could evolve from a special authority established by Government
charged with overseeing and implementing a rationalisation programme and transition to the savings
and loans model. The authority would be empowered to create the federated network and establish
the central finance facility. If required, state funding could be made available to the authority.

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3: NETWORK RATIONALISATION AND CONFIGURATION
The credit union movement should be realistic about the future of the smallest credit unions and
those that have been poorly governed and managed.

In the U.S., for example, the movement reached a maximum of over 24,000 credit unions in 1973,
but that was at a time when only one American in seven was a member. Today the U.S. has about
7,500 credit unions, but their average assets are close to 50 times greater and nearly one third of
Americans belong. Canada and Australia had similar experiences.

The chart below shows overall sector size and comparative data.

Source: WOCCU Statistics (U.S., Canada & Australia 2010), CBI (Republic of Ireland 2010)

In all these countries, the decline in the total number of credit unions was mostly the result of small
but healthy credit unions merging into larger ones. The office of the merged credit union often
stayed in place as a branch to serve the local community.

There are three reasons why the number of credit unions could have been expected to decline here
as well.

First, the smallest credit unions, with no employees and in which volunteers do all the work, are
finding it hard to recruit the volunteers they need. This is understandable. When credit unions were
the only reasonable source of credit for most people, there was a powerful incentive for volunteers
to donate time to credit union service. That incentive is considerably lessened today.

Secondly, the compliance burden on credit unions has increased over time. All consumers deserve
financial services that are delivered in a safe and reliable fashion, and the members of small credit
unions are no exception. It will be difficult for a credit union to absorb the resulting costs of
compliance unless it can spread those costs over a sufficiently large asset base.

But most important, it will not be possible for many credit unions to offer the service levels that
today’s consumers are demanding. The best strategy for many will be to join forces through mergers
that can give the surviving credit unions the scale they need going forward.

While these reasons for rationalisation have been acknowledged here, the negative impact of
external forces (global and domestic) and internal financial stability shortcomings inherent within the
business model have starkly brought the need to rationalise to the forefront as a sectoral financial
stability and sustainability challenge.

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In the past, rationalisation was an inevitable consequence of success which for various reasons was
delayed by the Irish movement. Today it has become an inevitable consequence of poor governance
and management of many credit unions, an economic recession and a consumer credit crisis.

One way in which to consider rationalisation is to focus on the number of customers served as these
numbers drive savings and loans volumes, data management requirements, transactions, operating
costs and interest revenues. They also indicate the potential for add on sales of associated fee
earning products and services.

To achieve scale economies it’s possible to define the appropriate network size by the numbers of
customers served. For example, whilst somewhat of an arbitrary number, 50,000 customers per
credit union is useful to consider network reconfiguration.

The chart below illustrates the resultant configuration should new model credit unions service
7
50,000 customers each.

Using this approach, the network would consolidate through a planned programme of mergers down
to about 60 credit unions. In turn these “consolidator” credit unions would be required to transition
to the new model credit union – the savings and loans model.

The resultant network is aligned on a loose form “county” common bond rather than the current
narrow parish basis. It is likely that members would continue to perceive their credit union as being
“local” and be persuaded by the promise of continuing access to improving quality products and
services. Indeed consumers should be free to shop around credit unions for the best deal, in which
case membership should be open to anyone who wants to join.

In so far as occupational/employer based credit unions are concerned, they have generally provided
a postal type service from a central office to their dispersed members. More recently, most have
embraced the on-line or internet facilities. Some provide a branch/office/agent type location/facility
to deal with their walk-in member transactions. Even immediately, these occupational/employer

7
Credit union total member numbers include active, inactive and dormant relationships. On current experience less than a third of the
50,000 would be active users of credit union products and services.

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based credit unions could be consolidated into just one central office to provide branded services to
their members from one location.

As mentioned above the scale of rationalisation would require an empowered body charged with its
central planning and execution. No such body exists at this time.

One option would be to establish an interim central facility whose immediate objective is to define
and execute a rationalisation programme through which consolidator credit unions become founding
members of the central.

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4: THE NEW MODEL CREDIT UNION
Transitioning to the savings and loans model will require substantial changes to the balance sheet,
and financial and business operations of consolidated credit unions.

A credit unions competitive advantage lies in its relationship with and understanding of its members
needs. While customer value is embedded in “why things are done” this has not successfully
translated into “the way things are done” which remain rooted in outdated, legacy business systems
and processes.

• The new model credit union exists as a constituent member of a federated network and
outsources its non-essential operations to the central shared services provider.

• It excels at servicing its customers and encouraging them to deepen their relationship with
their credit union.

• It distinguishes between the “member as owner” and the “member as customer/consumer”.

As an owner, a member can expect to share in the profits but as a customer a member should
rightfully expect to be paid a market based rate of return on their savings.

The notion of providing fee-free services, particularly high cost over the counter transactions, will
have to end with credit unions charging a reasonable fee for the level of service they are providing –
in many cases services that banks and others have ceased to provide or have priced according to
cost.

At the very least credit unions should have some element of cost recovery rather than what is
currently happening which amounts to the cross subsidisation by infrequent-users of frequent-users
free services.

In addition the practice or habit of paying or charging one rate for all accounts, whether savings or
loans, should cease replaced with appropriate rates being paid or charged for differing product
categories. For example a high transaction, low value savings account attracts the same rate as a high
value, low transaction long term savings account. Similarly the same rate is charged on a short six
month loan of €1,000 as a longer term loan of say €10,000 over three years.

The era of free life insurance came to an end elsewhere years ago as credit unions switched to
member-pay insurance coverage. The cost of insuring for free loans of upwards of €100,000 and
savings balances to €13,500 is a crippling burden that given credit union member demography is
unsustainable. Credit unions should as a matter of urgency significantly reduce the level of coverage
and move to member pay models that effectively switches what is currently an operating cost to a
fee earning revenue stream.

To excel at their core business of savings and loans credit unions need to offer a much wider choice
of modern savings and loans products along with learning how to “ask for the business” from their
customers.

Savings Products
The traditional share account is manifestly outdated as the primary product and funding mechanism.
Limited to paying dividends only once a year and then only in arrears after the annual accounts have
closed it is a mechanism that has been exposed as an anti-consumer practice in the current climate.

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The share account should be retained only as an account denoting member’s ownership share in the
credit union. It should be repositioned as being purely the means by which members have an
ownership stake in their credit union. In good years, shares could pay a much better rate than
savings deposits. But credit unions need to be straight with their members, making it clear that share
dividends are not market based and that last year’s rate is no indicator of what it will be this year and
that in any event, non dividend on shares is ever guaranteed.

A variety of deposit accounts should replace shares as the primary place for customer savings.

Interest rates should track the market and exceed where possible what banks are paying in the
normal market environment. This is not the case today as banks fight for deposits to replace the high
cost of funding from the interbank market.

Products should expand to incorporate a full range of retail deposit accounts such as:

Demand Deposits: for in-and-out money would pay a low rate reflecting the transactional nature of
services which might carry a fee or unless a minimum balance is maintained no interest is paid. These
accounts could also offer electronic payment facilities such as standing orders and direct debits and
be the primary transaction account offered online and by ATM

Regular savings accounts: regular savings accounts could be designed to encourage regular savings
and pay higher rates for balances saved whilst allowing for infrequent withdrawals

Term Deposits: for longer term lump sum savings would pay higher rates depending on the pre-
established period of time. These accounts would have limited if any withdrawal privileges.

Zero rate deposit accounts: where set-off is offered against loan interest charges.

As permitted by law credit unions might develop special retirement savings accounts.

Linked accounts: the attached savings rule should end and replaced by assignment of deposits where
such collateral is required.

The practice of nominated ownership in event of death should also cease. Instead the banking
approach to joint accounts should be adopted.

Credit unions would not offer current accounts, cheque books or overdraft facilities until such time
as they and the central developed the technological capability, supporting architecture and
assembled the resource capability required to provide such accounts and facilities.

Lending Products
A full range of consumer lending products should be made available shifting from the traditional
instalment credit facility to fixed and variable term loan type structures.

Additionally consideration should also be given to developing a revolving credit facility eliminating
the cost of involved in the multi-issuance of small facilities.

Given their numbers of customers, credit unions should have the collective strength to negotiate
with product providers to offer white label fee-earning products offering attractive rates to their
customers. These would include insurances, retail investments, debit cards, prepaid debit cards,
credit cards, car leasing and other durable goods financing facilities.

- 17 -

Credit unions should partner with high quality, reputable mortgage lenders as loan originators. Over
the longer term, via the central finance facility, they could develop the competencies and legal
authority required to act as mortgage producers.

Credit unions should be required to comply with consumer protection codes and develop robust
organisational competencies in credit assessment and risk management. In particular they should
have the capacity to continue to provide loans to the less well off and financially marginalised – to
people of good character who cannot borrow elsewhere.

Modern credit risk and lending assessment practices should be deployed including affordability
assessment techniques and full membership of credit bureaux. Additionally in keeping with affording
credit to marginalised borrowers, credit unions should develop specific credit assessment techniques
using non-financial information to better manage and understand credit risks.

Just as important as introducing a new high quality product is the adoption of correct pricing
methodologies. This means setting rates at different levels depending on the service involved and
rebalancing rates on a regular basis to stay competitive in the market.

As mentioned earlier, fees should be charged, where appropriate, for services provided. As its stands
credit union fee income to total income is less than 1%. In other advanced markets, fee income
represents a substantial percentage of total income earned by credit unions.

Operational Model
Providing a modern range of high quality consumer savings and loans requires substantial upgrading
of IT, operational systems and internal controls to achieve greater efficiency and safety.

Compared with the peers in other countries, Irish credit unions spend too small a percentage of
overheads on data processing and information systems. This false economy has driven up costs by
limiting flexibility and increasing reliance on manual processes as well as amplifying operational risks.

Non-standardisation of IT core systems leads to differing capacities, capabilities and responsiveness
to increasing complexity in particular regulatory reporting and risk management requirements. It is
unlikely that any of the current systems are capable of supporting a wider range of products or
providing the operational flexibility required under the new savings and loans operations model
proposed here.

Deploying modern IT systems will be required to provide customers with the convenience they
expect these days. For example customers should have access to their funds 365/24/7 via ATM
machines. They should be able to manage their accounts and effect transactions over the internet.

There is an urgent need to upgrade loan underwriting and arrears management processes as well as
credit risk management and reporting processes. Credit unions need to employ more sophisticated
tools for asset/liability management, investment analysis and product pricing and for monitoring and
reporting on legal compliance obligations. Credit unions should have internal audit capabilities
including appropriate systems for assessing and managing risk and testing for sufficiency of internal
controls.

More efficient and effective operations will require substantial expenditure on IT and IS as well as
staff and director training.

In many cases IT projects are being developed and implemented without a coherent supporting
business strategy or business case. In some cases, individual credit unions have gone on solo runs
implementing new systems at some considerable cost without it appears tangible business benefits
being established or achieved.

- 18 -

The sector should guard against IT projects driving the business strategy. IT should enable delivery of
the business requirements and not define what the business is or isn’t.

It is highly likely the new model credit union proposed here will require an enabling modern core
banking system, database model and architecture to support an operational model that excels at
delivering savings and loans products.

Even if consolidated as illustrated above, credit unions will not have the resources, operational
capability or competencies required to transition to the new operations model. Their scale will
remain small. All the more reason for a federated alliance and its central finance facility, which
through its shared services delivery model, would provide the requisite upgraded technology
platform, management information systems and delivery channels.

Governance Model & Strategic Orientation
Consolidating to larger operations and transitioning to the new business model will require higher
levels of governance and management capabilities to achieve the standards of operational excellence
required to excel at delivering low cost, high quality consumer savings and loans products and
services.

A new form of governance will be required as boards should switch to the principles based strategic
board approach and empower senior employees to deliver on the business strategy.

Larger consolidated credit unions will need to be managed by full-time professionals with the
training, experience and skills required for any institution that is holding people’s money.

Current governance practices confuse the very different roles of non-executive directors and
executive management. This results in part-time volunteers making management decisions and
performing management roles for which they are neither trained nor qualified.

Volunteer directors’ crucial leadership role should be to establish business goals and policies that
advance the credit union ethos of fairness to members and service over profits and to ensure the
safe and sound prudent management of the business.

Directors should not be distracted from their real job by dealing with day to day operational
decisions and routine matters.

Management of the credit union should be the responsibility of a professional chief executive. The
CEO should in turn be supported by full-time management team of qualified professionals with
specialist skills in finance, operations, risk management, compliance, marketing, audit and so on.

Most importantly the current short term strategic and business orientation focussed on
maximisation of dividends to members will have to be replaced with a longer term orientation
focussed on economic sustainability.

Professionalisation of governance and management is a key feature of network maturity which is
best illustrated in the strategic orientation of credit union boards and management.

The diagram on the next page illustrates the stark difference in strategic orientation between
Canadian and Irish credit unions:

- 19 -

These findings show a result that most people will find surprising. Financial exclusion is not seen as
the primary orientation for the majority of Irish credit unions.

The Irish responses clustered within (2) and (3) starkly highlight the short term Irish credit union
strategic orientation of the dividend distribution finance company business model - to pay the
highest dividend - and lack of emphasis on competiveness and sustainability.

In essence a credit union board is custodian of an intergenerational endowment represented not
only by the credit union’s financial strength – its reserves, but also its capacity to achieve its
economic and social objectives.

Intergenerational handover of fiduciary care and responsibility can only happen where governance
places the credit union itself front-and-centre and not on the periphery of strategic decision making.

Indeed it’s the combination of the careful husbandry of the intergenerational endowment with its
longer term strategic orientation, and embedded customer advocacy of the
member/owner/customer relationship that creates robust credit co-operative systems.

Thus the leadership job of a board of directors should be to focus on formulating and directing the
strategic governance of the credit union, to establish and regularly review its top-level policies, to
hire and supervise the chief executive, to set financial and other goals, and to monitor management’s
performance in achieving those goals.

These are the essential functions of top level governance in a financial institution. They deserve the
undivided attention of the board, whose energies should not be wasted on day-to-day decisions
which staff are paid to make.

There are two additional and very important advantages to this model of governance called the
strategic board.

The first is that it prescribes roles for volunteers that can be fulfilled without an undue commitment
of time. By adopting a modernised model of board governance, credit unions discover that the
challenge of recruiting capable directors diminishes considerably.

Secondly, and even more importantly, effective governance is indispensable to attracting and
retaining professional managers with the talents and skills that are needed to run excellent credit
unions. Highly capable people gravitate to organisations where roles are well defined: Where

- 20 -

directors establish clear policies, expectations and goals, where results are objectively measured and
rewarded – and where directors then get out of the way and let managers manage to achieve those
goals to their best professional ability. Excellence in the board’s governance of the credit union is key
to excellent performance by its CEO and staff.

Graphically the shift in governance emphasis is shown below:

It is to be expected that the new model governance will require directors who are fit and proper for
their important roles. In which case a specific credit union fitness and probity regime should set out
the requisite skills and experience required of directors. Given the increasing complexity of financial
services providers generally and specific complexity envisaged with larger credit unions, directors
should be remunerated accordingly.

- 21 -

5: A FEDERATED NETWORK OF CREDIT UNIONS
It is a matter of historic record that while credit unions in Ireland have long recognised the need to
develop a cohesive centralist system, they have been unable for a variety of reasons to transition and
mature as credit co-operatives in line with their international peers.

Furthermore the Irish credit union business model and network structuration within an atomised
independent system operating within restrictive common bonds has meant that 8economies of scale
and scope have not been achieved.

Long before 2008 the business model in use contained a number of flaws which are exposed when
credit unions grow and mature as they have in Ireland.

Emphasising dividends paid from profits, the inclination of voluntary boards is to adopt risk adverse
practices focussed on maximising dividends and to compete with one another to pay the highest
rate. This behaviour leads to a strategy of dividend maximisation which eschews investment in
improving products and services and adopting market based pricing mechanisms. It also comes at a
cost of building the reserves required to ensure economic viability and sustainability and invest in
improving operational competence. Moreover aging boards tend to represent a sectional savers
interest and favour maximising dividends and minimising investment in building long term
sustainable business capacities.

The business model was at high risk to the possibility of an external shock which would have
negatively impacted on both system and individual credit union financial stability. Both the global
credit crisis and domestic recession have created these negative shocks and adverse conditions.

Addressing trends emerging the sector in a recent speech the Register for Credit Unions said:

“As yet it is unclear as to the level of restructuring that is likely to take place over the next couple of
years. However it cannot be ignored in that we are now seeing an increasing number of credit unions
coming under financial stress. The trend in arrears is continuing upwards and the opportunities for
prudent lending are decreasing. Income is depressed and costs are either remaining static or
increasing. Should these trends continue it is not implausible that a significant restructuring
programme for the sector may be required. If the sector is to remain sustainable in the long term then
the time for progressive solutions to the circumstances arising in the credit union sector may be
coming soon – if it’s not here already.” Address by James O’Brien, Registrar of Credit Unions, to the
National Supervisors Forum, 6 November 2010

While significant stability intervention has been implemented by the Central Bank, there is a risk that
the all too necessary regulatory cure may kill the patient, unless an overarching national policy and
development framework is created through which restructuring is achieved.

Such a policy and framework should ensure that the sector transitions at pace to a modern business
model within a federated network.

The sector faces significant issues that would challenge better resourced and competent credit co-
operatives. On their own credit unions haven’t the resources to make the changes necessary to

8
Lack of scale and scope is leading to rising costs and without a commensurate increase in income, margins are dramatically reducing.
Undiversified, credit unions are wholly reliant on income from unsecured consumer finance augmented by investment income from excess
funds. Operational efficiencies have not been achieved through the deployment of modern IT systems and automated processes. Adjusting
for cost of funds (dividend rate) credit unions were operating at over 80% cost income ratio in 2007 which left little head room to finance
investment losses and inevitable loan losses from unsecured consumer and small business lending.

- 22 -

survive and thrive. And collectively they demonstrate an inability to co-operate together and create
the central finance systems found elsewhere.

Uniquely amongst developed credit union and credit co-operatives Irish credit unions have remained
stuck in transition between a start up phase “finance company” business model and more mature
“savings and loans” model. (For a discussion on this please see the appendix)

Critical to transitioning to savings and loans co-operatives is the creation of central finance facilities,
a robust flexible regulatory system, professionalisation of governance and management,
considerable investment in IT and improving operational capabilities.

Unfortunately Irish credit unions were never likely to make this transition unless driven to do so by
an external forces.

Transitioning to a savings and loans business model within a federated network is an urgent
requirement if the sector is to deliver on its oft mentioned latent potential to offer a viable consumer
and small business banking alternative to commercial banking.

There is a need for a step change, creating the dynamic which will cause this to happen. Credit
unions will not be able to accomplish this step change on their own.

If Government and the Oireachtas consider the sector of national importance then policy must
address one key question: is the future to be defined by the autonomous, independent, atomised
credit union or is the future to be defined through a federated network of which consolidated
credit unions are constituent owners. Deciding on the latter is the first step to beginning to craft a
viable credit co-operative system that works.

- 23 -

A Federated Network

Creating a federated financial infrastructure and shared services alliance between credit unions
would solve for the strategic dilemma facing credit unions today. The sector doesn’t have the
collective resources, scale, scope or competencies to offer a viable savings and loans alternative to
commercial banking.

A 9federated network structure consisting of a “10central finance facility” owned by credit unions
would have the potential to:

1. Fulfil the strategic economic and social objectives and needs of participating credit unions.
2. Improve scale economies and achieve broader market reach
3. Leverage synergies
4. Utilise capital more efficiently, while enabling more effective access to wholesale funding
and capital markets
5. Enable credit unions to become a dominant provider of consumer savings and loans services
in Ireland.
6. Have the potential to provide banking services to small business
7. Facilitate the orderly rationalisation of the credit union network
8. Through contractual solidarity and cross guarantees effect stablisation intervention where
required

Critically the central facility or apex organisation, would also serve as the basis for the long overdue
rationalisation of the credit union movement, as well as provide financial stabilisation for viable
credit unions.

However, the facility would primarily operate as a wholesale commercial enterprise serving the
institutions that own it. It would operate as a wholesale bank to the constituent members of the
federated network. It would not act as a trade association or representative body.

Creating such a facility would be a significant undertaking, requiring a substantial commitment by
credit unions that join in its formation. For this reason, it would be sensible to begin with a relatively
small number of larger qualifying credit unions. The idea, however, is to build a facility in which all
Irish credit unions participate as both a co-owner and user.

Rather than creating such a facility from scratch, it might be possible to source a commercial
organisation that would have a number of the skills, organisational structure and the ability to act as
a contractor or in a joint venture operation with the credit unions that join the structure.

A diagram depicting the high-level model of a federated network is shown below.

9
See appendix for more detailed discussion on federated co-operative networks
10
Central Finance Facility is a term used by international credit union trade body WOCCU to define central corporate entities owned by
constituent credit unions.

- 24 -

The creation of a comprehensive, centralised support system has been a long-term goal of Irish credit
unions, and it has been endorsed in principle both by Government and the Central Bank. However, it
is an objective that credit unions and their trade bodies ILCU and CUDA have been unable to achieve
on their own.

Given current economic, political and financial market conditions, there is now a unique opportunity
to facilitate the creation of such a network.

The balance of this submission summarises the relevant international precedents and Irish
environmental circumstances, discusses potential models for a credit union alliance, identifies a
conceptual structure for such an alliance (including the potential advantages, disadvantages and
challenges in creating it), and suggests a roadmap for taking this visionary concept forward.

- 25 -

The Federated Alliance – evaluation criteria

To be achievable, any plan for an alliance must meet the following criteria:

1. A compelling and achievable business case for new model credit unions.
2. A compelling and achievable business case for a central finance facility
3. The plan must respect and preserve core credit union values, and provide for a degree of
local autonomy.
4. The number of credit unions will need to consolidate considerably to realise the scale
economies required to excel at their core business of saving and loans.

While these conditions are necessary, in my view they will not be sufficient to achieve acceptance by
a critical mass of credit unions.

Over the past decade, several services providers have presented compelling commercial proposals
that would have enabled Irish credit unions to achieve better scale economies or offer a broader
range of products. For a variety of reasons, these have either failed to achieve sufficient credit union
support to be implemented or have generated only modest results.

Furthermore the sector has long talked of centralist co-operative initiatives but has been unable to
progress these beyond publishing high level discussion documents. Long on talk and short on action
the system and its constituents are demonstrably incapable of transitioning to higher level business
models or creating the centralist systems required to underpin financial stability and sustainability.

Irish credit unions confront an imminent 11crisis which can only be addressed if they move quickly to
modernise their business model and rationalise the number of independent operations. And this will
require a step change which can only be accomplished by Government intervention.

Accordingly, an undertaking on the scale of that contemplated in this note is unlikely to succeed
unless a fifth criterion is satisfied:

There must be strong pressure on credit unions by Government and the Central Bank to participate
in a federated alliance.

Indeed such is the challenge, I would suggest that a special body be established by Government
charged with driving credit union rationalisation, transitioning consolidator credit unions to the new
business model and establishing the central facility.

Evidence from other countries suggests that transitioning to higher level structures occurred only as
regulators and government officials pressurised credit unions to adopt higher standards of
performance in return for greater flexibility. This intervention was in turn used by small groups of
larger, progressive credit unions and their managers to effect change. Pushed from behind by
concerned regulators and pulled from the front by larger credit unions, change occurred over time.

For example the modern day federated Australian credit union system arose from governmental and
regulatory responses to the collapse of the Pyramid Building Society. Likewise US federal deposit
insurance came about from credit union pressure to establish a federal guarantee over concerns the
private system was insufficient. The concern in Canada has been to allow for the ordered
consolidation of the number of credit unions in particular those without a viable future. In all three
countries whilst the numbers of credit unions have dramatically declined they have evolved as

11
New lending volumes have dramatically declined since 2008 which will cause a rapid deterioration in loan book quality and critical
interest income stream.

- 26 -

vibrant alternatives to banks through expanding products and services, delivery channels and
number of branch outlets. In Canada some centrals now have their own branch networks having
bought them from banks.

None of these changes would have been possible were it not for the creation of central finance
facilities, professionalisation of governance and management, investment in modern technologies,
adoption of the savings and loans model and in time transitioning it to the full banking model.

Of the three basic models for credit union/co-operative cooperation mentioned above I believe that
only the second, the Federated Network, is likely to meet all of these 12criteria.

The Atomised model is dependent on a wide and deep markets for credit union outsource services
and service providers. The development of the US credit union service organisation (CUSO) model
was only possible given the continental scale of its financial service marketplace.

Proposing a fully Integrated/Merged structure in which credit unions become, in effect, local
branches, the third model would be viewed as a takeover of the credit union movement. Even the
suspicion that this was the goal would result in overwhelming opposition from the credit union
sector.

Conceptually, the three alternatives are diagrammed as follows:

Atomised Federated Network Integrated/Merged
“Loose Alliance” “Coalition of the Willing” “Command Hierarchy”

League Central Hub
Central Co-operative Cooperative Bank
Representational/Development
Wholesale Bank

Members
dominate Balanced Centre
management Dominates
Autonomous
status Credit union Branch there
drives local to sell
A la carte
delivery
membership

Credit Unions Credit Unions Branches

+ Good customer experience + Good customer experience + Efficient Sales Machine
-Inefficient + Efficient - Poor customer service

Degree of Integration
Adapted from Mercer Oliver Wyman

The left hand column represents the current Irish credit union form of loose association through
trade bodies and their business services. The far right column represents a mutual building society
organisational system of a central head office and branch network.

The best way forward, is for a federated network. In this model, credit unions would receive
centralised support services from an entity they would both own and over which they would share
joint control.

Developing an appropriate governance structure for such a central federated body would be one of
the most challenging elements involved in designing and implementing this concept. Needless to
say, people would have to be convinced that the resulting central body would operate at a high level

12
Credit union ownership is crucial to the long term durability of an alliance. When U.S. credit unions entered the third stage of
development in the mid-1970s, they first obtained current accounts, card processing and investment services from commercial banks.
Within a decade, they were abandoning those contractual arrangements, building credit union-owned corporate credit unions and other
service corporations to perform those functions. Credit unions did not want to remain dependent on actual or potential competitors for
their core functions. CUNA Mutual preserved its position because it was always owned by its credit union policyholders. Similar
considerations were also present in Canada and Australia.

- 27 -

of financial soundness and operational professionalism. This critical dimension is discussed in greater
detail below.

A proposed federated structure

The proposed structure for a credit union alliance involves creating a new central finance facility that
would be owned by participating credit unions, who would also be its only customers. Although they
would receive central support services from the new entity, credit unions would continue to trade
independently under their own names.

The facility would likely be incorporated as a commercial bank, although ownership might be held
through a holding company organised as a co-operative. A diagram of the proposed structure is
shown again below:

Fully implemented, the central banking facility would allow credit unions to collectively achieve
greater efficiencies of scale in back office operations such as IT and payments systems, as well as
obtain other services such as liquidity and investment management, regulatory compliance, internal
audit, risk management, human resources, marketing support, and group purchasing.

Depending on the final design, it is likely that a significant portion of operational capabilities would
be centralised to the new entity. Some functions of the central might be conducted through one or
more wholly owned subsidiaries. In addition a stablisation mechanism for credit unions based on
contractual solidarity and cross guarantees could be provided as a 13backstop to the DGS.

While there are many legal, regulatory and tax issues that would require research before an optimal
structure could be validated, it would appear that the structure above should confer the following
advantages:

13
Some Canadian provincial central finance facilities provide a stablisation mechanism and funding under devolved authority and
authorisation of provincial deposit insurers and regulators.

- 28 -

Legal Simplicity. Participating credit unions would retain their current legal forms, pursuant to the
Credit Union Act. It does not appear that setting up this structure would require amendments to
primary legislation.

Ownership. Credit union acceptance of this concept depends on the perception that it conforms to
established international norms for credit union support organisations. Key to those norms is the
concept that credit unions should own the support structures that are strategically essential to their
on-going independence as a unique social movement. This structure would satisfy that requirement.

Governance. Using a co-operative holding company as the vehicle for joint ownership allows for use
of a capital structure that would recognise disproportionate contributions of its owners, while
affording representation on the holding company board.

Although governance is the most difficult aspect of designing a central facility, I believe that a
structure can be set up that is acceptable if the governing board is constrained by certain agreed
upon principles. Those should include, for example, that the central provides services to its owners
on a fair and equitable basis, with uniform pricing reflecting actual costs given the respective volume
of business each brings.

Access to Capital. Whilst a co-operative holding company structure would be used to maintain credit
union control of the central banking facility, it would also allow for the facility itself to be 14publicly
listed. This would enable access to equity markets on a basis that could be advantageous to the
majority owners.

In-system stability. Through contractual solidarity and cross guarantees, credit unions would
effectively leverage off their combined balance sheets.

Special Purpose Subsidiaries. To the extent desirable for tax or other reasons, the structure would
permit for the incorporation of subsidiaries for special purposes. Those might be owned by the
central finance facility (as shown in the diagram above) or by the co-operative holding company.

Conceptual Federated Model

Members

Credit Credit Credit Credit Credit
Union Union Union Union Union

Central Finance Facility
Bank

Asset
Insurance Leasing Credit Cards
Management

14
OKO Bank (Finland) provides for public listing

- 29 -

Anticipated business advantages

Notwithstanding the logic of the proposed ownership structure, the likely success of the alliance
depends on the business advantages it actually brings credit unions. From an overview perspective,
the business case appears to be compelling:

Scale Economies. Credit unions would be able to afford resources they individually lack the size to
obtain affordably.

The functions performed by the central body could start with payment systems, IT and
investment/liquidity management, and they could grow over time to include most or all of the
following back office and support functions:

• Regulatory compliance
• Legal services
• Internal audit
• Risk management
• Human resources (recruitment, training, payroll, etc.)
• Group purchasing of supplies and equipment
• Market research and analysis
• New product development
• Product support and development

Funding and Liquidity Management. The central would have the capability to help credit unions
participate in the wholesale funding markets. The proposed facility would be designed to facilitate
this process and to manage more efficiently the liquidity and capital of its owner institutions.

Specifically, this could be accomplished through the following mechanisms:

• Through the central platform, credit unions would be provided with investment services.
• Credit unions would be allowed to borrow from the central facility to meet their short term
liquidity needs, such borrowing to be fully secured by the funds they hold on deposit with
the central.
• To the extent that any one party requires greater liquidity, the professional management
provided by the central would be used to obtain funding from wholesale markets. As a bank
in its own right, the central could also draw funding from the Central Bank of Ireland.
• Participating credit unions could access ECB MMR support which is something they cannot
do at present.

The central could provide for stabilisation funding for credit unions similar to the system deployed in
Canada where centrals working with deposit insurers are authorised by their regulators to stabilise
troubled but viable credit unions. Such a mechanism would be dependent on contractual solidarity
and cross guarantees together with an appropriate relationship with the Central Bank and its DGS.

It should be noted that in advanced markets stablisation funds are no longer utilised. Risk
minimisation is effected through early state interventions, prompt corrective actions and enforced
mergers. Funding where required is frequently used to temporarily support the acquiring credit
union. For a more detailed consideration of stabilisation please see the attached submission to the
Central Bank on stablisation.

- 30 -

Given their need for professional liquidity management, credit union access to current account
services should be conditioned on their maintaining a substantial share (if not all) of their liquidity at
the central.

As already noted, the proposed structure could provide access to equity markets if the central (or
one of its subsidiaries) becomes a listed company. To the extent they need to free up their existing
capital to support growth, participating credit unions could transfer assets into the central; thereby
taking advantage of the latter’s access to capital market funding and capacity to securitise assets.

Broader Retail Reach & National Footprint. The proposed alliance would offer credit unions the
ability to offer products through a larger 15branch network, as well as conduct workplace affinity
marketing via employer credit unions.

Broader Product Line. Credit unions would benefit from access to a broader array of financial
products. Representing a primary retail distribution channel to millions of consumers, the central
would have enhanced market power to enter into alliances with product providers 16unavailable to
individual credit unions at this time.

Credit unions individually lack the size to be effective participants in the home mortgage market.
However in line with developments in other markets the central could provide the resources,
competencies and capabilities to enable credit unions to offer mortgages.

Enhanced Financial Services to Small Business. Whilst credit unions provide limited financial
services to small business, they are not recognised as primary bankers to small enterprises. In other
countries, central finance facilities have developed competence and expertise in this important area
of co-operative banking.

A central could assemble the resources required to allow credit unions to expand their small business
service capabilities. Typically, centrals establish mobile small business lending teams who, operating
on a shared branch basis, are supported by dedicated central expertise. Some also provide internal
loan syndication processes which pool and allocate loan assets to participating members. They also
leverage their collective market purchasing power, building third party alliances to increase the
scope of small business products and services offered.

Social Finance. Effective social finance is a specialised form of commercial lending requiring expertise
that credit unions do not possess. A central could establish a special purpose finance facility and
specialist lending team providing social finance facilities through credit unions.

Movement Stability and Rationalisation. The central facility could provide a platform for
professionally managing the rationalisation of the credit union system. It is widely recognised that
the number of credit unions in Ireland will need to reduce, but there is no vehicle currently available
to handle that process in an orderly fashion.

In General. Credit unions have neither the scale efficiencies nor the operational competencies to
deliver on a long standing objective to deliver a full banking service. An alliance along the lines
proposed in this submission has the potential to create the roadmap to achieve this business and
social objective.

15
There are a significant number of underperforming credit unions in high density urban and provincial locations that would benefit from
rationalising with a larger neighbouring credit union and participation within the alliance structure.
16
Alliances to provide consumer products (insurances, credit cards etc) require distribution scale in customer numbers which an alliance
would make available.

- 31 -

Anticipated business disadvantages and obstacles

The potential disadvantages of the proposed structure come from the execution risks of its
implementation. Obviously, it would represent a major strategic initiative that would have
significant implications for future operations.

The primary obstacle to accomplishing this vision is in getting credit unions to participate. Credit
union decision making processes are notoriously slow. In the past, even where credit union boards
agreed to proceed with a joint initiative they have changed their minds at the last minute and failed
to actually commit to and fund commercial joint ventures. Even in much more highly developed
credit union movements, volunteer boards are reluctant to fully embrace new business ideas. The
history of credit union modernisation in the U.S., Canada and Australia has been characterised by
major new initiatives being launched by a handful of leading institutions, with the rest following in
time once the concept is proven to work.

Moreover, the process of developing an alliance would be complicated geometrically by the number
of credit unions initially involved. On the other hand, a structure that is developed and implemented
by a founding group could be presented on a basically “take it or leave it basis” to those credit unions
who follow.

It is likely the Central Bank will look favourably at credit unions participating in an alliance and afford
them the greater flexibility they have advocated for. This has been the experience elsewhere where
federated centrals supervise their members under devolved powers from state regulators. In this
case it is envisaged that credit unions anxious to grow and expand services to members will want to
join a federated network system.

Government support

An important first step will be support for this concept from Government and the Central Bank.
Although Government has been largely preoccupied with its rescue of the Irish banking industry,
officials in both the Department of Finance and Central Bank are undoubtedly very conscious of the
critical need for reform of the credit union sector.

6: CONCLUSION
In conclusion the immediate future of credit unions should be defined by sticking to the knitting of
savings and loans and excelling at their delivery. The current network should rationalise through a
planned programme of consolidation with resultant consolidator credit unions required to transition
to a new model of business operations. These credit unions could be required to be constituent
owners of a central finance facility which is underpinned by contractual solidarity and cross
guarantees. In effect what’s proposed is the creation of a European style community focussed, credit
co-operative banking system guided by credit union operating principles and ethos.

Bill Hobbs
August 2011

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APPENDIX 1 : NOTE ON FEDERATED CO-OPERATIVE SYSTEMS
Atomisation or Federation
Globally credit co-operatives have developed from individual loose form groups of individual credit
co-operatives (atomised) to highly integrated networks coalescing around a central finance facility
(federated). Frequently this facility is a wholesale bank providing a range of services to its constituent
owners.

The following diagrams illustrate the typology found in credit co-operative systems. Ireland
regrettably remains rooted in the start up phase in all these models.

This diagram illustrates the stages of development found in credit unions internationally. The Irish
system has been stuck between Nascent and Transition for almost two decades.

Nascent Industry Transition Industry Mature Industry
Small asset size Large asset size Large asset size

Tight Common Bond Adjusted common bond Loose common bond

Serves weak sections of society Widened customer base Competitive environment

Single savings and loan product Greater product diversification Electronic technology
environment
High commitment to traditional Weakening reliance on Professionalisation of
self-help ideas volunteerism management

Development of central services Well developed central services

Need for greater effectiveness Organised progressive trade
and professionalism of trade bodies
bodies
Diversification of products and
services based on market rate
structures
Emphasis on economic viability
and long term sustainability

Rigorous financial management
of operations
Well functioning deposit
insurance mechanism
Adapted from
“An Industry Approach to Classifying Credit Union Development” C Ferguson & D G McKillop 2007

This typology of Nascent, Transition and Mature can be translated in turn into generic business
models deployed in each stage:

Credit Union Business Models
International Phases of CU Development
Model A Model B Model C

Co-operative Savings & Loan Full Service
Finance Company Specialist Co-operative Bank

Source Third Way Alliance 2009

- 33 -

The following diagrams capture the stages of development from atomised credit co-operatives
(Ireland) to federated strategic networks seen in European style co-operatives such as RaboBank, The
Netherlands and OkoBank, Finland. Farther afield the Canadian Movement Desjardins and Australian
credit unions amongst others have also evolved strategic networks.

Irish credit unions can been seen to be lying somewhere between atomised and cohesive networks
.

Cohesive
Atomised Network Strategic Network
Representation Pooling resources/
standardisation Separation of strategic and
Cooperative operational management
Education Market Sharing
and control
Advisory Standardised Image
Services Prudential supervision
delegated monitoring
Delegation of strategic
planning
Contractual solidarity
cross guarantees

CIRPÉE
Centre interuniversitaire sur le risque, les politiques économiques et l’emploi

The Power of Networks: Integration and Financial Cooperative Performance
Martin Desrochers
Klaus P. Fischer
May/2005

Characteristics of Networks

Representation The central represents the system in issues of common concern
(regulation) taxation, other cooperative movements etc
Atomised Cooperative education Provides or supports cooperative education among members of
the first tier
System
Advisory & Prudential services The central provides business and or/prudential management
services for the members

Voluntary pooling of resources and The central is responsible for the management of common
standardisation resources and supports standardisation of operating
procedures across the system
Market sharing The network has rules eliminating inter member competition
Consensual
Networks Unique image The network assumes a unique trade mark and image to which
all members adhere

Delegation of strategic planning The central performs strategic planning for the network,
function although there is no mandatory compliance with approved
strategic plans
Separation of strategic and operational There is a separation of strategic and operational decision
decision management management between the central (strategic) and members
(operational). The central and members are bound by network
decisions. This includes mandatory pooling of resources and
Strategic standardisation of operations in areas chosen by the network

Networks Prudential supervision role The central assumes the role of prudential supervisor (or
auxiliary supervisor) of the members

Contractual solidarity The network adopts mechanisms of collective insurance
designed to assist members or the central in difficulties
Adapted from: CIRPÉE
Centre interuniversitaire sur le risque, les politiques économiques et l’emploi
The Power of Networks: Integration and Financial Cooperative Performance
Martin Desrochers
Klaus P. Fischer
May/2005

- 34 -

A Co-operative Banking Strategy for Ireland: Creating a National Federated Network Amongst Credit Unions

A Co-operative Banking Strategy for Ireland: Creating a National Federated Network Amongst Credit Unions

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