Maximising the savings of members has been a long-standing doctrine of credit union success. For not only do savings build abundant liquidity for lending, but they also contribute directly to the financial health and resilience of the members. In the long run and for their own financial security, it is not what members borrow that matters, but what they save. The 19th century credit union pioneers knew this; that’s why they regarded credit unions as primarily savings institutions committed to the promotion of thrift.
But something strange is happening in the credit union sector, mostly in Ireland but also now in the UK: Credit unions are beginning to see the maximisation of savings not as an opportunity but as a threat. In the past, savings growth was to be applauded, for as well as ensuring the stability of the credit union and the security of its members, it demonstrated the high level of trust that people placed in the institution. People do not deposit their life savings in institutions they do not trust.
But now more and more credit unions have the maximisation of savings as an item on their risk register. Credit unions can be seen to be capping the level of total or monthly member deposits and driving down dividend rates in order to reduce the inflow of savings – or even asking members to take out their savings and lodge them in another financial institution. What has happened and how has this come about?
To understand the extent to which credit unions see savings growth as a problem and to comprehend the actions they may be taking, CFCFE has surveyed 47 Irish and British credit unions and interviewed 12 chief executive officers. The results of this inquiry are being combined with the perspectives of trade associations and sector stakeholders.
Our findings so far suggest that there is a consensus that the fundamental driver of the problem is the sub-optimal level of lending. This is combining with low income available on deposits to depress the income needed to build capital ratios and pay dividends. In Ireland, negative interest rates are adding to the costs of retaining savings and exacerbating the problem. The impact of the pandemic is a mixed picture, with different levels of savings growth or lending decline across respondents.
A majority of credit unions from our sample in Ireland, and a minority from the UK, have introduced actions to lower savings to protect the stability of the credit union, but there is particular concern in Ireland that this goes against the grain of the credit union ethos. It is worth noting that the vast majority of members in Ireland and the UK are unaffected by savings caps, which are around €20,000 and above, but those individuals who have high net personal worth and / or who have built up substantial savings pots with the credit union over a long period of time or through retirement lump sums. On the whole, credit unions in the UK are, in our sample, not as concerned, which may reflect the healthier loan-to-asset ratio of the UK movement compared with Ireland.
In the short term, a radical change in lending volumes is unlikely and therefore insufficient. Research participants have suggested solutions including more flexible approaches to capital adequacy, reserve deposit accounts that can be regarded off balance sheet, and greater scope to implement new fee-based services. These ideas would require regulatory support. CFCFE plans to consider some of them in more detail in the coming months.
The final report will be available in April. If you are not a CFCFE member, go to our Home page to subscribe to our mailings and get notified.