Co-Ops & Credit Unions – A Governance Crisis?

My Feasta colleague Ciaran would probably introduce this article with the words: “If I were a conspiracy threorist, which I am obviously not,….”. This week, we have parallel stories running in the mainstream media – in the UK about the disgraced ‘amateur’ chairman of Co-Op Bank, and in Ireland – about the ‘amateur’ management of the Newbridge Credit Union which has required (allegedly) its absorption into the sanctuary of the state owned Permanent TSB bank.

The subtext of both of these stories seems to be the inherent dangers in trusting the operation of financial institutions to non-bankers. Quite handy (Ciaran might say) at a time when the incompetence and carefree disconnectedness of mainstream banks is being so clearly and repeatedly showcased. Just when the implications of ‘over-professionalising’ banking and allowing an overpaid clique of casino-managers to screw up the real economy are becoming clear to the masses, we are being encouraged to think we can’t do without them.

Now the case cannot be made quite so explicitly, because this might cause us to remember a few unfortunate details. Like the shameless, casual gaming and misuse of the banking system carried out by Anglo Irish Bank as graphically revealed in the release of the ‘Anglo Tapes’; or the shenanigans of Fred the Shred at RBS as the company lost £24 billion in 2008. David Drumm at Anglo and Fred Goodwin at RBS were ‘professional’ bankers.

The public backlash in the UK is exemplified by the MoveYourMoney campaign[1]. MYM claim that 2.4 million people and businesses have switched banks. They rate banks on honesty, customer service, ethics, culture and support for the real economy. About Co-Op Bank MYM say: “The Co-operative Bank was once the standard bearer of ethical banking, but the bank has experienced recent setbacks that have hurt its image. With high fines and use of tax havens the bank scored poorly for honesty, while on customer service it barely scored any better. Some customer power, and minimal risky investments were plus points, but need to be looked at against a backdrop of high directors’ pay and limited support for the real economy.” Co-Op Bank has played a key part in financing groundbreaking renewable energy projects such as Loch Carnan [2] and Baywinds[3], the launchpad for Energy4All and its subsequent successes. But the banks recent troubles have seen it withdraw from this market [4].

The recent icing on the cake for the bank was the entrapment of its chairman by the Daily Mail (who else?) in the process of allegedly buying illegal drugs. This unfortunate incident has opened the door to intense criticism, not primarily about his drug use but around his credentials as a bank chairman, illustrated by a poor performance in front of a House of Commons select committee. Much is being made of his lack of operational banking experience. By implication, appointing a non-professional was the big mistake – but what were Drumm and Goodwin’s excuses?

In Ireland, the Central Bank obtained a court order in January 2012 to appoint a Special Manager to Newbridge Credit Union (NCU). In the view of the board of the NCU, the legislation used to launch this order, and the subsequent resolution which sees the transfer of NCU accounts to Permanent TSB are ‘clearly designed for banks and not credit unions'[5] and inappropriate. They claim that there were no liquidity or solvency issues in January 2012, and that the actions of the Special Manager, abetted by a series of ill-informed and biased leaks, have subsequently compromised the commercial position of the NCU. Since the placement of the SM no AGM has been held and none are planned. The danger is that the truth will never see the light of day. Patrick Honohan, Governor of the Central Bank of Ireland is due to appear before the Public Accounts Committee of the Dail imminently [6], but an outbreak of transparency seeems unlikely – Honohan has been accused of trying to cover up the Anglo issues [7], and was eventually forced unwillingly into triggering an investigation [8].

The Central Bank are thought to have plans, to be implemented by the so-called ReBo (REstructuring BOard) to reduce the number of Credit Unions from 400 to between 150 and 200. The suspicion is that the NCU intervention is a part of a wider Central Bank initiative to discredit the CU movement and bring it to heel – into line with traditional banking. It has also been alleged that the absorption of NCU provides a convenient way of quietly introducing 50mn euros+ of finance into the troubled PermanentTSB. The CU movement has a very strong tradition at the heart of Irish society, but a concerted media offensive based on a selective reading of the Newbridge situation could do it severe damage.

The longer term issue here, both for the Irish Credit Unions and for the ethical bank movement and co-operatives in the UK, is of credibility. There is a huge increase in interest in the ‘sharing economy’, a disaffection with the banks and an appetite for new financial models. A key issue though is the competence of challenger banks and credit unions in the assessment of risk. It’s not that they have a hard act to follow – the ‘professionals’ have cocked it up time after time. It’s more that (as Ciaran might say) they should expect the banking incumbents, assisted by the mainstream media, to take every opportunity to defend their entrenched position. If this rearguard action succeeds, the opportunity for innovation – for example in the capital financing of energy projects – will be lost. There is already depressing evidence that the highest aspiration of the mainstream political class is a return to ‘business as usual’. That would be a disaster on both sides of the Irish Sea.

5] Statement on Behalf of the Board of Directors of Newbridge Credit Union Limited 12 November 2013

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2 Replies to “Co-Ops & Credit Unions – A Governance Crisis?”

  1. Is there any evidence that the loans to developers which appear to have brought down the Credit Union were made by the Special Manager? However much the takeover may accord with long-term plans, it is necessary to prove that the Credit Union could have traded out of its difficulties before denouncing it.

  2. The lack of transparency means that not much *is* clear. Its possible that any bad-risk developer loans were manageable within the context of the overall loan book. The board certainly seem to think the situation was manageable at January 2012. An AGM where these questions could be answered might help.

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