Longer term and business lending, risk and asset liability management Chapter Officers – 17 th & 18th February 2007

Introduction Long term lending Business Lending Risks Importance of Asset Liability Management Possible solutions for consideration Recognition that this may not be an issue for every credit union but it is for the movement

Longer Term Lending Context Credit unions have been giving larger loans and longer term loans Revised Section 35 means this trend will continue At September 2005 over 20% of the total loans for the movement were over 5 years in duration Almost 4,500 loans outstanding are above €50,000 Due to restrictions not yet an issue for most Northern Ireland credit unions

Longer Term Lending Different Skill set required for longer term lending Can be increased credit risk Larger loan amounts –Lower interest rates/lower margins –Increased management information necessary Taking of securities Matching loans over longer terms with immediately withdrawable shares Cross selling is vital

Key Supports Support infrastructure to provide: –Credit Assessment –Credit Control –Asset Liability Management –Legal Support –Securitisation Link to Savings Protection Scheme –SPS Company may issue guidelines/standards Membership of ICB / Experian Other management information

Asset Liability Management Asset/liability Management (ALM) is the proactive management of all assets, liabilities, income and expenses to obtain the maximum return for the credit union with the minimum amount of risk. Currently imbalanced as assets are characterised by a longer maturity profile than the liabilities that they support Liquidity risk Interest Rate Risk Repricing risk Restructure savings from shares into deposits

Mortgage Business Case Growth in lending market has been driven by the growth in mortgage finance Consolidation of loans Opportunity for credit unions to enter mortgage market and make a return Credit Union absence from the mortgage market has resulted in lower growth rates in lending and loss of market share ROI lending growth rate 6.5% versus market rate of 20% (year ended Sept 06)

Mortgage Business Case Surplus liquidity in the movement would: –Enable credit unions to provide 17,000+ mortgages –But unchanged Section 35 implies only 500+ mortgages –Revised Section 35 implies 750+ mortgages If required extra funds could be obtained externally or via securitisation programme

Credit Union Analysis Section 35 has been modified which is only the first step A support infrastructure would be required for credit unions, especially smaller credit unions Risk weighted approach to capital is essential Enable credit unions to develop non- interest income streams from cross selling

International Comparison Australian Movement –75% of loan portfolio accounted for by housing –Savings almost exclusively held in deposits –Risk weighted reserving –Non-interest income is 34% of total income US Movement –38% of loans are real estate –Wider range of services by larger cus –Lower levels of delinquency

Mortgage Options 1.Credit Unions register as mortgage intermediaries 2.ILCU as Mortgage Broker/Agency 3.Joint Venture 4.Mortgage CUSO (credit union service organisation)

Credit unions as Mortgage Intermediaries System being used by credit unions with IIB and EBS already Credit unions receive a commission for mortgages taken out by its members 0.25% - 1% Commission rate depends on the work carried out by the credit union and volume of lending Credit unions must receive authorisation from the Financial Regulator & League Board Not an option for Northern Ireland credit unions as they cannot register as intermediaries

ILCU As an Agency/Broker ILCU negotiates with multiple mortgage providers Agency recruits small number of staff Credit unions generate larger volumes of business and larger commissions A portion of the commissions would be used to cover the costs of the agency For Northern Ireland credit unions discussions would need to take place around this option

Joint Venture The Joint Venture acts as the mortgage provider with credit unions acting as intermediaries Decreases risks and reduces cost (versus CUSO approach) Credit unions can make surplus funds available to lend to members Credit unions can invest funds and get a return If required extra funds could be provided by the partner Additional staff to deal with the joint venture company Buyout Clause The Northern Ireland Registrar has no issue with this option

Mortgage CUSO Two main types could be possible: 1.Wholly owned by the movement and the processing/underwriting work outsourced to another company 2.Wholly owned by the movement and the expertise hired by the company to do its own processing/underwriting work The Northern Ireland Registrar has no issue with this option

Mortgage CUSO Movement dedicates resources and funding to develop a CUSO Mortgage is held on balance sheet of credit union if it has the funds Centralised Functions for Credit Assessment, Product Development Significant costs and risks associated with setting up a CUSO

Business Lending Considerations Credit Unions in the Republic of Ireland are giving business loans to maintain loan volume and to meet changed member needs, independent assessment is vital Specific Competency –Analysis of business plans and financial projections –Management information is critical –Supervision is vital –Mentoring and advice role

Business Lending Considerations Risky area of lending activity Options –Local expertise and experience –Use of third party e.g. First Step –Business Lending Advice Centre Advise on loan approval/refusal Security requirements

Next Steps Discussion at Chapter Mortgage Business Case Summary to be circulated to credit unions Feedback at next Policy Forum