Credit Union Bank Deposits

Update – European Banking Authority makes recommendation to European Commission

In January 2014, following representations from the European Network of Credit Unions (ENCU) of which ABCUL is a founding member, the European Banking Authority (EBA) made a recommendation to the European Commission (EC) that it consider the unintended consequences of Basel III liquidity rules on credit unions in Ireland and elsewhere.

This recommendation will be taken into account by the EC when it comes to issue “delegated acts” which will modify liquidity rules under the Capital Requirements Regulation which implements Basel III in Europe.  ABCUL is hopeful that the EC will heed the EBA’s recommendation and that this will result in some improvement in bank deposit rates for credit unions.  It should be noted, however, as below, that this is only one of a number of factors contributing to falls in interest rates for credit union deposits.

February 2014

The problem

Over the past few months it has been brought to our attention that some credit unions have been experiencing both sharp reductions in interest rates offered by banks and, in some cases, a refusal to accept deposits from credit unions altogether.  This is a very worrying trend in an already-tough trading environment.

ABCUL has been doing what it can to explore the reasons behind these trends and believes they fall into two categories:

1. Monetary policy – the various schemes which the Government and Bank of England have adopted to support the economy and to encourage lending (i.e. 0.5% base rate, Quantitative Easing, Funding for Lending and Help to Buy) have depressed banks’ demand for funds from depositors.
2. (International) regulatory reforms – through our work with the European Network of Credit Unions (ENCU) and the World Council of Credit Unions (WOCCU) we are aware of several regulatory changes affecting banks which are combining to make credit union deposits less attractive.

1. Basel III – the new Basel rules, set by the Bank of International Settlements, seem to classify credit union deposits as “hot money” which has a higher assumed run off rate in the event of financial stress and, therefore, require banks to hold greater liquidity against.  This has the effect of raising the cost of this capital to the banks which can cause some to reduce the returns they offer or refuse to offer them at all.
2. Anti-Money Laundering – the Financial Action Task Force has introduced anti-money laundering requirements which insist that financial institutions vet the customers of their financial institution customers which is a regulatory cost which some banks may consider too high to justify providing accounts to credit unions.

What is ABCUL doing?

While there is a limited amount we can conceivably do about monetary policy given the ongoing economic context, we are hopeful that working in partnership with our international colleagues we will be able to secure reinterpretations of the regulatory matters cited.

We are actively working with WOCCU and ENCU to try and ensure that the regulations that banks have to comply with do not prevent them from serving credit unions or drastically reducing the rates they offer the sector.  For instance, we recently held meetings with the European Banking Authority (EBA) in London and the European Commission in Brussels particularly in relation to Basel III and the definition of credit union deposits.  Policy makers at both institutions are sympathetic to credit unions’ situation and are looking to clarify credit unions’ status as depositors in their regulations with the effect that they be considered more “sticky” and therefore less costly to hold.

We are also exploring how far anti-money laundering measures are contributing to these trends and how we might be able to mitigate this.  Similar moves in the US were averted by providing support to bank compliance with AML measures and using political pressure. Similarly, we have also discovered an issue with Companies House not returning credit union records since registration moved to the FCA in April which has been cited by some banks as a reason to deny accounts to credit unions and we are exploring how this can be resolved.

Market research

ABCUL has tasked an associate to research the market for credit union deposits to establish the scale of the problem. To date all of the major banks seem to be continuing to accept deposits from credit unions though sometimes credit unions are required to open separate transactional accounts, offshore bonds or certain forms of Treasury account in order to do so.  Our advice is therefore to be persistent when dealing with banks who initially indicate that they cannot take credit union funds as it is often the case that they will under certain circumstances or with certain products.

Bank interest rates on deposits, of course, remain depressed but we are hopeful that the recent annoucnement of scaling bank Funding for Lending by HM Treasury may indicate the beginning of an unwinding of extraordinary monetary measures to support the economy.  Combined with our interventions on regulatory on regulatory policy, we hope that this wiill lead to increasing interest rates over time.