Brussels, 16 October 2014
State aid: Commission approves restructuring aid scheme for Irish credit unions
The European Commission has found an Irish scheme aimed at restructuring the credit union sector to be in line with EU State aid rules. In particular, the Commission concluded that the scheme will strengthen the Irish financial sector, while limiting the risk of distorting competition in the Single Market. This is the first scheme that a Member State puts in place for the restructuring of small financial institutions as foreseen in the Commission's 2013 Communication on state aid rules to support measures in favour of banks in the context of the financial crisis (the so-called 2013 "Banking Communication" see IP/13/672 and MEMO/13/886).
Commission Vice President in charge of competition policy Joaquín Almunia said: "This scheme will help Ireland to successfully restructure the credit union sector without unduly distorting competition in the Single Market".
Credit unions are financial cooperatives that provide access to credit and savings facilities to their members. They are regulated by the central bank and required under Irish legislation to keep a minimum reserve as a buffer to absorb losses before they can have any impact on deposits and deposit guarantees. During the crisis a number of credit unions fell below the minimum reserve requirements although this is no longer the case.
In July 2014, Ireland notified plans to address this by supporting the stabilisation of credit unions and their amalgamations. The scheme will have a budget of €280 million, out of which €250 million are funded by the Irish state to support amalgamations, and €30 million to stabilise specific credit unions will be funded via a sector levy. Viable credit unions with a certain minimum level of reserves may apply for capital injections to raise the reserve ratio to the required level. Credit unions with a reserve ratio below this threshold will need to be resolved. Beneficiaries will have to repay injections received, or if they are unable to do so, the outstanding amount will be recovered from the sector by means of a levy. This means that the Irish state will be reimbursed in full.
To strengthen the sector, credit unions with insufficient reserve ratios are encouraged to merge with stronger credit unions. This is expected to lead to economies of scale and stronger management. To implement these amalgamations, credit unions may apply for state aid in the form of capital injections from the Irish authorities.
The Commission found the scheme to be in line with its 2013 Banking Communication. In particular, it deals with the issue of capital shortfalls in the credit union sector, which the EU-IMF programme identified as a problem in Ireland. The Irish central bank will perform a strict viability assessment on each individual case taken into consideration under the scheme as part of the commitments provided by Ireland. Finally, the fact that individual players in the Irish credit union sector are very small (on average roughly 35 million in total assets) and that only those credit unions of a size of up to 100 million in total assets will be allowed to benefit from aid under the scheme will ensure that the distortions of competition brought about by the aid are limited. Credit unions of a size over €100 million in total assets are not excluded from stabilisation support. Support to such credit unions will have to be notified to the Commission in advance and requires the Commission's approval.
Credit unions are member-owned, not for profit entities, whose business primarily relates to savings and consumer loans (not mortgages). Credit unions only do business with their own members. The sector is geared towards social inclusion and access to credit facilitated by the common social bond of the members rather than commercial success. There are some 390 credit unions in Ireland that have on average a balance sheet size of € 35 million. Compared to other banks, this is very small.
The Programme of Financial Support for Ireland from the European Union and the International Monetary Fund concluded that the Irish credit union system needed restructuring as a significant number of credit unions turned out to be undercapitalised during the crisis causing concerns for financial stability. The scheme approved today facilitates the required restructuring process.
The Commission's 2013 Banking Communication opens the possibility for Member States to propose schemes for the restructuring of smaller banks. Once approved by the Commission, such schemes outline the general principles for granting restructuring aid and make it unnecessary for Member States to notify each case separately. This allows Member States to swiftly grant unproblematic support in a wide range of situations and helps the Commission to focus on the potentially most distortive cases. Member States are required to regularly report on the implementation of their schemes.
The Irish scheme for credit unions is the first such scheme to be notified to and approved by the Commission.
More information will be available on the competition website, in the public case register under the case number SA.36262.