Central Bank publishes review of the credit union sector 

Information Release 2 May 2014

View full Credit Union PRISM Risk Assessments Supervisory Commentary

The Central Bank of Ireland has today published a paper, circulated this week to credit unions and their trade bodies, on the findings of its assessment of governance and risk management standards and practices across the sector. During the course of its PRISM risk assessment engagements the Central Bank identified areas of best practice which set standards for the sector, alongside a number of specific areas for development.

In the course of the review the Central Bank found a number of credit unions had sound standards and good practices, were prudently managing risks, and had embedded sound risk management and compliance practices. These credit unions could become models for the wider sector to follow. 

However the review found a number of issues in credit unions which require improvement. Since commencing risk-based supervision of credit unions in May 2012, the Central Bank has completed on-site risk assessment engagements with almost 200 credit unions representing approximately three quarters of the sectors total assets and savings.  These credit unions have been issued with risk mitigation programmes requiring them to address the issues.

Governance, credit, operational and strategy/business model risk accounted for eight out of ten of the material risks issues needing remediation with weaknesses in governance and credit highlighted as areas requiring improvement.

Director of Credit Institutions and Registrar of Credit Unions, Sharon Donnery, said: ‘Our first cycle of risk-based engagements has provided us with deeper insight into the specific issues and challenges facing the credit union sector, in particular the nature of some weaknesses which require improvements in standards and practices. We have found some individual credit unions with good standards and prudent strategies, and see these credit unions as setting the standard which the wider sector can build on. The Central Bank will continue to work with the sector to assist it in addressing these challenges and continuing to develop it to the highest standards. We experienced good levels of cooperation from the sector, and in most cases boards and management considered the review a challenging and fair process, from which they developed a better understanding of our expectations for sound governance and managing risk and the scale of transformation needed under a strengthened regulatory framework.

‘While recognising the importance of the sector nationally in providing financial services, credit unions are responsible for safeguarding and protecting members funds and ensuring they are not put at risk. Compliance with the legal and regulatory standards developed for the sector is a fundamental basis for any credit union in meeting this responsibility.  Where we found that these standards were not in place, credit unions’ boards and management have been required to make improvements to their governance and risk management systems.’

The Central Bank has published the outcomes of the review on its website as an essential guide to boards and management as they implement their risk management frameworks and compliance programmes.

Notes to Editors:

Risk based supervision, carried out through the PRISM framework is fundamental to the Central Bank’s statutory mandate to ensure that each credit union is protecting the funds of its members and meeting its regulatory obligations.

Under PRISM, regulated firms are grouped into four separate impact categories. Three of these impact categories currently apply within the credit union sector; Medium High, Medium Low and Low.

For Medium High and Medium Low credit unions risk-based supervision includes off-site reviews, on-site meetings and ‘Full Risk Assessment’ engagements through risk is assessed across ten PRISM risk categories.

The engagement process involves requesting and analysing a significant amount of information from credit unions in preparation for supervisory on-site risk assessment visits. In the course of these supervisors meet with boards, oversight committees and management teams. Supervisors expect to engage in productive, forward looking, risk-based dialogue concerning the credit unions significant business activities, material business risks, strategy and business model.

Through this process supervisors form judgments on the material risks posed and issue credit unions with Risk Mitigation Programmes in which they set out their risk assessment and outline the actions that need to be taken to address any risks we find too high.

Supervisory expectations of Low impact credit unions are the same as those of their higher impact peers in terms of standards of governance, risk management and compliance appropriate for the scale and complexity of the credit union, and at all times adequate, to effectively protect member’s savings and provide and support prudent lending and investment practices.

For Low impact credit unions  PRISM applies through off-site monitoring of key financial data and risk indicators. Cognisant of their scale and complexity, this proportionate approach is to adopt a reactive response to issues arising from deterioration in key risk metrics which can necessitate an on-site engagement. 

For a more detailed description of PRISM, please visit our website at http://www.centralbank.ie/regulation/processes/prism/Pages/default.aspx