I welcome the Minister of State. I wish to outline the rationale for a credit union bond and to ask the Minister for Finance to initiate negotiations towards introducing one. I know this is also an area of interest for the Minister of State.

I have visited many credit unions in Galway city and county, and in doing so have learned a considerable amount. I have come to the conclusion that the Government needs to look again at credit unions and open its mind to the potential for a win-win by working differently with credit unions. It should initiate negotiations with the Irish League of Credit Unions to produce a credit union bond.

I will outline the realities as I have learned them. Credit union loan books are shrinking and their main income is charging interest on money they lend. The opposite is happening with loan books shrinking and the investment pot is getting bigger. They then have to invest that money somewhere and are getting incredibly poor interest rates. Funds not loaned out are invested in bank deposits, Government bonds or other financial products at very low rates of between 0.5% and 1%.

Credit union funds were attractive to banks at one point because the banks did not need to hold them liquid. They were treated like fixed deposits until Basel III changed the status of credit union deposits so as to require banks to hold them liquid, therefore attracting less interest. A report published in May 2013 showed that because of Basel III, credit unions lost €58 million in deposit interest.

Credit unions are now transferring their funds out of Ireland into European banks. For example, Athenry Credit Union, a very successful credit union, now has funds invested in KBC in Belgium. Credit unions have lots of funds in Ireland at the moment but these could potentially leave the country. It is estimated that they have about €8 billion in deposits, of which about €2 billion is now invested outside Ireland. Investments are getting larger and loans are getting smaller. The loan-investment ratio is about 2:1 - in other words only half their pot of money is lent out in loans.

Credit unions would like to see a bond, guaranteed by the Government which complies with Central Bank regulations and offers an element of liquidity with a return better than we are receiving on the market. I ask the Minister of State to explain why this is happening. At the moment the Government borrows money, probably at about 3%, and the credit unions have €8 billion they could lend to the Government if they got a rate better than 0.5% to 1%. It seems like a no-brainer to me. I know liquidity needs to be built into that and that there need to be terms and conditions, but why is the Government not prepared to do business with the credit unions? In setting up a bond the Government could borrow money. While €8 billion will not meet its needs, it is not bad. We have narrowed our deficit greatly. If the Government offered credit unions 2% rather than the 1% they are getting, it could save itself 1.4% in interest rates.

I will give a specific example. In January 2014 the Government offered a ten-year bond at a rate of 3.4% and Athenry Credit Union bought €8 million worth of that bond. Therefore, there is a discrepancy. This came to mind when I was visiting the credit unions at the time the flooding was taking place - an issue close to the Minister of State's heart. We know the bill for repairing the damage created by the flooding could be €300 million or even more. St. Anthony's and Claddagh Credit Union in Galway city was willing to lend this money to the Government. It trusts the Government which is great to hear. It would prefer to keep its money local and in Ireland if it was just able to get a slightly higher interest rate than it is getting.

I have since learned that credit unions are looking to the international banks. Why has the Government not entered into negotiations with the Irish League of Credit Unions which is open to do this? Will it do it?

I thank the Senator for raising this issue. She is aware that the Government established the Commission on Credit Unions in May 2011. The Government also published an agreed final report in March 2012 and has accepted fully the commission's recommendations. Over 60 of its recommendations are being rolled out under the Credit Union and Co-operation with Overseas Regulators Act. The legislation contains measures which will reform and strengthen credit unions and deals with four broad areas, namely: prudential regulation; governance; restructuring, including the establishment of the credit union restructuring board called ReBo; and of course stabilisation.

During the passage of the Bill through the Houses of the Oireachtas there was extensive engagement and debate on the subject of credit union investments. Partly in response to the debate in this House, an amendment was made to the Bill to include a specific reference to credit unions investing in projects of a public nature. I recall, although I did not take it here, that I took Report Stage for the Minister for Finance in the other House and remember bringing forward the amendment myself, following the debate that occurred in this House.

The Commission on Credit Unions Implementation Group was set up to monitor progress on implementation of the recommendations. Membership of the group includes the credit union representative bodies and the Registrar of Credit Unions and it is chaired by the Department of Finance. The group reports to the Minister for Finance directly and quarterly on its progress.

As part of the implementation of the commission's report, investments in State projects for credit unions, which was raised by the Senator, was added to the agenda of the Commission on Credit Unions implementation group in the second half of 2013. That was due to the fact that when the commission was initiated this was not an issue. It was not raised as a result of the recommendations and only came about as a result of the debate in both Houses of the Oireachtas, and correctly as a result of that debate.

The Department of Finance invited credit union representative bodies to bring forward proposals for credit union investments in State projects. Proposals were received from the Irish League of Credit Unions and the Credit Union Development Association. The Department of Finance facilitated engagement between the Irish League of Credit Unions, the Credit Union Development Association, the Central Bank and the NTMA to see if the suggestion of a specific credit union bond could be progressed.

A number of issues were raised regarding the possibility of a credit union bond. They were as follows: that a bond would not be liquid, as credit unions would only be able to sell to other credit unions and, therefore, there would be a very limited market for disposals; it would not be optimal for the NTMA to structure bonds for separate areas of Government policy, for example housing and schools, rather than funding more generally because when we go to the market we go for a specific amount of money which we then use for specific purposes as against for purposes by themselves; and any proposal for a bond which would be callable before maturity date and would affect the total return on the bond with the yield reducing accordingly. A number of alternative approaches were explored as follows: investing in sovereign bonds for a long-term investments of say ten years; and using short-term products, for example, Exchequer notes or similar, for short-term investment. These may have a very low rate of return but are callable at any time.

On foot of the NTMA engagement, credit union representative bodies were asked to reflect on the issues raised regarding a credit union bond. They have been invited to consider the next steps, including an alternative proposal under which credit unions could invest in State projects. Any such proposals would need to be approved by the Registrar of Credit Unions. In 2006 the Registrar of Credit Unions issued a guidance note on investment limits for credit unions investing in Irish and EMU State Securities as follows: maturity date shall not exceed ten years; not be more than 30% of holding shall be held in bonds maturing after seven years; and holding shall not exceed 70% of the total value of the credit union's investment portfolio. Most of the proposals would meet the criteria in these cases. Any proposal, therefore, will have to be in line with this guidance and considered in the context of the tiered regulatory approach.

The Commission on Credit Unions made recommendations for a tiered regulatory approach which could see some credit unions take on a more sophisticated business model with increased regulatory requirements. The Central Bank is proposing a two category approach to the introduction of a tiered regulatory approach for the credit union sector.

Under the proposals currently being considered category 1 credit unions would be limited to basic investments and Government bonds within specified limits. Credit unions that are capable of, and wish to undertake a wider range of activities and services, could apply to become a category 2 credit union. This category would allow for a wider range of investments with longer maturities and in Government bonds, along with the ability to offer certain additional services. Category 2 credit unions will be subject to additional regulatory requirements, as one would expect, given the fact that the risk would be higher.

The Central Bank held an informal consultation process with all credit union stakeholders on their proposal for a tiered regulatory approach. Consultation Paper CP76 was published on the Central Bank's website on 23 December 2013 and closing date for receipt of submissions was the end of March 2014. A further consultation and regulatory impact assessment is to follow later this year.

I assure the Senator that both the Minister and his officials in the Department of Finance will continue to work with the representative bodies to explore and find alternative ways for credit unions to invest in State projects. I look forward to hearing from them in respect of alternative proposals that they may have on the matter.

I thank the House for giving me an opportunity to discuss this important issue and allowing me to outline the work that has taken place behind the scenes with credit unions. This issue has not been left in abeyance. On the contrary, a lot of work has already occurred, as I think Senators will see from my remarks. We now have a broad proposal to make about two tiers of credit unions which could pitch for investments. What is required now is a wider engagement to see if we can tease out those issues through the various bodies.

Senator Fidelma Healy Eames can ask a brief question.

From what I have heard the Minister of State and the Department have an open mind on the issue. He has heard my story that the local credit unions are very keen to work with the Government on this matter but between the two views there is a hole or gap. What is not happening to make this happen?

Lots of things have happened. The legislation has only gone through a while ago. As I said, we have already had two very substantial consultations and we have now reached broad agreement about the tiered approach required. There is absolute support in Government to make this a reality. The proof is the very lengthy and good discussions that we have had on the matter at all Stages in both Houses. It takes time to get a product into the field. There is absolute commitment to it from the Minister for Finance and his departmental officials because they report to him on a quarterly basis on the progress that has been made following the enactment of the legislation and the commission itself to see if we can make this happen.

I am confident that over the course of the next few months that we will get a more sophisticated and exacting proposal from the credit union sector. It could deal with the regulatory issues that have been set out by the NTMA and the Central Bank and the potential risk issue which is one of the reasons the commission first reported. I do not see this issue as something that will be left in abeyance and not followed up and reported. I think we are going to make progress but it will take a little more time before the issue is brought to fruition.

Can I conclude that the credit unions are pushing an open door with the Government on this matter?

Absolutely.

I thank the Minister of State. I also thank the Cathaoirleach because I have received a good response.