The Financial Regulator has begun a review of credit-union loan books to examine "potential stresses" across the sector as officials fear the full impact of the recession on the cooperative lenders is only beginning to become apparent, according to regulatory sources.

"As we have previously stated, the sharp rise in the levels of reported arrears and the significant increase in loans being rescheduled as more and more members come under financial stress is a matter of concern," a spokeswoman said. "In recognition of these stresses our main regulatory focus at this time is on the quality of credit-union loan books and the level of bad-debt provisions held by credit unions."

The move comes amid escalating tension between the regulator and the Irish League of Credit Unions (ILCU) over credit-union solvency, and stricter rules on provisioning and reserves.

Late last month assistant director general of financial supervision Jonathan McMahon told an Oireachtas committee that 20 credit unions faced serious solvency issues. It later emerged that these 20 institutions were on a watch list for high levels of arrears and potential solvency issues.

ILCU claims, however, that only five of the 402 credit unions it represents in the Republic (it has about 100 members in Northern Ireland) have low solvency levels "in danger of going below 100%", according to chief executive Kieron Brennan. He said the league had assisted these with funds from its €119m savings-protection scheme.

ILCU said the average solvency ratio for its members was 116%, well above its target of 109%. ILCU figures also show 90% of members with a 9% reserve ratio – a target set for 2012. The regulator has set a minimum level of 10% which all credit unions must reach by 2013.

The league has been trying to muster support from Fianna Fáil backbenchers in briefings over the last week as the regulator moved to assert its control over the sector. Brennan said the move was "to counteract the unbalanced negative view put our by the registrar for credit unions".

ILCU has been telling TDs that it has "self-imposed" a tough, new regime on provisioning and has undertaken 150 "risk-based and routine" credit-union loan reviews on its own in the last 18 months.

Credit unions are trying to demonstrate that sweeping provisions in the Central Bank Reform Bill, which will give the regulator wide-ranging powers over the movement in exchange for more flexible terms on loan extensions, are unnecessary and excessive, Brennan said.