The Irish League of Credit Unions (ILCU) could lose control of its Savings Protection Scheme (SPS) to the Financial Regulator over concerns the fund cannot cope with widespread or large-scale insolvencies among the league's member credit unions, according to regulatory sources.

The registrar of credit unions, which has regulatory power over individual credit unions but not the ILCU or the fund, will be publishing a consultation paper in the coming weeks detailing six options for the fund, including having it taken over by the regulator or being wound down entirely.

The proposals are part of a wider set of issues currently being examined by regulatory officials, who believe credit unions are facing a brutal 18 to 24 months of rising arrears and loan defaults.

Regulators believe the €110m SPS fund would be quickly overwhelmed if one of the larger credit unions, or several credit unions at once, needed to tap into it to stave off insolvency.

They are also concerned that the existence of the fund creates a 'moral hazard' risk in that credit unions might take less care in managing their finances in the expectation that they will be bailed out in case of trouble. For this reason, regulators are reluctant to put the fund on a statutory basis.

The SPS fund is meant to protect any of the ILCU's 521 credit unions - more than 400 of which are in the Republic - from financial difficulties that could threaten members' savings. The SPS has the discretionary power to compensate each credit union member up to a maximum of €12,700 and to provide other assistance to help a credit union trade out of difficulty. ILCU members collectively have €14bn in assets, making the movement roughly equivalent in size to EBS Building Society.

New rules allowing loan payment terms to be extended to five years have already been included in the Central Bank Reform Bill to help credit unions manage loans which are threatening delinquency.

But conditions attached to the reform, such as stricter provisioning and capital reserves to compensate for the sort of risky borrowers who would need an extension, have caused uproar among credit unions.

The credit unions recently called for the removal of the new rules from the bill pending the end of a strategic review later this year.