Friday 3 October 2008

Minister, show backbone in dealing with Banks

The EU Commission has said that it will look into whether the Irish bank plan breaches competition rules and if it does, the commission will force Ireland to recoup the money from banks. This may sound like more of Brussels poking its nose into our affairs. You know what it really is: a God send for the tax payer.

While I know the government had to do something to help the banks I am inclined to believe the went too far. Why had no other governments used this approach? Why was Ireland so roundly criticised? Doesn't a blanket prop really invite moral hazard since there isn't even a fear of failing now. At least on a case by case basis bank execs would wonder if they were going to get the help the need.

But I don't know. Perhaps as more facts emerge we will be provided with justification for the nuclear option. Fair enough. But one thing really worries me. It is that the government will not be robust enough with the banks in the even of their drawing down tax money. In our little clientelist, boys network elite, can we have confidence that the government will go in hard and rough if they have to bail out a bank?

In France, before Dexia was bailed out the government set strict conditions. They insisted not only that the CEO would go, but he would go without his golden parachute. Can you imagine that happening here? I can't.

The minister has talked about possibly taking equity and maybe putting members on the board or management team in the event of a major bailout. I haven't heard what is provided for in the legislation but I gather it is up to the minister in each case. Will he make use of the full rigour of these provisions or will he pussy foot and give funding with no guarantee other than the financial regulator will monitor the bank's activity.

Well you know what. The Financial Regulator is worse than useless. Yes, worse. If there were no regulator at least there would be no pretence of oversight. But the current regulator has been gutless, even reckless, in his dereliction of duty.

On prime time, CEO of the Regulator, a very uninspiring John Neary, insisted that the only problem in the Irish banks was the international credit freeze. He denied they had lent recklessly or taken too much risk with a construction bubble. You know what John - you are either stupid or lying. Perhaps a bit of both. And it is shocking John if the likes of you are left guarding 400 billion of tax payers money. What kind of crony are you? Where did you crawl from you spineless, disgraceful twit?

So please please, Mr Lenihan, I hope you show that under your sweaty shirt there is that which our regulator so singularly lacks: a backbone. Please, it's our money, so you have our full permission to be tough with the banks. Use it.


BryanFeeney said...

No other country in Europe faced the prospect of a third to half its banks going bust before Halloween. Two of Ireland's banks - most likely Anglo and Nationwide - were going to fail, and the knock-on effects would have taken out at least one more bank, and most likely seen Bank of Ireland taken over by a foreign entity.

It's worth bearing in mind that there is no indigenous market for equities in Ireland, most purchases are made by investors and funds operating outside the country, and so have a more pessimistic and less detailed view of things. For example, while Ireland's property market is in a severe downturn, with a frightening excess of supply (esp in apartments), Irish banks do not foreclose (mainly due to populist legislation that makes foreclosure difficult). So you don't get the secondary effects of property auctions further depressing the market. Most banks in Ireland tend either to renegotiate in the short term or - failing that - seize and lease-back to their clients. This means most Irish mortgages have more value than in the US, where banks do foreclose, aggressively, and people, with nothing to lose, have even begun trashing houses before they go.

Equally, the Irish have much less debt than either the British or Americans, and much greater savings. This means that banks in Ireland are relatively solvent, with the primary problem being liquidity. Anglo, AIB, BoI all reported profits in the last quarter. Further, AIB is - via a controlling share in a subsidiary - the largest bank in Poland, Eastern Europe's largest country, which is still seeing solid growth. For it to lose a quarter of its value in a single day is a reflection of panic (and cynicism), rather than fundamentals.

At the current moment in time, the Irish exchequer has paid less money to banks than that of Britain, the Netherlands, Belgium, Luxembourg, France or Germany. What's being implemented is an insurance scheme. Banks pay into the exchequer, and the exchequer only pays out if the banks fail. But as this guarantee means they can raise short-term credit to solve liquidity issues, and they're all solvent - being profitable and well capitalised - it's unlikely they'll ever fail, which means the exchequer can profit. There is a chance one of the ex-building societies may go under, but that's a manageable loss, and far less toxic to the overall banking sector - and by extension the economy - than a third of the country's banks being wiped out in a month.

There are major problems of course, arising from the rush in which this was implemented, and one does get a sense of rising panic in the cabinet. When first launched some banks regulated by the Irish Financial Services Authority were not covered, and some regulated by the British FSA were. This discrepancy needs to be sorted. Also the govt, to avoid the wrath of the EC, needs to put a cap on account growth by number (as Britain did with Northern Rock). However, with Greece having joined the party (despite it's exchequer being in much worse state), Ireland has probably secured breathing room to develop a modified plan that will still retain the fundamental guarantees, and secure the banking secure. This assumes, of course that they manage to keep that idiot son of Nationwide's CEO and other similarly challenged buckos quiet.

Póló said...

I agree that fast action was needed in the face of the run on the Irish banks.

We're still here, but just about.

However, the State, in throwing its very existence into the pot on this one, needs to extract a fair price from the banks. The €1 billion touted is peanuts in terms of a commercial price for the sort of guarantees offered. This needs to be upped by a factor of 10 and new rules on capital adequacy, transparency, remuneration of executives, and a host of other constraints need to be put in place.

A banking licence is a public good, like the radio spectrum, and these guys had better get disabused of the idea that they have a worth arising purely from the private market economy.

Time for a return to basics. It's very simple really, just a bit obscured by the self serving propaganda of recent decades.

Aux armes, citoyens!