Ask not what the Government can do for the banks - ask what it can do for consumers

The entire European banking industry is facing a crisis, but it is particularly acute in Ireland, so says John Dolan in his weekly column
Ask not what the Government can do for the banks - ask what it can do for consumers

MONEY WORRIES: The exodus of banks from Ireland is bad news for customers.

“VACCINATE the bankers!”

Strangely enough, that is not a rallying cry we have heard at all in recent weeks, as professions which have kept working and dealing with the great unwashed during the pandemic jostle to get bumped up the queue for the jab.

Maybe the likes of teachers and gardaí just have better unions...

Of course, I’m being facetious.

Along with healthcare workers, teachers and gardaí are among the most liked and trusted members of society... bankers less so.

A UK study in 2019 found the most trusted professions were doctors, nurses, teachers, paramedics, then police. Bankers were among the least trusted, right down there among politicians, car salesmen (sexist, but true), and, um, journalists, it says here.

All of which, I feel, is unfair on the public face of the banking industry — those toiling in the ever-dwindling number of branches who have kept working throughout the pandemic.

When people say they don’t trust bankers, they aren’t picturing the clerks, they’re picturing the public image of the faceless, highly-paid, bonus-chasing executives, who ramp up interest rates on hard-pressed home-owners while gambling with their profits — and then come cap in hand to the Government and taxpayers when they hit a losing streak.

If that UK study was carried out in Ireland, I reckon bankers would fare even worse, given the stain on their profession that was left by the crash here a decade ago.

When it comes down to it, most of us agree with Bob Hope: “A bank is a place that will lend you money if you can prove that you don’t need it.”

In other words, they have a licence to, if not print money, then certainly to make it in very large quantities.

All of which leads me to a pressing question: Why on earth are banks fleeing Ireland (yeah, fleeing, not fleecing) in their droves?

In February, Ulster Bank announced it was exiting the Republic on a phased basis after more than 160 years — a blow for the banking industry, and hardly a vote of confidence at the prospect of a united Ireland either. Last week, it was the turn of KBC Bank Ireland to scarper stage left.

Many reacted to this twin blow by paraphrasing Oscar Wilde: “To lose one bank may be regarded as a misfortune; to lose both looks like carelessness.”

Except this is beyond carelessness. Other banks to have left our shores in recent years include Bank of Scotland Ireland, Danske Bank and Rabobank.

If losing two is careless, what is Oscar’s word for losing five?

In December, Rabobank even announced plans to occupy three floors of a swanky building in Dublin’s docklands on a ten-year lease — so it is happy to pay some of the highest tenancy rates in the world to be based in Ireland, but doesn’t want our custom?

This exodus means Ireland is left with just three big players: AIB, Bank of Ireland and Permanent TSB — and the State, meaning us, owns large chunks of these.

Together, this trio account for 71% of customers, a ratio that will only grow as more rivals leave. This dearth of competition spells bad news for consumers, in the shape of higher interest rates and bank charges.

So what’s going on?

There are three main stumbling blocks preventing Irish banks from making enough money, according to a recent article in The Currency by its Finance Correspondent Sean Keyes.

“The first, and biggest, problem is capital requirements — money the European Central Bank (ECB) tells banks to put aside to protect them from bad loans. They’re there to make the overall system safe and prevent a re-run of 2008-2012. While they do that, they’re a handbrake on profits.”

Irish banks, added Keyes, have much bigger capital requirements than European ones because of Ireland’s noughties crash.

The second problem facing Irish banks, he said, was costs. “Between compliance, software developers, branch networks and the rest, it’s increasingly expensive to run a bank,” said Keyes.

These costs tend to be more punitive for smaller banks, like those in Ireland, than they would be for, say, larger UK banks — where problem one is also less of an issue, since UK banks’ capital requirements are less onerous.

The third issue for Irish banks is the prevailing low interest rates, aimed at aiding economic recovery, which cuts into their profit margins, a problem exacerbated by tracker mortgages.

Keyes concludes a perfect storm has hit Ireland’s banking sector. “Each of the big three problems got much worse lately.”

The entire European banking industry is facing a crisis, but it is particularly acute in Ireland.

We might add a few extra problems specific to Irish banks.

The Irish legal system makes it extremely difficult for them to repossess properties from defaulting customers, and Irish banks also claim the level of fees and levies to cover the costs of financial regulation on them is an extra burden.

Add in the small matter of a pandemic, and you can see why some banks are nervously eyeing the bottom line, and the exit door.

******

So, what can the Government do to help the stricken banking sector? It has startlingly few options.

The ECB sets interest rates and the Central Bank of Ireland (CBI) can ask it to raise them — but is unlikely to get anywhere given that Ireland is such a small country.

In any case, can you imagine the reaction across the pandemic-hit continent if bank interest rates rose, and the cost of our mortgages went up with it?

The CBI has a little more wriggle room on seeking reductions in capital requirements, but it seems unlikely to want to depart any time soon from the strict regime it imposed after the disastrous crash, when our banks faced the prospect of going bust.

Clearly, moving to make repossessions easier would be political madness in the current economic and political climate.

That just leaves the issue of costs — Ireland being an expensive country to live and work in: good luck trying to change that in the short or even medium term.

Thus, the Government’s hands appear to be tied — it is paying the dual price of handing over so much power to Europe, and suffering for Irish banks’ actions leading up to the noughties crash.

So, it plays a waiting game, watches the sector consolidate and merge into a handful of large banks across Europe, and hopes Irish ones end up in the mix.

So much for the banks, how can the Government help consumers?

Here, it does have options.

The CBI can usher a new wave of digital-only banks, which have more efficient operating and cost bases, into the market, to help create a more viable, diversified banking system.

The Government could also pursue a policy of its partners in Green Party, to set up a Local Public Bank system, with a mandate to serve the community in its region by providing finance and other modern banking services.

Thirdly, the Government could introduce legislation that would allow credit unions or post offices to offer a real alternative to banks

All this would help consumers, but not the big banks, in which the Government owns lots of shares.

The question is, does it want to help consumers... or banks?

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