A national banking system is systemically important but individual banks, their boards, and mercenary senior executive teams are not. Those familiar with the parable of the boiled frog will not miss its meaning for Irish banks, which are solvent only because the full weight of known loan losses has not yet been realised. They are only surviving as their liabilities are being guaranteed by the state while they wait for the inevitable “good bank/bad bank” nationalisation programme. Just like the frog that, as the heat is slowly turned up, will stay put to be boiled alive, Irish bankers are hoping the state will bail them out of the boiling cauldron of disintegrating property loans they themselves created.
Minister Lenihan is faced with a dilemma of how to rescue boiling frogs without bankrupting the state - how to restructure the banking system and limit the cost to the tax payer. As the economy alarmingly contracts, the banking systems ability to provide credit will be impaired, unless banks are capitalised at new higher international Tier 1 norms. In this scenario, Government’s current bail out funding mechanism won’t cut the mustard as only pure equity will count as “new” capital.
The wisdom now is banks must be nationalised, split into a good bank and bad bank or an asset management company. Some are suggesting the asset manager should buy up bad loans at a hefty €23bn discount funded by Government bond issues with the state in turn nationalising the banks and injecting fresh capital. The bet is the banks once restructured and trading profitably can then be reprivatised, recouping the capital provided. It’s a gamble that at some stage in the future there will once again be a market for Irish bank shares.
Whatever the structure, Irish banks will have to consolidate, becoming a lot smaller, less profitable and more national in focus. It is hardly acceptable that tax payer’s funds should be diverted by Irish banks to support their overseas assets.
Meanwhile having institutionalised moral hazard, the biggest Mexican standoff in Irish history is being played out as bankers wait for Governments response- they know full well that calling in a loan will require them to write it down and this they will not do until “guaranteed” a floor price they can offload their bad loans at.
Ireland’s mercenary banking executives mutated shareholder value into an aggressive performance culture that drove a couch and four through traditional prudent banking. Their mercenary world view ignored disconfirming information and silenced anyone who challenged the status quo. They turned off internal warning systems only seeing what they told themselves was important to see.
The root of this mercenary culture is illustrated in one bank that has been at the centre of a series of intergenerational scandals that stretch back decades. Having learned early what “too big to fail” meant, its leadership sought to build an international bank headquartered in Ireland. If AIB ever saw itself as a national bank, it did so only to extract as much profit as it could from its Irish operations.
Its aggressive, profit maximising, hard sales culture was a role model for others who stretched the limits of responsible behaviour. Anglo Irish Bank’s culture brooked no internal criticism and its manipulation of organisational resources has echoes it seems in AIB’s history. Ditching its prudent protestant ethic, Bank of Ireland promoted and imported its own mercenary class who drove the bank to the brink of self-destruction, where 225 years of careful husbandry was blown in five short years of reckless mayhem. Others willingly followed the leaders, evolving their own mercenary response as they became part of a herd, deafened by the thunder of its own rhetoric and urged on by institutional investors and their stockbroker advisers.
Many fine organisations, committed to getting the right balance between stakeholder’s interests, challenge such herding behaviour. The best business leaders understand how to lead, how to articulate authentic values and how to remain open minded, guarding against group think. The vast majority of good people working in banks are appalled and feel disgraced by the blind recklessness of their senior management, whom they correctly blame for what has gone wrong.
Changing culture - “the way things are done around here”- takes radical transformation which cannot be led by people who have sustained and facilitated the existing culture. As old dogs don’t learn new tricks and continue to run in packs, it always takes fresh new boards and senior management teams to lead transformation. But Irish bankers are busy learning to play a new game – believing they are “too big to fail” they are now leveraging off “too big to bail out” as classic insider apologists take to the media crease to bat for mercenary banking and its continuing unfettered independence.
Monday, April 6, 2009
What now for Irish Banking
Without bank credit, modern societies cannot function. Economic reconstruction is linked to banking and returning banks to health is an absolute must do. The lessons of history show that recovery, when it comes, is export led, underpinned by bank lending to businesses as they create new jobs.
Since 1945 numerous national banking crisis have caused deep and prolonged recessions. Throughout this time governments have nationalised banks, ring fenced distressed debt and rebuilt banks to be refloated later. Today governments worldwide are realising the only option left is to take ownership of banks and begin the process of rebuilding them and financing horrendous loan losses.
Minister Lenihan hoped a €7bn capital injection would entice private investment and the banks said they could continue to make profits to write off bad debts, pay the government a fee for the use of state funds and provide capital to support new loans. This strategy is blown and any hope that private investors would be willing to support the banks has evaporated. Irish banks will need fresh capital at new higher safety levels. Bad debts cannot remain on their balance sheets as they act as a black hole into which capital and future profits are sucked.
The government will have to provide a fresh infusion of equity capital whilst tackling two issues. The first is carefully structuring the write off of over €23bn of bad property development loans. How this is done will result in what’s called a bad bank or to be more precise a specialist asset recovery company into which bad loans are parked to recoup as much as possible. There are a few options ranging from banks creating specialist “side pocket” subsidiaries to government establishing a bad bank. A hybrid approach could see government part insuring some bad loans with other loans moved into a bad bank structure. But the problem is valuing these loans. With falling property values and a frozen market, getting the figures wrong could expose the tax payer to huge losses and let the banks off the hook in paying their way.
The second challenge is safely shrinking banks balance sheets without doing terminable damage. Irish banks ratio of loans to deposits is one of the highest on the planet as they borrowed vast sums from the international money markets. It doesn’t take a rocket scientist to work out that if a bank has to reduce its ratio it must get in more deposits from the public and reduce its lending. The trick for a bank is to continue lending while it is slimming down as economic activity dramatically declines.
Smaller banks may not survive shrinkage and the consumer banks EBS and PTSB may have to be consolidated into the big two. INBS may well be merged into Anglo Irish Bank which in turn may become an asset manager. Of course other options and combinations are possible but the result is the same – fewer, larger, better capitalised and less profitable banks. Foreign owned banks such Ulster Bank, Halifax/Bank of Scotland Ireland and NIB may slip into cryonic suspension as their parent banks focus on their own national home markets.
In the meantime bank credit will be rationed as the nation hunkers down in war time like response to an economic crisis that threatens to bankrupt the state. Banks may be still lending to small business but only to those that can show they have a future and not just a past. In economic crisis the past matters little as what matters is what happens next. Unfortunately aggressive leverage by many business owners have left them highly exposed to bank debt and collapsing turnover. Banks are also targeting first time house buyers hoping to kick start the property market. But with a huge supply of unsold homes it will take a substantial uptake in new lending to get the market moving.
Writing off billions in property development debt is one thing but what of the mountain of debt many people can no longer afford to repay? With rising joblessness, collapsing incomes and increasing personal taxation, tens of thousands are being trapped into a spiral of worsening debt. Any programme to reconstruct banking will have to go hand in hand with a programme to help people reconstruct their ruined personal finances.
People such as Brendan and Joan, who have a mortgage of €450,000, car loans of €25,000, other loans of €15,000 and credit card debt of €8,000. Brendan, an architect, lost his job last year and Joan’s take home pay as a teacher has been reduced. With two young children they can barely afford to cover their mortgage payments. As they default on their loan repayments, they will be exposed to the rigours of Ireland’s Dickensian debt collection system, through which they can expect court appearances, judgements, instalment orders and even jail should they fail to pay a court ordered instalment. There are tens of thousands of people in the same position, many far worse off.
Irish banking will survive but in a different form. Credit will become scarcer and less available than before. Loan qualifying criteria will tighten and getting a loan will become harder. Many people will be squeezed out of the consumer credit market as banks will only lend to those having a better personal credit rating which will become a passport to affordable credit.
For now the Financial Regulator has introduced a mortgage arrears code. It’s a small start to what has to be a comprehensive programme to deal with a national household debt burden. Many people will never be able to repay what they owe and ways have to be found to provide for a legal or quasi-legal route out of, what for many is near personal bankruptcy. In other countries work out schemes see people pay a certain percentage off their debts over a period of years, following which lenders agree to write off the balance. There is a dire need for a similar arrangement here.
Since 1945 numerous national banking crisis have caused deep and prolonged recessions. Throughout this time governments have nationalised banks, ring fenced distressed debt and rebuilt banks to be refloated later. Today governments worldwide are realising the only option left is to take ownership of banks and begin the process of rebuilding them and financing horrendous loan losses.
Minister Lenihan hoped a €7bn capital injection would entice private investment and the banks said they could continue to make profits to write off bad debts, pay the government a fee for the use of state funds and provide capital to support new loans. This strategy is blown and any hope that private investors would be willing to support the banks has evaporated. Irish banks will need fresh capital at new higher safety levels. Bad debts cannot remain on their balance sheets as they act as a black hole into which capital and future profits are sucked.
The government will have to provide a fresh infusion of equity capital whilst tackling two issues. The first is carefully structuring the write off of over €23bn of bad property development loans. How this is done will result in what’s called a bad bank or to be more precise a specialist asset recovery company into which bad loans are parked to recoup as much as possible. There are a few options ranging from banks creating specialist “side pocket” subsidiaries to government establishing a bad bank. A hybrid approach could see government part insuring some bad loans with other loans moved into a bad bank structure. But the problem is valuing these loans. With falling property values and a frozen market, getting the figures wrong could expose the tax payer to huge losses and let the banks off the hook in paying their way.
The second challenge is safely shrinking banks balance sheets without doing terminable damage. Irish banks ratio of loans to deposits is one of the highest on the planet as they borrowed vast sums from the international money markets. It doesn’t take a rocket scientist to work out that if a bank has to reduce its ratio it must get in more deposits from the public and reduce its lending. The trick for a bank is to continue lending while it is slimming down as economic activity dramatically declines.
Smaller banks may not survive shrinkage and the consumer banks EBS and PTSB may have to be consolidated into the big two. INBS may well be merged into Anglo Irish Bank which in turn may become an asset manager. Of course other options and combinations are possible but the result is the same – fewer, larger, better capitalised and less profitable banks. Foreign owned banks such Ulster Bank, Halifax/Bank of Scotland Ireland and NIB may slip into cryonic suspension as their parent banks focus on their own national home markets.
In the meantime bank credit will be rationed as the nation hunkers down in war time like response to an economic crisis that threatens to bankrupt the state. Banks may be still lending to small business but only to those that can show they have a future and not just a past. In economic crisis the past matters little as what matters is what happens next. Unfortunately aggressive leverage by many business owners have left them highly exposed to bank debt and collapsing turnover. Banks are also targeting first time house buyers hoping to kick start the property market. But with a huge supply of unsold homes it will take a substantial uptake in new lending to get the market moving.
Writing off billions in property development debt is one thing but what of the mountain of debt many people can no longer afford to repay? With rising joblessness, collapsing incomes and increasing personal taxation, tens of thousands are being trapped into a spiral of worsening debt. Any programme to reconstruct banking will have to go hand in hand with a programme to help people reconstruct their ruined personal finances.
People such as Brendan and Joan, who have a mortgage of €450,000, car loans of €25,000, other loans of €15,000 and credit card debt of €8,000. Brendan, an architect, lost his job last year and Joan’s take home pay as a teacher has been reduced. With two young children they can barely afford to cover their mortgage payments. As they default on their loan repayments, they will be exposed to the rigours of Ireland’s Dickensian debt collection system, through which they can expect court appearances, judgements, instalment orders and even jail should they fail to pay a court ordered instalment. There are tens of thousands of people in the same position, many far worse off.
Irish banking will survive but in a different form. Credit will become scarcer and less available than before. Loan qualifying criteria will tighten and getting a loan will become harder. Many people will be squeezed out of the consumer credit market as banks will only lend to those having a better personal credit rating which will become a passport to affordable credit.
For now the Financial Regulator has introduced a mortgage arrears code. It’s a small start to what has to be a comprehensive programme to deal with a national household debt burden. Many people will never be able to repay what they owe and ways have to be found to provide for a legal or quasi-legal route out of, what for many is near personal bankruptcy. In other countries work out schemes see people pay a certain percentage off their debts over a period of years, following which lenders agree to write off the balance. There is a dire need for a similar arrangement here.
Subscribe to:
Posts (Atom)