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.
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