“The best way of predicting the future is to invent it” Taoiseach Brian Cowen said recently. But for Irelands’ big two banks it’s more like “back to the past” as they are forced to sell off non-core business and stick to the knitting of domestic retail banking. EU authorities are insisting bailed out banks must sell billions of assets, close branches, cut balance sheets drastically, restrict payments to investors, executives and staff and focus narrowly on retail banking.
Bank of Ireland and AIB are currently in the throes of proposing their plans to the EU’s competition authority hoping for its endorsement of the Governments bail out strategy. The two banks are undoubtedly systemically important. Without them the economy cannot recover. And as Bank of Ireland was a tad less reckless than AIB, it seems it may not require majority state ownership to recover. Signalling it will sell off non-core business to shrink to its domestic banking base, Bank of Ireland has succeeded it seems in attracting private investment.
AIB must be envious that Bank of Ireland has managed to find a way to stave off majority state ownership even if this means the Government increases its stake to 36% at a hefty additional cost to the tax payer. But as Irish Government bond spreads widened over German bonds last week, Bank of Ireland’s good news is hardly the vote of international confidence in Ireland that Minister Lenihan would have people believe. Given continuing Greek travails and contagious threats to other countries including Ireland, international government bond investor sentiment may yet undermine the banks’ fund raising plans. Should investors consider Irish economic recovery at even greater risk they will demand a higher return to finance Government’s voracious borrowing requirement and undermine Irish banks ability to raise fresh equity.
AIB is also being forced to shrink back to its core Irish retail banking operations leaving its international banking strategy in tatters. It may be forced to sell off its valuable Polish and US businesses but the capital raised will probably not be enough. It’s likely to end up in majority state ownership as it will be unable to raise enough private investment to meet the regulators higher capital requirements.
False dawn predictions that the Nama strategy would “get credit flowing again” aside, the important thing is that both banks manage to achieve the regulators higher capital targets and then get back to the business of traditional retail banking. In time perhaps the state and tax payer will get some return from the billions invested in the two banks, which may mitigate the incalculable economic and social costs in supporting them.
It now seems that the Government considers winding down Anglo Irish Bank the only viable option. Anglo may have been of systemic importance when the blanket state guarantee was given in September 2008 but only because the state couldn’t allow it to safely fail – there was no resolution mechanism in place to arrange for its orderly winding down. There still isn’t. Anglo together with its “mini-me” Irish Nationwide, will probably destroy over €30bn in tax payers funds.
Government’s attempt to treat this destruction of money as a form of long term investment by the state was rejected by the EU which says the cost must be borne today. Its position called Government’s investment bluff and both Anglo and INBS now face the real prospect of being wound down. It’s likely that Anglo will be split into a bad bank/asset manager and its good bits corralled to be sold off. Irish Nationwide, with few good bits worth salvaging, should simply be wound down now or alternatively lumped in with Anglo’s bad bank. Last weeks contradictory statements from Finance Minister, Brian Lenihan who hinted at a wind down and Tánaiste, Mary Coughlan who stuck with the investment version did little to inspire confidence in Government’s strategy. One of the intriguing behavioural aspects of the economic crisis is the willingness of so many ordinary people to continue to put money on deposit with Anglo Irish Bank and Irish Nationwide, effectively funding their reckless loans. The Governments’ hand would be forced quite quickly if people decided to move their deposits elsewhere.
Meanwhile PermanentTSB continues to struggle with a business model designed to fuel boom time consumer credit. Its parent, Irish Life Group, touting the so called third banking force, has hung up the “for sale” sign. The third force notion has been around for years. The current version talks up a merger of PTSB, EBS and INBS along with Anglo’s good bits. The rationale for creating a broad based commercial bank large enough to compete with the big two is less than compelling and remains the stuff of stockbroker analyst’s musings.
In any event the EBS is said to be exploring a third party private investment proposition which could limit its requirement for state support. How it squares this off with its mutual status remains to be seen. Talks on an INBS/ EBS merger also appear to have foundered.
Any additional capital the banks raise, whether provided by the state or raised privately, will help them plug the gap left by NAMA’s haircut pricing and fund other loan losses, most of which have yet to be experienced. With the full cycle of bad loan yet to be factored in, the hope is this round of capitalisation will be enough to enable banking to work again.
Since September 2008 the country has had a moribund, undercapitalised, illiquid banking system that won’t have its balance sheet partially repaired by Nama until February 2011. When announced Minister Lenihan, confident a floor had been reached in property values, talked of a 30% Nama haircut. It’s currently averaging 47% as property continues to decline in value. Largely designed to head off full scale nationalisation, Nama may have worked in Bank of Ireland’s case but the other banks remain to be dealt with.
Rather than invent the future by building a new working banking system, Government is stuck with trying to fix the system using yesterday’s solutions.
A version of this article appeared in the Irish Examiner, Business Section, Monday 3rd May 2010
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