Two years on and the gamble that pledged the nations wealth to shore up its banking system, the infamous banking guarantee is close to running its initially planned for course. Provided to buy time to stabilise banking, it will undoubtedly have to be extended. Banking stabilisation has not yet been achieved. And there is a complete lack of any business case from the main banks on how they intend managing through the next three to five years.
What’s more, no one has synthesised what type of banking system will be required to intermediate between savers and borrowers into the future. Everyone agrees it won’t be the one we have at the moment.
On current reckoning Anglo will cost the tax payer about €22bn in hard cash simply to retain its licence. Twenty billion will be consumed in its bad loans furnace – a mix of Nama and non-Nama distressed loans and about two billion will be needed to support it as a going concern, its good bank bit of about €15bn in residual performing loans. Just how Anglo intends functioning as a good bank is not yet clear. It says it may form a nexus around which others may consolidate or become a part of the mythical third banking force. It won’t be able to do this without the state guaranteeing those willing to provide it with funds.
Meanwhile AIB is struggling to show how it will raise the €7.4bn capital target set for it by the regulator. It might realise €2bn from selling its overseas assets. It may shave a bit from its operating costs and has hinted at swinging job cuts. It may convince shareholders s to pony up the balance. But it doesn’t stand a ghosts’ chance in hell of doing so unless the state continues to provide a guarantee beyond the end of this year.
Many maintain that large organisations become captive of small groups of insiders who manipulate resources for personal gain under the guise of generating shareholder value. What’s good for the executive management cohort becomes good for shareholders.
In the name of the shareholder, AIB’s cultural inclination will be to fight hard to head off greater state involvement. It’s a bank with an interesting take on moral hazard – trading off the “too big to fail” doctrine. Its investment in buying ICI resulted in the nations foreign reserves being used to save the bank. It led the charge in selling tax-free non-resident accounts to residents. A rogue trader lost it close to $800m (€600m). It knowingly overcharged customers for years until publicly exposed.
Now facing regulatory demands for greater capitalisation and swinging Nama haircuts its core mercantile values are being tested. So far there’s been a lot of talk of selling the family silver but it has yet to publish a convincing business case demonstrating just how it sees itself becoming a soundly governed profitable commercial bank.
Two things are certain. Either, AIB will raise its capital target privately retaining its independence or the state will fund the money and it will end up nationalised. But what of other banks business plans?
At the heart of the crisis is the relationship between the state and privately owned commercial banking. Intent on pursing their own plans, powerful vested interests are forging a new relationship. Much has been written of Irish banks problems but little if anything about their future prospects. Just who is responsible for defining the future state of Irish domestic commercial banking and ensuring the state and its citizenry can access affordable financial services?
To date no one has had a stab at estimating the relative size or component parts of a new domestic banking system. There is talk of needing four national banks. Yet we have had a four bank national system for decades. Throughout, Bank of Ireland and AIB’s dominant market share remained relatively static even with the arrival of foreign competition much of which only a rebranding of existing domestic banks. Hoping for the arrival off shore of the banking version of the marines is wishful thinking. And spending too much time looking at the entrails of the past won’t define the future.
The creation of a working commercial banking system that intermediates prudently between domestic savers and borrowers can only happen if it is designed between Government, its agencies and what’s left of the national banking system after Nama and recapitalisation.
A version of this article appeared in the Irish Examiner Monday August 9th 2010, Business Section
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