National Payment System is our lifeblood

Banking’s restructuring may require the nationalisation of our national payments system to protect what is a vital strategic asset.

Faced with catastrophic, contagious runs on banks, governments frequently have no option but to order them to close their doors. In declaring what’s called a bank holiday, national payment systems would freeze up. ATM machines would stop dispensing cash and electronic fund transfer and settlement systems would be turned off.

Within days commercial activity would collapse, as business and consumers would have not have access to funds or any way of settling payments. There wouldn’t be enough cash to go around.

Such a payment system meltdown was no doubt an Armageddon scenario used to justify the disastrous banking guarantee in September 2008.

Two years on our two main clearing banks are once again in the firing line. Bank of Ireland and AIB are systemically important not just because of their size, but because of their role and ownership of a vital national resource – our national payments system.

Imagine if suddenly our electricity grid was shut down, not to be switched on again for months. Most of us could imagine the social and economic effects.

We have a national infrastructure of vital strategic resources required to keep the country working. These include the electricity grid, railway lines, road and water systems. They are so vital that most are state controlled and are managed by semi-state enterprises. Equally as important is our money transmission system.

Called the national payment system, this money grid transmits payments from Donegal to Cork, handles our salaries, utility bills, our retail purchases and settlements between firms here and internationally.

At retail level, it’s a network of differing interconnecting IT and operational systems owned by our main banks and governed by private companies.

A complex system of interconnecting stakeholders are involved including banks, utility companies, commercial enterprises, government departments the Central Bank and ECB.

The systemic risks of one part failing and contagiously infecting the rest are well understood, which is why the Central Bank has oversight of system. While in other countries, non-profit state bodies own and manage national payment systems, here our main clearing banks largely own and manage ours.

Total economic costs of money grids are reckoned to be as high as 3% of GDP. The cash grid alone was reckoned to cost €1.6bn in 2006.

Last year the system managed 374m cheque, credit transfer and direct debit transactions totalled €803bn in addition over 10m ATM, Laser and Credit cards accounted for 490m transactions totalling another €48bn.

In any one day the gird handles nearly 2.4m transactions, totalling €2.3bn in value.

By far the largest and most systemically important component parts are Bank of Ireland and AIB’s retail payment transmission and settlement operations.

Both these banks will be subjected to the most fundamental reforms of the national banking system since the mid 19th century. Both will be surgically downsized to basic utility type retail banks, restricted to operating within the state’s national boundaries. Their foreign operations will be sold off and domestic operations slimmed down to an affordable size.

The plan is to stuff them full of capital, effectively quarantining them to pretty them up for sale to outside bidders. For the first time in the two hundred and fifty year history of banking, this country will lose control of its hitherto domestically owned national banking system and potentially control and maintenance of its national payments system.

With our main banks effectively up for sale, the only buyers with pockets deep enough to afford them are foreign banks. Bank profit maximisation conflicts with the social cost of national payment systems. Can their continuing investment in modernisation of our national payment system be relied on?

Universal access to an affordable basic bank account is long recognised as a fundamental right of all citizens without which they cannot participate in modern developed societies and their economies.

The current priorities under a national payments strategy are to reduce the reliance on cash, eliminate the use of cheques and make available a universal basic banking account. The latter was a condition of Government’s recapitalisation programme.

What’s to happen with a national payment system predominantly owned and operated by our big two banks? What is to happen to a national strategic resource without which commerce cannot survive?

If our national money grid is as strategically important as our national electricity grid what plans are being made to ensure it is maintained and enhanced?

Surely then it’s in the national interest that strategic ownership, control and future development of this states national payments system is included for in any plans to restructure banking.

Should nationalisation of the national payments system be on the table?

A version of this article appeared in the Irish Examiner, Business Section, Monday 29th November 2010

Ireland's lions led by donkeys

Ireland's taxpayers have been sacrificed on the Atlantic Wall to protect the Euro from the inevitable onslaught of the mighty bond markets overwhelming forces.

Yet were it not for ECB policy and its hubristic blind spot, Irish banks would have not been able to fuel the Irish property and consumption boom.

ECB policy designed to maintain stability and geared to support Germany unification and core Eurozone economies was wholly unsuitable for Ireland.

Its sub-office the Irish central bank and our national financial regulator bought into the grand Euro project and shared the ECB’s blindspot that permitted German banks lend hundreds of billions to peripheral countries.

Germany’s own central bank and regulator resorted to their Nelsons' eye so to be “shocked” when forced to domicile rogue Depfka’s €180bn losses on Hypos balance sheet.

Not to be outdone the Bank of England's blind spot pemitted tens of billions to flow into Ireland unchecked.
Why was it that our banks were able to raise billions more than they should ever have been allowed to raise to make loans into an overheating property market?

The fact is no one was policing the policeman. No one stood down UK and German banks reckless lending to Irish Banks. No one questioned the wisdom of fuelling unsustainable property and consumer spending booms.

We are now faced with what amounts to be an insolvency work out plan that demands we cash in our national pension fund to stuff our banks full of capital. Yet stuffing live turkeys doesn’t turn them into swans.

This time out the banking numbers had better stack up. Many rightly fear they won’t. They worry that what’s happening again is another bout of can kicking. This time the can is being kicked into ambitious economic performance targets which no sooner had they been committed to by this Government were stretched by the IMF. The addition of an extra year to achieve the 3% debt/GDP target allows for slippage that can only come from undershooting assumed growth rates or funding costs of additional bank capitalisation support.

We are still living in kick the can land. We have no idea how profitable the shrunken banks will be. One thing is for sure to reversing their deposit to loan ratios will continue to distort the market for savings and cause retail lending rates to rocket.

If banks average costs of funds is dictated by the states rating plus a margin for risk for the bank, then average government debt rates will set the floor for bank rates – at least those demanded by those who lend to our banks. The cycle is set for risk adverse credit crunch that will marginalise and consign consumers and business enterprise to penal interest rates for some time to come.

While we have been withdrawn from the Atlantic Wall, no longer a fighting force, the Portuguese are now being rushed to man the defences.

Lions led by Donkeys, Irish taxpayers have been sacrificed to buy time for others to shore up their homeland defences. The problem is the markets won't stop until they achieve total victory. It's not the first time we have fought another mans war on his turf - perhaps we would have been better off fighting it on our ground and told bank bond holders and their protective proxy you are going to have to pay.

Digging up the Punt blanks and recalibrating Sandyford's printing presses might still have to happen. One wonders if in the donkeys in Merrion Street's bunker are hatching a plan B?

In a country that must once again economically plan for emigration the words of Paddy Kavanagh probably reflects the feelings of many today. It might also be an ode to Fianna Fail's cronyist legacy

O stony grey soil of Monaghan

The laugh from my love you thieved;

You took the the gay child of my passion

And gave me your clod-conceived.

You clogged the feet of my boyhood

And I believed that my stumble

Had the poise and stride of Apollo

And his voice my thick-tongued mumble.

You told me the plough was immortal!

O green-life-conquering plough!

Your mandril strained, your coulter blunted

In the smooth lea-field of my brow.

You sang on steaming dunghills

A song of coward's brood,

You perfumed my clothes with weasel itch,

You fed me on swinish food.

You flung a ditch on my vision

Of beauty, love and truth.

O stony grey soil of Monaghan

You burgled my bank of youth!

Lost the long hours of pleasure

All the women that love young men.

O can I still stroke the monster's back

Or write with unpoisened pen

His name in these lonely verses

Or mention the dark fields where

The first gay flight of my lyric

Got caught in a peasant's prayer.

Mullahinsha, Drummeril, Black Shanco-

Wherever I turn I see

In the stony grey soil of Monaghan

Dead loves that were born for me.

State will need to rescue credit union sector

Solvency funding and state intervention will be required to stabilise and reform the sector, writes Bill Hobbs

CREDIT Unions may need tax payers’ funds of upwards of €650m over the next three years should a realistic loan loss scenario materialise.

At the very least they are likely to require well over €200m in state solvency support. In the past two years having struggled to fund loan and investment losses from collapsing profits, many are now experiencing serious solvency issues.

Currently the only solvency support fund available is ILCU’s unregulated €125m scheme which it may use at its discretion to support its 400 affiliates in the Republic and 110 in Northern Ireland.

It seems that it has already committed €45m in support of fifteen credit unions, according to a recent media report.

Last June the Central Bank published a consultation document on its proposals for a stablisation system, a resolution and funding mechanism for insolvent but otherwise viable credit unions. But credit unions affiliated to ILCU voted in support of its outright rejection of the bank’s stablisation proposals.

This month the bank said that “trends emanating from the sector are suggesting that even greater reform may be required than those envisaged in our recent consultation paper”.

It seems then its original stablisation proposals will not be robust enough to deal with risks no doubt surfaced by both its own loan loss stress testing and strategic review initiated by the Minister for Finance.

Having provided billions in largely unsecured loans to fuel boom time compulsive consumerism, credit unions are acutely exposed to the consumer debt crisis. As well as traditional loans to marginalised borrowers, their lending included financing first time house buyers’ down-payments, lending to small businesses and small scale speculative property developers.

For the past two years they have all been heavily rescheduling troubled loans. Equating to between 15% and 22% of boom lending, loan losses could amount to between €1.0bn and €1.5bn over the next three years. Depending on how well they have been governed and managed, losses will vary by credit union.

Applying regulatory loan loss stress test ratios together with likely financial performance criteria to thirty one leading credit unions, representing about one fifth of the sectors total assets, my results showed one in two incurring impaired solvency under optimistic conditions.

Under high stress loan loss and realistic financial performance conditions, thirty showed varying degrees of impaired solvency.

Extrapolating these results to the entire sector, results in a state solvency funding requirement of upwards of €200m under optimistic conditions. This rises to upwards of €650m under more realistic stressed conditions. The likely figure is probably somewhere in between.

With a moribund banking system unable to make enough good loans to ordinary people, credit unions are an important alternative source of consumer credit. Yet with an inability to mobilise household savings over the past decade, they have close to €3.5bn on deposit with the banks which should be used to make good loans.

Credit union’s ethos to be of service to their customers who are also their owners, within their local community by offering them affordable financial services is just as relevant today as it was fifty years ago. But the business model used is not. Years of poor leadership, insular governance and management, political captivity and lethargy have combined with a consumer debt crisis resulting in an inevitable and predictable outcome.

Significant state intervention and solvency funding will be required to stabilise and reform a sector that has failed to keep pace with what’s required of modern, fit-for-purpose credit co-operatives.

In return for state aid, the Government will undoubtedly insist the sector be consolidated to a smaller network of larger, viable, better governed and managed credit unions. The outcome could see a robust, financially strong, national network of modern independent credit co-operatives participating through a centralised finance and corporate services facility. While the number of credit unions may shrink dramatically from 414 to less than 100 or so, merged unions could retain some independence, remaining open to provide a better range of affordable financial services.

Everywhere else credit co-operatives have long since consolidated, modernised and expanded their services to offer a valued alternative to high street commercial banks. Key to their success is their professional centralised finance and corporate facilities.

These provide essential services such as liquidity, access to wholesale funding markets, securitisation, internal audit, staff development, information technology platforms, process standardisation and automation, expert credit and operational risk management, legal services along with products, services, call centers and online delivery channels.

Long on the rhetoric of change but short on action, credit unions have run out of time to effect such change on their own. If the sector is to be reformed it will need a purposeful state empowered change agent to order and facilitate reform or else a crisis led enforced consolidation could result in a chaotic shambles.

A version of this article appeared in the Irish Examiner, Business Section, Monday 15th November 2010.

The public service is not fit for purpose

Chaos is the natural outcome for organisations that can't respond to the demands asked of them, writes Bill Hobbs

To convince the bond markets that the state is trustworthy to lend money to, this Government is being forced to brutally eliminate jobs in a way that will undermine the quality of public services for years to come.

It’s an evitable consequence of a political system that failed to lead the transformation of a public service. Designed for an Ireland that no longer exists, the public service hasn’t been fit for purpose for some time.

Dominated and controlled by influential groups, it’s a system hardwired not to change. It’s led by people who look in the mirror to take credit when things go well and look out the window to apportion blame elsewhere when things go wrong.

When such organisational systems, designed around the principles of collective unaccountability and non-responsibility, are faced with a crisis they spiral into dysfunctional chaos.

In any organisation there are people who are skilled at making it do what it’s supposed to do despite the best efforts of others. Rob an organisation of these people and it will quickly disintegrate into chaos as staff and managers struggle to keep its processes working. They gum up, become stuck as knowledge and experience gaps appear.

Front line staff, the people who span the boundary between the system and the people it is supposed to serve, are no longer able to drag value from it. Within health service systems as patient care deteriorates despite the best efforts of staff, people may die. Yet Health Minister Mary Harney maintains that front line services will not be affected through cost reductions which will see five thousand support staff forced to leave within a matter of weeks.

Real leadership requires leaders to communicate honestly and openly on the consequences of their decisions. Such ruthless job elimination violates two fundamental motivating precepts: a need for job security and justice.

Had politicians delivered on public service transformation in the recent past, there would be no need for the brutality of what is now being done. It’s being done not because of a political determination to transform but to convince the bond markets that the state is trustworthy to invest in.

Reforming public sector organisations requires strong political leadership, a disciplined management focus on what matters, engaging people in defining change and challenging thinking about how to do what really matters, better.

In his book “From Good to Great”, Jim Collins identifies a pre-requisite of great service providers as having the right leader and the right people on board. He says the first step is to get the right people on the bus, get the wrong ones off and make sure the right people are in the right seats and let them figure out how to drive the bus to where it should be going.

Our Government and public services are stuffed full of the wrong people who are expert at doing the wrong things far too well.

Not one of the current cabinet has worked in a meaningful business leadership position demanding accountable decision making and none have the slightest experience of the dysfunctional organisational effects of the wholesale job eliminations they are about to unleash. Nor will they be held accountable as they’ll be gone when vital public services start collapsing.

Our senior public servants succeed because they are skilled at not rocking the boat within a system that fast tracks those who display the skilled incompetence of their bosses.

Mediocrity, deficit thinking, management by the numbers, emphasis on a command and control hierarchy, blind deference to authority and little understanding of the fundamental difference between management and leadership, with a management class system based on status, rank and service, all combine to protect the system.

Public sector unions act to preserve a status quo in which work gets done at the pace of the slowest performer.

Hard workers seeing that their dedication and commitment to being of service is of little extrinsic value, internalise their perceptions and work less hard.

Such systems are rife with influential informal networks, cliques who act to subvert change. Myopic and self-serving they turn inside out - the citizen serves the system rather than the system serving the citizen.

Public service transformation will require elected politicians who do not fear failure and who will deal with brutal facts with transparent honesty, having a passionate commitment and determination to overcome obstacles.

The challenge for any new Government is to ensure the right leaders are in place, the right people are on the bus in the right seats and the wrong ones are told to get off. But how many election candidates have the experience, and ability to lead the fundamental reform required?

A critical first step will be for voters to identify and elect only those who they believe should have a seat on the bus.

A version of this article appeared in the Irish Examiner, Business Section, Monday 8th November 2011

Government's scorched earth policy is economic lunacy

In "The Valley of the Squinting Windows" written in 1918, its author satirically used a fictional village of Garradrimna to expose the parochialism of Irish life. Listening to RTE 1 this morning brought a small slice of a modern Garradrimna to life. But this time it’s not a fictional village it’s the voice from the bunker in Merrion Street as this Government ekes out its final days.

Tuning into Morning Ireland was like eavesdropping a conversation of a Garradrimnan bar stool regular. Agricultural Minister Brendan Smith blamed the international global marketplace for our woes. Has anyone told him the collapse in our domestic economy was caused by us alone? Does he not realise that it’s physically impossible to export houses and buildings?

Smith then unveiled his grand contribution to the austerity battle plan. An EU fund would be tapped to buy Irish cheese to be handed out for free to needy citizens. The single most important Government contribution to improving the welfare of citizens this week of all weeks was a headline announcement of free cheese. Free cheese parcels should be mentioned quietly by low level civil servants and not announced by senior Government Minister anxious to generate some favourable publicity. Marie Antoinette on hearing of Parisian bread riots may have asked the naive question why don’t they eat cake? Brendan Smith’s take on this is we should eat cheese.

But maybe Smith has invented agrarian quantitive easing? Getting the EU to buy up Irish cheese would prime the economy with fresh money!

In 1945, facing the ovewhelming might of invading Allied armies closing in on all sides, propaganda from Berlin's Reichstag bunker promised at first wonder weapons and later still rescue by a mythical new army being assembled. When reality finally dawned, blaming everyone else for the destruction he and his cronies had caused, Hitler ordered the wholesale demolition of German industry and infrastructure. Only the intervention of his side kick Albert Speer who countermanded this lunatic order saved Germany from total ruin.

With the bond market closing in all sides, our bunker in Merrion Street unveiled its wonder weapon NAMA which was to get banks lending. It proved a monumental failure that led to an unmitigated economic planning disaster resulting in what will probably become a €65bn tax payer banking bailout bill. Since unleashing NAMA, two rogue banks have been mothballed, another is trying to jump from the fat to the fire, the big two are all but shut for new business, one foreign owned outfit has closed down both a business bank and retail bank, the others are being drip fed loan loss capital from their parents. The credit union sector, the only partially working bit left of the banking system, is too sickly and too small to matter.

The problem for Minister Lenihan is the two banking hulks, AIB and Bank of Ireland while hauled up on the sand bank at low tide are still holed beneath the water line. The tide is rising again as they make ready to unveil a fresh round of losses.

Yet another weapon the Farmleigh gathering was supposed to lead the mythical army of the Diaspora to the rescue. It was but more propaganda which dressed up the tiniest morsel of reasonable news in Bunker Speak to herald a winning Government strategy.

This week was both eerily prophetic and pathetic. First we had the announcement of what amounts to scorched earth, economic madness. Minister Lenihan is set to cut what little meat remains off the bones of an anorexic near zombified economy. Bled almost dry of fiscal fuel more is to be drained off. Echoing Charlie Haughey he told us we would have to live within our means.

And he unveiled yet another wonder weapon! The interest roll up deal on Anglo’s IOU’s would save spending more money, for now. We were also reminded of a positive trade balance as the multinational export sector is doing well. It is at generating profits, taxable at only 12% but it will hardly generate the jobs needed for economic recovery. And balance of trade matters little to those struggling with emaciated incomes.

There was more good news from the bunker – the live register was down! Things are still getting worse but more slowly it seems. And then the best wonder weapon of all was revealed. It was the stock Fianna Fail response to economic woes, that most traditional of all Irish export businesses – the business of exporting young people. Are we the only country on the planet that economically plans for emigration?

Well if Minister Lenihan is serious he could always front load emigration by paying people to go – a grant worth two years job seekers allowance would probably work.

The Bunker has spoken. Free cheese, emigration for an anorexic anaemic economy, and interest roll ups were the order of the day. We have to wait a few more weeks to hear of the rest of its battle plan while parochial politics plays out its end game in Donegal.

Regulate debt managers before it's too late

Financially vulnerable consumers have no protection from unregulated debt management companies, writes Bill Hobbs.

 

It is said that regulators always arrive far too late and out of breath at the scene of an accident. And what an accident to arrive at! Financial service firms’ marketing of dangerous products destroyed hundreds of billions in household wealth, including people’s pensions and left tens of thousands of insolvent households struggling to pay loans they can no longer afford.

 

Responsible for consumer protection, will the Financial Regulator act to protect the most vulnerable of all – people struggling with unaffordable debt who are being exploited by a new form of financial service firm, the commercial debt manager?

 

Leading consumer protection experts maintain financial service firm regulation conflicts with consumer protection. Yet Government maintains the regulator should both ensure firm’s safety and soundness and protect people from their predilection to maximise profits from marketing dangerous products. But the regulator says regulating products for safety would stifle innovation. Instead its protection focus is to ensure firms are satisfied consumers appreciate and understand what they are buying from them.

 

It is now talking of a new sub-category of consumer it calls the “vulnerable consumer” whom it says should be afforded higher levels of protection. Everywhere else consumer advocates maintain that all consumers are vulnerable unless proved otherwise. They say financial products are far too complex and should be simplified using clear unambiguous contracts. They see financial innovation for what it really is – the opportunistic marketing of dangerous products.

 

Financially vulnerable consumers have no protection at all from a recent, potentially dangerous innovation - the unregulated, unlicensed commercial debt management company. These are the outfits who say they negotiate affordable debt repayment plans with lenders. Busy exploiting a gap in consumer protection, many are abusively marketing products to vulnerable people leading them to believe they will arrange to write off their debts but only if they buy their debt management plans. They can charge over €500 to negotiate a plan and during its lifetime levy thousands in fees based on how much people pay over to them monthly to be disbursed to lenders. Many are mortgage brokerage operations that, having profited from boom time reckless mortgage origination, are now looking to profit from a bust time household indebtedness they helped to create.

 

Search for “debt advice” or “debt managers” on the internet and a plethora of new businesses pop up. Few bother identifying who they are and some brazenly imply they are “regulated”. Others are saying they self-regulate. Some are subsidiaries of mortgage brokers and investment intermediaries. Others are non-transparent thin fronts for British based operators. Many claim they can have people’s debts written off. Those that don’t, verbally assure their customers that buying their debt management plans will result in debts being written off. Sales tactics used to hook vulnerable consumers include talking up how their products relieve the psychological stress of debt. Many are blatantly piggy backing the good work done by MABS and others who have long campaigned for a proper debt resolution system.

 

Commercial debt managers pose two quite serious consumer protection risks that must be regulated. The first is they are in the business of profiting from providing financial products and financial advice. If they were advising on borrowing or investing money they would have to be regulated, comply with business conduct rules and consumer protection codes. Their directors and managers would have to be fit and proper individuals. Their staff would have to be qualified financial advisors and they would have to divulge their fees and charges. They would have to be licensed to operate and subject to sanctions if they broke the rules. Their products would carry health warnings and their customers would have the right to complain to the Financial Ombudsman.

 

The second and most glaring consumer risk relates to the way in which they handle people’s money. Debt managers make their profits from getting people to pay over to them their monthly loan repayments which they then disburse to lenders. They charge a fee for this service based on a percentage of the amount managed. This is a money transmission business that should be regulated. Payment service providers here must be licensed by the Central Bank and regulated under its rules. In other countries such as South Africa, debt counsellors are banned from handling client’s money. Not so here, where their product provider, financial advisory and money transmission operations are currently outside of our regulatory bailiwick.

 

How have the Financial Regulator, the National Consumer Agency and relevant Government departmental officials responded? It seems no one is interested in bringing these businesses under their wing. Is this another case of waiting for an all too predictable public scandal, when people’s money has been lost before acting? I should hope not. Rushing into the stable after the horse has bolted and demanding shiny new shovels is no longer an acceptable form of consumer protection.

 

A version of this article appeared in the Irish Examiner, Business Section, Monday November 1st 2010.