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
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