Banks need to address the profit taking behaviours that caused their demise, writes Bill Hobbs.
Has the curtain finally been brought down on the Great Liberalisation epoch in Irish Banking? It was a time when, thanks to Euro zone membership and friendly regulators, our banks accessed a boundless supply of cheap wholesale money to fuel a property lending boom. It was also a time when banks deliberately produced complex products to ensure consumers remained blind to the risks they were induced to take.
A consumer debt crisis is an inevitable outcome of abusive credit marketing. In the hands of abusive bankers who persuaded unsophisticated, financially illiterate consumers to buy into their misleading and negligent marketing hype, mortgages became weapons of social destruction. Irish bank’s dangerous financial innovation played a large part in causing the catastrophic property bubble.
Their marketing of cheap affordable credit induced far too many people to borrow far too much. One the canards promoted during the boom was that more banks led to greater competition and lower prices. In fact, competition between financial service firms tends to drive prices higher as firms deliberately increase product complexity as a ruse to increase prices. The more complex they make their products, the less likely people will try to educate themselves on different offerings and the more likely they will buy from the most familiar brand.
The size of the debt problem is evidence of not only a failure in bank regulation but an abject failure to protect consumers. The scale of home repossessions required to clean up bank balance sheets is finally becoming public. Faced with repossessing close to 30,000 homes, there are two generic solutions. Either banks possess and sell off these homes or they write down people’s loans to affordable levels.
Thanks to the ECB’s small interest rate increase last week, media and public attention is now focussing on home owner’s debts. Yet for over a year, banks have steadily increased their mortgage lending rates. You will now pay €4,500 more per year on a €150,000 mortgage than if you were living in Germany
Released last week, redacted briefing reports for the incoming Minister for Finance, Michael Noonan are strangely mute on how to deal with the scale of the consumer debt and consumer protection problems.
How big is the debt problem? Adding consumer losses together – home mortgages, “buy to let” and other personal loans - the total bill could reach €15bn. This is the money that will not be collected. At crisis recovery rates, the underlying loan amounts exposed to losses will be many times higher. These losses will be translated into higher fees and interest rates as bank customers will be forced to cross-subsidise bank losses.
Banks and their gatekeepers say they have to pass through their cost of funds to borrowers. But they are passing these costs through bloated operations built during the boom times.
Government policy has not yet considered how best to protect consumers in what will become a banking oligopoly. Ignorance is a source of oligopolistic power that banks will exploit to drive up profits at the expense of their customers. Unless there is a willingness to insist banks and other financial service firms produce simpler, less complex products, profit gouging will become a feature of the marketplace for years to come.
Financial institutions love complex products as they can pack them full of tricks to induce people to buy and traps to enforce loyalty. Will banks and other financial service providers be allowed to continue making it harder and harder for people to understand what it is they are selling? Or will the financial regulator insist that banks treat their customers fairly and replace complexity with easily understood terms?
Should price controls be introduced? There is nothing preventing interest rates and fees being capped. And there is nothing preventing Government from insisting that bankers live within tighter margins.
The great liberalisation of Irish banking led to a marketplace full of complex and quite dangerous credit products. Unless challenged by a robust consumer protection agency with the powers to insist on fairer prices and terms, a banking oligopoly could embed unnecessary complexity and excessive profit taking. So far it seems that Government and regulators are only concerned with restructuring banking and haven’t addressed the profit taking behaviours that caused their demise. It should be possible to insist that products are regulated and prices are controlled.
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