Why is the Government helping a rival to the banks?

Mon, Dec 10, 2012, 00:00

BUSINESS OPINION:One of the more interesting titbits in last Wednesday’s Budget was the revelation that the National Pensions Reserve Fund (NPRF) is going to get into the business of lending to small businesses.

According to the Minister for Finance, the NPRF – a child of the National Treasury Management Agency like the National Asset Management Agency – is developing “ a range of support funds to provide equity, finance and restructuring and recovery investment to the SME sector”.

We have been told the funds will range in size from €100 million to €400 million, but beyond that we are pretty much in the dark. Minister for Jobs, Enterprise and Innovation Richard Bruton was not giving much more away at his post-Budget press conference. He said that the NPRF would provide details in the New Year.

However, a report on Bloomberg the same day gave a hint of what might be coming. It said that a London-based fund manager called BlueBay Asset Management was going to “join with Ireland’s National Pensions Reserve Fund to establish a fund offering loans to small and medium-sized businesses”.

According to the report, the fund could raise as much as €450 million and would start senior secured lending in the first quarter of next year. The final snippet of information was that the new fund expects to deliver an annual return of 15 per cent for its investors.

At the risk of looking a gift horse in the mouth, it’s worth teasing out the rationale for the Government sponsoring such a scheme.

Senior secured lending to small and medium-sized enterprises is the bread and butter of the big commercial banks and, when you own one (AIB) and are a big shareholder and guarantor of the other (Bank of Ireland), why would you set yourself up in competition with them?

The conflict is even more acute at the level of the NPRF as it is the vehicle by which the Government acquired its stakes, and thus is funding what looks like being a direct rival to its two single biggest investments. Not only that, it is funding a rival that clearly plans on eating the Irish banks’ lunch if it is to return 15 per cent annually to its backers.

We hope the Government will explain its thinking in due course, but a couple of obvious explanations suggest themselves.

The first is that the Government has given up on getting the banks to do what it wants with regard to SME lending either because they can’t control them or because the banks remain so badly broken they are not able to sort out their SME loan books without further capital.

One would suspect it is a mixture of both. It is clear that there is growing frustration on the part of the Central Bank at the slow pace at which the banks are facing up to the problems in the commercial lending books as well as residential mortgages.

Recent speeches by the Central Bank’s head of banking supervision Fiona Muldoon and her boss deputy governor Matthew Elderfield have made this clear.

The consensus at the moment is that the banks have been given the money by the taxpayer to meet their losses but are holding back for various selfish reasons.

Without a doubt, the narrow conflicting interests of the banks as against the wider national interest is a factor in all of this, but we also have to confront the possibility that they don’t in fact have enough money.

The day of reckoning in this regard is most likely to be the next round of stress tests required under the terms of the bailout and by the European Union. They have been slated for next year and there is a game to be played out yet in terms of what they will look at and how hard.

But the Central Bank has made it clear that if these tests – and it’s a big enough if – conclude that the banks don’t have enough capital to absorb the losses in their residential mortgage and commercial loans books, they will have to take more money.

The notion of another bank bailout next year does not chime well with Ireland smoothly exiting the EU/IMF programme in 2013 and the NPRF’s search for other sources of funds and alternative mechanisms to fix the debt crisis in SMEs starts to make sense.

Given that the Government seems to be talking of four or five funds of up to €400 million, it is potentially quite a big initiative and may stave off the need for more capital for the banks. But given that the lenders are looking for a 15 per cent return, it could prove a very expensive back-door bailout.

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