Taxpayers will continue to carry bank burden
IT WAS odd that during an Oireachtas committee’s questioning of Permanent TSB chief executive Jeremy Masding, for three hours last week, that the bank’s €4 billion bailout with public money was only mentioned twice.
One reference came from Independent TD Stephen Donnelly, a member of the Oireachtas finance committee: “The people of Ireland made €4 billion available to this same institution as part of the recapitalisation and Mr Masding has admitted that not one euro of that amount has been forgiven for borrowers. I recognise that he is citing fiduciary responsibility but I do not think that is acceptable.”
The meeting was dominated by the pressure being put on customers by the decision by the bank, once the country’s biggest mortgage lender, to maintain the standard variable rate on home loans at the higher end of the market.
While Masding was being questioned, International Monetary Fund deputy director Ajai Chopra was speaking, in another part of Dublin, about the challenges facing the country. He talked about how the Irish banks had to regain profitability to sustain new lending.
A view expressed at the Oireachtas committee was that the €4 billion injected into Permanent TSB has created an obligation on the bank to reduce interest rates to what would be uneconomic levels. There was no discussion around whether that money would be recovered.
This, in effect, suggests that the problems of 74,000 customers at Permanent TSB whose mortgages are on variable rates – the only borrowers whose rates can be adjusted – outweighs the concerns of more than 2.2 million PAYE and income tax payers footing the bill to bail out Permanent TSB.
It was argued that the high rates were increasing the level of arrears and the capital cost of the bank but Masding rejected this.
It is important to protect the interests of the 74,000 customers but surely the prospect of the State recouping some or all of the €4 billion should be front and centre in any questioning by an Oireachtas oversight committee?
It is a sad fact of the fragile state of Irish banking that lending rates must rise – or costs of raising money by the banks must fall sharply (but this is not going to happen any time soon) – if the banks are to return to full health.
And full health in this scenario means profits.
The difficulty for the banks, most of which are State owned, is that “profit” has become a dirty word in banking given its recent pre-crisis association with pay and bonuses. But it should have a new association – the recovery of some of the billions of euro injected into the banks.
Yesterday Permanent TSB announced details of its restructuring plan to create a smaller, profitable bank by 2016. It involves closing 16 branches and up to 250 more redundancies. The cost-cutting will reduce overheads by 10 per cent but like all banks Permanent TSB will have to make sure it charges more for loans than it pays for deposits if the bank is to recover fully.
The fact that the bank is publicly owned means it will come under pressure from the public’s representatives to ease the burden of debt on customers who have, as taxpayers, paid for the €4 billion rescue of the institution.
But there are at least 2.09 million taxpayers who will not benefit from Permanent TSB maintaining uneconomic rates.
It is reasonable to call for some relief for these customers but failing to repair Permanent TSB’s banking model will ultimately land further costs on taxpayers.
Similar pressure has been applied on another State-owned entity, the National Asset Management Agency, for example. Property developer Treasury Holdings has argued in court that it lost out on their right to fair procedures to make representations to the State agency before a decision was made to call in their loans and appoint receivers to the business.
Had a public body not been involved and another entity sought to acquire its loans or appoint receivers to the business, it is unlikely they would be able to plead that their constitutional rights have been infringed.
It is also unlikely that a group of taxpayers could take a similar legal action to claim their constitutional rights were being infringed by legal resistance to a move that could recoup more money for Irish taxpayers.
The State’s involvement in the banks has exposed it to demands that are not always in the State’s best commercial interests.
It is a sad fact of the fragile state of Irish banking that lending rates must rise – or costs of raising money by the banks must fall sharply (but this will not happen soon) – if the banks are to return to full health