Cantillon

Inside the world of business

Sorry Willie, banks just too badly run to be trusted

WILLIE SLATTERY’S broadside on the National Asset Management Agency was spectacularly mistimed to put it mildly. On the day that the State Street boss took the airwaves to lambast the agency as “a crazy idea”, the chief executive of his target was pulling back the covers to reveal some of the horrors he has uncovered in the banks.

Brendan McDonagh’s testimony to the Oireachtas joint committee on finance rather brutally undercut Mr Slattery’s thesis that the banks themselves were best placed to work through their troubled land and development loans. The banks, according to Mr Slattery, have the “commercial wherewithal and the toughness to make sure that in their negotiations with developers they will get the best results”.

These presumably cannot be the same banks that Mr McDonagh characterised as a “troubling picture of poor loan documentation, of assets not properly legally secured and of inadequate stress testing of borrowers and loans”. The banks that Mr McDonagh says engaged in “a mindless scramble to funnel lending into one sector at considerable pace” and “reckless abandonment of basic principles of credit risk and prudent lending” are surely not the same organisations that Mr Slattery believes should be given billions in taxpayer money to try and sort out their own problems.

Mr Slattery has more than 20 years’ experience with the Central Bank and runs the Irish arm of a global financial services business that weathered the credit crisis better than most. He was also asked by the Government to sit on the public services expenditure review group led by Colm McCarthy. He is clearly no fool. And indeed, there is a logic to what he proposes and it is the model followed in many other countries, most notably the UK. His is also right to question whether Nama is transparent enough.

But it seems clear that it has yet to register with Mr Slattery, and presumably many others, just how breathtakingly badly run the Irish banks really were. It is truly staggering when someone in Mr McDonagh’s position tells a parliamentary committee that he was not sure if the behaviour of the institutions amounted to fraud or incompetence. The track record of the banks is actually so bad that it raises questions over whether they can carry out even the limited role envisioned for them in the Nama process, never mind lead the work out.

Surrendering sovereignty

“Never waste a good crisis” is a refrain that has been well aired over the last two years. But it remains the case and Olli Rehn, the EU economics commissioner, is off to Madrid this weekend with a very ambitious wish list of budgetary reform measures.

The most eye-catching of them is the notion that member states will get to examine each other’s budget plans. It’s unlikely to fly, but some of the less tendentious measures may gain traction this weekend, such as automatic fines for breeching deficit levels.

The fundamental issue is that it is not possible to have greater discipline without surrendering economic sovereignty. The crisis surrounding the Greek deficit and rescue indicates that sovereignty may either be surrendered under pressure or voluntarily given up in return for agreed reform, but ultimately it will be eroded as long as the European project’s momentum towards integration is sustained.

It will not be lost on the euro zone members that if more sovereignty had been exchanged for better enforcement at Maastricht, we might not have found ourselves in this mess.

Untouchable bondholders

The inequitable burden being allocated in the fallout from the Irish bank collapse was highlighted again this week with ESRI professor Alan Barrett stating that taxpayers should never have been faced with such a financial burden “due to the behaviour of the private sector”.

In relation to the need to bail out Anglo Irish Bank with up to €22 billion, he noted in the think tank's Quarterly Economic Commentary: "If Anglo is of systemic importance, it should always have been regulated as such."

Shareholders, taxpayers and even bankers have all to varying degrees paid for the calamitous failure of regulation in the Irish banking sector. Yet bondholders continue to enjoy considerable protection. Holders of subordinated debt have taken a haircut but the bulk of bank borrowings outside interbank transfers and central bank funding is through senior debt – and that continues to be seen as untouchable.

Many, especially in financial services, argue that making bondholders face up to the risk inherent in their investment would be self-defeating. Penalising bondholders will tarnish the image of Irish debt in general and push up its cost to the exchequer, they say.

But how real are the risks? For many, especially foreign institutions, holdings of Irish bank debt are of little significance given their size. Domestic institutions, which might be harder hit in relative terms, have in any case been too exposed to the Irish economy. Ultimately, institutional bondholders chase return and will likely buy into recovery.

The IMF has suggested that banks of “systemic” importance might be forced to meet higher capital requirements to reflect the risk of bailout. In a similar vein, would it not make sense that bondholders in institutions that we now understand can rely on the state in the last resort should receive a return roughly equal to that available on Government debt, rather than the premium that has applied until now?

TODAY

ACCA will host an invitation-only debate on issues affecting SMEs this evening in Dublin, while the National Recruitment Federation will explore ways to stabilise the economy at its conference in Citywest, Co Dublin

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