ESRI urges faster sale of State-owned banks

The Economic and Social Research Institute (ESRI)has said the Government should consider a speedier sale of State-owned banks such as AIB to boost competition in the mortgage market and ease borrowing costs.

In new research published with its quarterly economic commentary, the body found that the relationship between the European Central Bank policy rate and standard variable mortgage rates (SVRs) in the Irish banks weakened further after 2011.

This was on top of negative credit growth across all sectors of the Irish economy.

€30 billion cost

The Government’s objective is to fully recover the €30 billion cost of rescuing the surviving banks – AIB, Bank of Ireland and Permanent TSB – by selling down its shareholdings over time.

The State currently owns 99.8 per cent of AIB, 75 per cent of PTSB and 14 per cent of Bank of Ireland.

Discreet plans are in train for an initial public offering of 25 per cent of the State’s shares in AIB but the timing remains unclear and is it not certain such a sale would proceed before the election. The Government’s preparations for a phased sale of AIB shares follows an initial public offering of a 25 per cent stake in Permanent TSB in April.

However, ESRI research author Prof Kieran McQuinn said Ireland could arguably have “a more dynamic recovery” if the banks now in State control came under new ownership and responded in a more dynamic fashion to the economic turnaround.

Asked if that meant the State accepting some loss on the €30 billion invested in the surviving banks in addition to €34 billion lost in Anglo Irish Bank and Irish Nationwide Building Society, Prof McQuinn said calculations would have to be made.

“They may not get the full whack back but equally I think that’s where you have to make the calculation on the positive effects for the real economy if we did have a more dynamic banking sector in place,” he said.

In response to a reporter’s question, he acknowledged one possible option was to break up AIB. However, he did not discuss that in detail.

A further factor for consideration was that the expansion of Irish small and medium-sized firms, which were heavily dependent on Irish banks, tended to be more employment-intensive.

“The underlying indicators from the financial sector are quite weak and that does suggest that we could experience stronger growth rates – particularly I think as we get through this initial phase of the really strong bounceback we’re experiencing – as we move into the medium term,” said Prof McQuinn.

Lack of competition

Previous research on the pass-through of official rates in the Irish mortgage market attributed the disparity between Irish SVRs and the ECB rate to the lack of competition among Irish banks and balance sheet impairments.

“The SVR issue would appear to be symptomatic of wider issues concerning the present state of the Irish banking sector,” said Prof McQuinn.

“With negative growth rates for credit across all sectors of the Irish economy, the question is whether this sector, as it presently stands, can meet the needs of the recovering economy.

“As such, the emphasis now should be on policy measures which increase the prospect of competition in the domestic banking market. Ultimately, this has particular relevance for what and when the Government decides to do with the taxpayers’ stake in different institutions,” he added.