Cantillon

Inside the world of business

We must keep kite-flying if we're to fix a broken system

AS PORTUGAL takes its turn graciously to accept the punishment only a bailout can bring, the wider debate about sovereign funding in the euro zone remains a hot one.

Our own Central Bank governor, Prof Patrick Honohan, engaged in a bit of kite-flying on the issue earlier this week, with an opinion article in the Financial Times. The kite in this instance related to GNP-linked bonds, which would see the Republic pay more to investors when economic growth is strong and less when the economy weakens. GNP would presumably be used instead of GDP because it would offer a purer snapshot of the domestic economy, to the exclusion of multinationals.

Such a product would only work, it should be noted, if investors could rely completely on the integrity of data on economic growth. Another factor, the basis for Honohan’s suggestion, is that it would entail “risk-sharing”, a concept that has thus far been anathema to the Government when it comes to bank bondholders. Sovereign-debt holders may look askance at the differentiation, although they would obviously be entering such deals with their eyes open.

GNP-linked bonds represent one example of how the sovereign-bond market could be shaken up. Another would be a bond with a lengthy maturity, such as the 30-year debt that has been proposed by former European commissioner and finance minister Ray MacSharry.

On another plain would come the so-called “e-bond”, which would see the euro zone jointly issuing sovereign debt as per a plan concocted by Eurogroup president Jean-Claude Juncker and Italian finance minister Giulio Tremonti. This was quite the fashionable topic around the turn of the year before it was bopped on the head by France’s finance minister Christine Lagarde among others. There are other ideas.

However the debate on bonds progresses, it is clear it needs to be pursued in the hope of finding an improved solution to sovereign funding needs. It is hard, after all, to imagine more proof that the existing set-up is broken.

Whitaker v Bates: an uncomfortable precedent

THE LANGUAGE from the financial regulator, Matthew Elderfield, on his plans to put executive and non-executive directors of the banks through the Central Bank’s fitness and probity ringer is clear.

He said this week that he didn’t underestimate the legal challenges he might face in using new powers to remove bank directors.

A Leeds United fan, he would do well to look back at a legal action taken in 1973 by the club’s current owner Ken Bates, who at that time owned Irish Trust Bank. TK Whitaker, then governor of the Central Bank, tried to remove Bates from the bank and demanded that he reduce his shareholding to 10 per cent. Bates took a High Court case and won.

Whitaker had received a report from the Bank of England to the effect that Bates was unsuitable to serve as the director of a bank. The bank discovered that Bates had failed to mention his involvement in a failed company called Howarth of Burnley in his CV.

Whitaker used the Central Bank Act 1971 to remove Bates from Irish Trust but High Court president Mr Justice Aindrias Ó Caoimh said the conditions imposed were unlawful, unreasonable and not validly imposed. Some with first-hand knowledge of that case say the high-profile failure left the regulator reluctant to take on legal fights against other banks.

Elderfield and Central Bank governor Patrick Honohan have argued that the regulator must be willing to face the possibility of losing cases and that this should not knock the Central Bank off the long road to reform.

The directors at State-supported banks who were party to the calamitous lending of recent years are firmly in the Central Bank’s sights in its forthcoming investigation into the banks.

In a topsy-turvy world Down Under is tops

SO WHERE does all this lofty talk of creating “pillar” banks out of Bank of Ireland and AIB/EBS originate?

The answer: Australia, where the government has followed a “four pillar” policy to protect its banking sector. The country has four strategically important banks – ANZ, Westpac, National Australia Bank and Commonwealth Bank. The policy was originally centred around six pillars but “pillar” status was removed from insurers AMP and National Mutual.

The government regards the four as so systemically important that it has insisted they remain separate, prohibiting mergers. This means that if one pillar crumbles, the country will still have three pillars standing. The policy stems from a decision by the government in 1990 to block a merger between ANZ and insurer National Mutual.

Michael Noonan’s plans for the Irish banking system centre on two domestic pillars and a third around the foreign retail banks.

This strategy is largely reliant on Ulster Bank, whose owner RBS has just installed New Zealand banker Jim Brown as chief executive. He should know all about banking pillars. ANZ in Australia owns National Bank of New Zealand. Bank New Zealand is owned by National Australia Bank.

With Australian banker Mike Aynsley in situ as chief executive of Anglo, the Irish banking scene is taking on a very Australian flavour. This is no bad thing given that Australia, like Canada, has emerged relatively unscathed from the global financial crisis.

Antipodean bank chief executives are in fashion. Clearly, with our world tuned upside down, it pays to look Down Under.

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