Ireland’s bankers have learnt little from the crash

You would not expect a conversation over a pint in a sleepy Connemara hotel after a day of fishing to be earth-shattering, but one such fireside chat foreshadowed to me the trouble Anglo Irish Bank was in, not long before its downfall.

Almost a decade ago, in September 2008, an octogenarian Galway businessman who I had met only briefly before had asked a mutual friend during our conversation if he would mind giving us some privacy for a few minutes.

It was a sudden and sharp shift in a discussion about fishing, but the man had something on his mind that he wanted to talk to me about.

Once we were alone, the Galwegian – a successful entrepreneur, then retired with his fortune made years earlier – leaned in to ask my advice.

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He whispered that his manager at Anglo had offered him a deposit rate well above the rate he was being paid at that time – and far above the norm – if he moved his nest egg in its entirety, then spread out across different institutions, to the bank.

This offer had thrown the man. It seemed too good to be true and his gut told him something else was afoot inside Anglo. He was worried for his grandchildren who would inherit his money and given the previous week’s news, which had been dominated by the collapse of Wall Street bank Lehman Brothers and fears over deposits, he wondered which bank might be next.

I explained I was not in the business of giving financial advice, though I noted that the then Minister for Finance Brian Lenihan had just raised the State deposit guarantee to €100,000 and so spreading your money up to this amount across several financial institutions should provide some comfort.

He had heard enough and changed the subject before our friend returned.

Trust

What struck me afterwards was how the trust this experienced businessman had in his bank and his bank manager had been shaken by the offer. It reeked of desperation and the man smelled it. The offer was appealing enough to shake his confidence to the point that he sought reassurance from someone he barely knew about what was going on at a bank he thought he knew.

Ten years on, the same question that man asked in a Connemara bar might be asked today: what the hell is going on within our banks or why is it still going on?

Almost a decade after the banking sector was pushed to the brink of obliteration, the trust of bank customers has been shaken again by the fact the banks are facing another billion-euro bill to cover the cost of a scandal involving bankers robbing customers of lower tracker-rate mortgages.

Reducing mortgage rates could even out the crazy peaks and terrifying troughs of boom-bust cycles

This week the Central Bank produced a report on the behaviour and culture of the banks in response to this latest controversy. It found that AIB, Bank of Ireland, KBC, Permanent TSB and Ulster Bank "all have significant distances to travel" to embed a customer-focused culture, were stuck in a crisis-era "firefighting" mode and reversing back into "command and control" management styles and silo decision-making that banks slip into in times of pressure.

It is strange that it took another banking controversy for the Government and, in turn, the Central Bank to examine what is it about the culture within Irish banking that makes people behave this way.

Derville Rowland, director-general of financial conduct at the Central Bank, said the tracker mortgage "examination" had shown that the behaviour of the banks was "not in the right place" and that their attitude was more a "do the legal thing and not the right thing." So little has clearly changed in 10 years.

Perhaps the greater lesson that the country’s bankers need to learn is to understand the real purpose of why their institutions exist, what their roles should be and why customers should not be an afterthought, forcing them to abandon the us-versus-them culture that drives management styles and decisions.

Banks are essential to a functioning economy, for many a necessary evil after the events of a decade ago. Like electricity and food, the steady supply of money is critical to a stable society and so bankers should consider their role more in these terms: as a civic utility bound to serve the customer and ultimately society.

This would help rein in the wild profit expectations, mindless competitive urges and runaway bonus culture that forced bankers in the past to take decisions that jeopardised their own institutions and eventually lumped huge costs on the public. Irish bankers should accept that the Celtic Tiger-era profits were a sign of distress, not success, and that banking should be steady, predictable and, well, boring. Look at Canada’s record.

Mortgage rates

Central Bank statistics earlier this month showed mortgage rates in Ireland were the highest in Europe. Reducing mortgage rates in line with other European countries might not just set priorities straight with the customer in mind but could even out the crazy peaks and terrifying troughs of boom-bust cycles that build high risks in banking.

In sentencing former Anglo Irish Bank chief executive David Drumm to six years in prison for criminal offences, Judge Karen O'Connor last month used the word "trust" five times in her ruling. She noted the "position of trust" Drumm held as chief executive when he directed a "dishonest and fraudulent scheme" involving fictional deposits – a desperate final step in that September 2008 drive to plug funding holes that motivated the bank's approach to that Galway businessman. She pointed out too how "the public has to be able to trust its banks".

Other Irish bankers may not have gone as far as Drumm but this week’s findings from the Central Bank show they still have a job of work to rebuild the trust of customers and reassure them that they come first.