EU-wide approach needed

 

ANALYSIS:What the Government has done is brave and necessary, and Europe should follow suit, writes RAY KINSELLA

THE DÁIL, in scrutinising and enacting the Credit Institutions (Financial Support) Bill 2008 has performed a signal service in copper-fastening the stability of the Irish financial system and, by extension, the wider economy. Their deliberations may, in retrospect, prove to be the catalyst that the EU has needed to develop a financial markets intervention model that actually works and which can help stabilise global markets.

The scope for scrutinising the legislation was, of course, highly constrained.

Firstly, there were market-driven time pressures. The stability that flowed back into Irish markets following the Government's action is a precious commodity. The legislation needed to be put in place.

Secondly, the spectre of the recent rejection by the US House of Representatives of the Paulson package hung over Leinster House. At the same time, questions had to be asked, clarifications sought and assurances given. The Act is the better for this scrutiny.

A number of issues have arisen in the immediate aftermath. The first relates to the coverage of the arrangements and, in particular, to the case for broadening its scope.

It was right that the Irish authorities, in the first instance, crafted the arrangements around Irish-headquartered banks and credit institutions. These institutions - unlike those headquartered in other EU countries - are the direct responsibility of the Financial Regulator and of the Government. These institutions had been targeted by speculators. Their importance to the stability of the wider economy can hardly be overstated.

Having said that, there are a number of institutions - Ulster Bank and HBOS, which are subsidiaries of British parent groups, and also National Irish Bank, which is a branch operation of a major European group - which have a significant presence in Irish retail markets. They provide competition and choice, and bring different service propositions to Irish customers. Having begun with the core task of stabilising Irish-headquartered institutions, the Government would surely be right in including these institutions within the scope of the arrangement.

The UK authorities have raised the question of the compatibility of the new arrangements with EU competition policy. Their criticism is just a little wide of the mark. The responsibility for the financial stability of an institution lies, first and foremost, with its board, and ultimately with the regulatory authorities of the home country.

The UK authorities have developed their own strategy for stabilising UK markets. That is properly a matter for them. It is entirely legitimate for the UK to lobby the Irish Government on behalf of its institutions.

But any suggestion that what Ireland has done is contrary to EU competition law is simply misconceived. There is little point in talking about competition or distortions in competition in an environment in which the very survival of institutions can be undermined.

The EU Commission has sent out a very strong signal to this effect in its references to its need to respond reflexively. The UK authorities know this. In calmer times, they will affirm publicly the reality that the overriding priority now is for all European countries to work together, firstly to stabilise the markets and then, to ensure that whatever forms of intervention are made, are consistent with open and competitive markets. The Irish financial markets intervention model initiative meets this test - but it goes further. It is the only such initiative - right across the globe - that has demonstrably worked. It has assuaged the concerns, and the opportunism, of the most merciless and dispassionate critics - the markets themselves.

In contrast to interventions based on nationalising troubled institutions or which socialise toxic products, the Irish model is focused on protecting depositors as well as on reassuring institutions in the wholesale markets which are funding Irish institutions. It provides guidance as to the actions that are now needed at a European level.

It is no longer tenable to have piecemeal and inconsistent approaches to interventions aimed at stabilising EU financial markets. What is needed is a unified EU-wide approach. Europe needs the kind of radical thinking that underpins the Irish initiative.

The point is this: the EU regulatory system, set out in a whole raft of directives, is based on the authorisation of institutions on the basis that they conform to specific requirements. These are extensive and very detailed. They are there to protect depositors and to underpin, so far as possible, the stability of Europe's markets.

The EU finance council now has an opportunity to do precisely what the Irish authorities have done. A two-year guarantee that all deposits in EU-authorised institutions would be insured would go very far indeed towards stabilising the markets. The markets themselves are beginning to pressurise governments to move in this direction.

Europe needs to be brave. Sensitised by the implications of the most serious crises in financial markets, European governments need to show conviction in their regulatory framework and engage in fundamental reforms at a global level, including the establishment of a global central bank.

More than a decade ago, British prime minister Gordon Brown was pushing the idea of changes in global financial architecture, and significantly, British EU commissioner Peter Mandelson is now promoting this idea.

In Ireland, we now have two years within which to make this initiative work. It is not the shareholders with banks who have restored calm to Irish institutions and markets. There has been a massive transfer of goodwill to the banks, from the people of Ireland. It is they who have underwritten the future of the banks and brought them back from the brink.

Goodwill is a two-way thing. The banks need to respond constructively, imaginatively and immediately to this goodwill.

This will require a change in the mind-set of the boards. Their responsibility is not just to shareholders. They have an equal responsibility to their customers, to depositors, to their employees and to the wider community. This balance has not been there in the past. But it is a model which recent events demonstrate is demonstrably more robust than one based on maximising short-term shareholder value. The latter is not just conceptually redundant in an environment where there is no shortage of capital; it has created a target-driven environment, incentivised by obscene levels of remuneration, and which is wholly destructive of the person within the institutions themselves and in the wider community.

Change should not be primarily a matter of regulation from on high, or even the exercise of very extensive powers granted to the Minister under the legislation. The banks have grown up with the Irish economy. They have the knowledge and the clout to respond to the needs of the economy, which, with all the goodwill in the world, banks headquartered outside the State simply do not have. The boards need - to use that tired old cliché - to think outside the box.

The Government, having stabilised financial markets, now has a more solid foundation on which to craft not alone the budget, but also a pathway which will bring the country through recession. If it listens to what is being said deep in the long grass, there is much more that can be done - and at no cost. We have to anchor foreign direct investment within the country. But there is a great deal more that can be done to develop Irish industry and services. Regulation, in different forms, is important. In Ireland, we have turned it into an industry, which is semi-detached from the realities of managing a business and which is simply suffocating enterprise. Addressing this problem would rejuvenate entrepreneurship, but it will take radical surgery.

The banks need to provide explicit indication that they will support all businesses and in particular small businesses through the hard times ahead. The Government needs to make it worthwhile for Irish businesses to employ additional workers and to expand their facilities.

Our destiny is in our hands to a greater extent than we might perhaps believe.

• Prof Ray Kinsella is on the faculty of the Smurfit School of Business and the Management Institute of Paris