Comment: State must do what is right
There are some valuable lessons to be learned from the past decade of Irish banking. It may seem like a trite observation but what happened in the recent past must never again be repeated in the future.
That may seem axiomatic in view of the public mood and the power that the Government is soon to wield over the sector, but economic history is littered with examples of banks losing the run of themselves in the aftermath of a crisis.
For example, British banks were among the
most over-exposed to the property sector when the credit crisis erupted in
2007, but this should not have been the case. Britain went through a nasty
property bust in the early 1990s, following the "loadsamoney culture" of
Thatcherism in the late 1980s which encouraged people to buy, regardless of
whether they could afford it. The banks were only too willing to get involved -
simply because everybody else was. Fast-forward less than twenty years and
British banks find themselves in the same predicament. It seems the pursuit of
profit can lead to a bout of amnesia.
The level of private sector debt in this country points to a banking sector that was on steroids over the past decade. Davy Stockbroker economist Rossa White issued a research paper recently in which he argued that the proceeds of the boom had been largely wasted because a disproportionate amount of capital had flowed into non-productive sectors. The size of the banking system relative to the country's GDP should have been a warning that something was awry a number of years ago.
The Central Bank should have been on top of this when it became obvious that the amount of private-sector debt was reaching alarming levels and that most of it was being channelled into property. But the Central Bank issued a series of bland reassurances which, in the end, proved to be worthless.
Encouragingly, the newly appointed Central Bank governor Patrick Honohan (pictured above) has certainly the right credentials to ensure that the banking system never poses the same level of systemic threat to the economy in the future. Perhaps the issue was not so much the regulatory framework that existed, but rather the enforcement of it. The appointments of Honohan and Matthew Elderfield as Financial Regulator under the newly reconstituted Central Bank and Financial Services Authority of Ireland is a very positive step.
But the complexion of the banking system is still up for grabs, although there is mounting evidence to suggest that both AIB and Bank of Ireland are going to end up in State ownership - or close enough to it.
There is a huge amount of criticism of the Government's approach to resolving the crisis. The argument is that the banks should have been nationalised upfront which would have obviated the need to pump capital into Bank of Ireland and AIB to keep them afloat.
But if the Government had pursued this option, what would have been the impact on State borrowing rates? More importantly what would have been the hit on the taxpayer?
Unless there is research produced that proves conclusively one option would have been far cheaper than the other, it is a case of splitting academic hairs.
But that is now in the past. If the banks are taken into the national fold, then the discounts that the banks take on development loans becomes a much more straightforward issue.
But what remains the case is as follows: there is an overhang of private-sector debt that could derail this economy if not properly managed. The only way forward is to create a buoyant export-led economy that raises national income which, in turn, can be invested in infrastructure projects that will lead to long-term sustainable growth.
If there is a return to the boom/bust credit cycle, then this country would be knocking on the door of the IMF post haste.
Credit needs to start flowing again into sectors that can provide a good basis for growth. These include greentech/cleantech, financial services, ICT and life sciences among others. There are plenty of domestic and international firms in Ireland with huge potential that need access to capital, or else they will fail.
After all, the high net-worth individuals that should make up the venture capital/angel investor sector have been wiped out. There is now a greater need for a functioning banking sector more than ever.
The reason why it is argued that the State has no role in the banking sector is that anytime it has happened in the past, lending was funnelled into politically desirable projects that had little economic benefit and which increased the cycle of bad debts.
If the State is to become the majority shareholder then it must do what is right, rather than what is politically expedient.
