FG sets out alternative strategy for banking sector

AIB’s results paint a very worrying picture for taxpayers and for the economy. There is little comfort for borrowers, or for businesses. Borrowing outside of the construction sector is down by €3 billion, and AIB’s commitment to restart lending is fragile at best.

The open threat of rising costs for borrowers, including mortgage holders, also points to further trouble in store for the Irish economy.

These results should send a stark message to Brian Lenihan and his Government that their banking policy is not working. Its banking policy, like so much of its economic policy, is one-dimensional. It is forcing the taxpayer to make huge payments and heaps risks on the shoulders of future taxpayers – but in return for what? No element of their strategy is working.

• No credit is flowing;
• No dividend is being paid to taxpayers in return for this huge exposure;
• No-one is being held to account for these disastrous errors.

In essence, the Government’s banking strategy is about forcing taxpayers to bail out delinquent banks by ‘writing whatever cheques are necessary’. It uses scarce taxpayers’ resources to nurse along crippled loans in the fanciful belief that 80% of them will ultimately perform (NAMA Business Plan). It pretends that the principles of capitalism should not apply when it comes to banking. Risk investors in banks who made bad decisions are to be sheltered by taxpayers from the consequences. The Government is being bounced into a position where it suddenly regards these bad investments as the responsibility of taxpayers.

Fine Gael has a very different view. We do not believe that taxpayers should be expected to shoulder the entire legacy of disastrous banking decisions. Instead, taxpayers’ resources should be concentrated on getting credit going to enterprise. Bankable business ideas are now withering and dying for want of credit. This will stall Ireland’s capacity for economic recovery.

Fine Gael’s very different vision is encapsulated in:

• A National Recovery Bank which would act as a wholesale bank, moving quickly to leverage €20 billion in new lending;
• The establishment of a State holding company, NewERA, to recycle the present enormous level of private savings in order to fund an ambitious programme of renewal in vital infrastructural arteries of our economy.

The Government is on the brink of making huge decisions which will have enormous implications for taxpayers, both in the present and into the far-distant future. The €54 billion purchase of impaired assets through NAMA, followed by a €15-billion-plus investment in the banks, will undoubtedly provide the banks with liquidity. But the bankers themselves have already admitted that this will not get them to start lending again. Banks will continue to use liquidity to pay down their debts and hoard their own capital in an effort to protect their independence. Bankers will remain highly risk-averse and unwilling to take new risks in a recession economy. Worst still, as the CEO of AIB confirmed this morning, the banks are just waiting for the dust to settle on NAMA before they once again push up the cost of credit.

We now need a Government that devotes all its energies and resources to driving economic recovery. This requires that it asks the question of its banking policy: ‘is this the best use of scarce public resources’? We need a Government that starts to play hard ball with the banks.

It must insist that banks first do everything in their power to resolve their own problems before turning to taxpayers for assistance. A policy of tough love will require the banks:

• To dispose of non-core assets to generate capital;
• To look to some of the professional risk-taking investors to bear losses;
• To offer new shares for subscription to the general public, even if the price of shares has to be very low;
• No taxpayer’s money must go into Anglo Irish bank until a bad bank isolating the post-NAMA impaired loans is established;
• Heads should be banged together to produce a third force in Irish banking, with the EBS coming together with the good elements from Anglo Irish and Irish Nationwide.

It is naïve to think that the only problem to be solved in our banking structure is finding a home for the impaired loans of the past. Bank recovery depends critically on Ireland’s successful transition to an export-led recovery. With confidence on the floor, individuals and businesses are saving furiously to pay down their existing debts and build a cushion for tougher times. For Ireland this is the classic ‘Paradox of Thrift’ – these savings are being used to pay down the banks for liabilities, not to finance a recovery.

The Government must understand that its role is not simply to nurse the bad debts of the past, but to find an outlet for this rich vein of private saving in worthwhile investments to build a strong exporting economy. This has priority call on the State’s scarce resources. Narrow one-dimensional strategies in banking, in the public finances, and in managing State assets all run the risk of generating a diet of no credit, no investment, no reform and no jobs.

It is 18 months since the crisis in banking broke upon us and so far no one has been held to account. However, ordinary families have borne enormous pain in job losses and debt burdens. The Government continues to ignore the sense of anger and injustice that this creates. It has fuelled the cynicism that powerful interests in Irish society will never be forced to accept their responsibilities. All we have seen is a grudging and half-hearted enquiry:

• Where are the tougher penalties and clearer offences, if the past wrongdoing can’t be effectively prosecuted under existing law?
• Where are the new fitness and probity standards for directors and executives within our financial institutions?
• Where is the regime for clawing back the bonuses paid to executives in the event that the banks have ever again to turn to the taxpayer for support?