Firesale of banks would burn us all
Only by keeping control of our banks on home soil can we hope to protect our sovereignty, writes Conor Killeen
Published 01/05/2011 | 05:00
'ACOUNTRY without an indigenously managed, regulated and controlled banking system lacks sovereignty." Such a statement flies in the face of popular expectations for the future of Irish banks.
Some commentators feel, understandably when examined in the context of immediately available private sector capital, that the future for our banks lies in ownership by foreign financial institutions. By Megabanks. This needs to be examined carefully.
The starting point is that today Irish banks are "unacquirable". They are considered toxic. Nobody would touch one. That is why €56bn is being pumped into our banking system by the Irish taxpayer. It is the very act of saving our banks at such monumental cost that highlights the importance to our economy of a working banking system.
The scale of the bailout highlights the role that properly operated banks play in the local economy.
One consequence of selling our banks would be that future profits from those banks, which have the potential to be enormous, would flow to their new overseas owners.
There is precedent here.
We generate large profits in Ireland for overseas shareholders of Intel, Tesco, Vodafone, Aviva, Diageo and Fujitsu, for example. By the time any of these profits are returned, via Irish shareholders, they have been massively diluted through paying the head office costs (among other things) in the US, Europe and Japan. There is nothing inherently wrong with this. That's the system we signed up for. But it need not be the system we sign up to for our renewed banks.
We used to own the majority of our banks. Diversifying pension fund investments away from Irish firms and into foreign assets at the time of entry into the euro was a theme that may have been overplayed. Perhaps local investors may have had a greater interest in arresting the excessive behaviours of our banks and bankers if we owned a greater direct interest in the outcome.
Now we own them again, we should not sell them overseas, but think of them as future profit monsters with profits generated from, and for Irish people. We believe the obvious home for Irish bank profits in future to be with Irish owners. It is no coincidence that we, a nation of hesitant and unexpected owners, will also be the bank's only immediate customers.
Looking from another angle, what is the experience of the Irish employees and customers of foreign-owned banks and financial institutions in the IFSC? For employees there are some "brain jobs" and a whole lot of jobs at the lower end of the food chain of international finance. We have written before about the means to create more valuable jobs in Ireland while deleveraging the banks at no cost (and potentially great benefit) to the Revenue. What is the experience of Irish SME customers in these banks? By and large, the customer base is not Irish.
This is not to denigrate the IFSC, but it does help to define the way international money management and banking institutions work. Keep the customer-facing and revenue-generating side at home and run operations functions in the lowest cost location. (Again, no tears please, that is the system we signed up to -- the point is that foreign owners have completely different motivations for being here.)
But the critical reason to work to a day when Irish banks are again strong and independent -- cognisant of their role in society, owned and managed locally -- is to keep capital and strategic decision-making in Ireland.
Lending, and providing credit is predominantly determined by executives who want to get the money back -- a vastly different mindset to equity investing. In the SME world, local credit is strong credit. To SME lenders, credit decisions do not benefit from being a long distance from head office. In another downturn (which inevitably will occur), credit decision makers in London, Madrid or Frankfurt or Zurich will decide to migrate credit away from markets where they are not intimately aware of the firms they are lending to. This is how it happens: markets fall, panic sets in, you withdraw to your home market and sell "non-core" assets. Non-core to one man can be core to another. Just ask any British or European finance director whose firm has been terminated as a client by an Irish bank in response to our bank demands for deleveraging. Looking for a replacement bank feels "core" to him.
So, roll forward to the next downturn. Imagine AIB is owned by Santander. Imagine a downturn half as difficult as this one. Notice anything? In Madrid it is easy not to hear the howls created in Dublin or Cork by the withdrawn facility. You can see how it looks today as Lloyds-BoSI, for their very good reasons, are exiting Ireland.
If we sell our banks, we will be turning off the capital flow to businesses in our country at some future point. Our banks have only one stated lending objective: to re-focus their business on Ireland. It follows they should be owned and run by people who are permanently resident in Ireland. We cannot, and will not, build a lasting, economically sound society based on finance provided from abroad.
When the hard work is done and all the capital provided has turned these banks around, when the burden borne by taxpayers works the magic of recovery, it is we that should reap all the future benefits. Benefits measured from creating, developing and managing well-capitalised financial institutions, with the prospect of funding enterprise, offering high-value employment, generating profits, and ensuring wealth can pass from the rescued banks to the current owners and their successors.
If we sell out, we will ultimately become to Europe what Wales is to Britain: toothless and dependent. This is a national crisis which demands the selfless devotion of customers, employees, managers, public servants, taxpayers and politicians. It does not need foreign advisers, investment bankers or consultants who toil away for months and simply point to a quick-fix sale to a foreign bank.
It may be that we need 10 or 15 years to complete the task, transfer ownership from the State to the private sector; but establishing a nation's sovereignty takes much, much longer. Either way, we are in a long process. Permanent economic dependence can creep up on a country. It is an insidious form of control that we can recognise and resist.
Conor Killeen is chairman of Key Capital
Sunday Indo Business