Sunday 26 March 2017

Bankers raw in tooth and claw

BORED reading about bankers? Fed up hearing about financial regulation? Are you the sort of person who thinks that the banks should ring that free phone number and consolidate all their debts into one easy monthly repayment?

If so, this is the column for you. Let's forget about depressing financial revelations and talk about something more interesting.

Let's see... what about nature documentaries?

Do you remember the Disney documentary White Wilderness? It was part of its True Life series and investigated the migration cycle of the lemming.

It showed hordes of small, furry animals converging on an exposed Norwegian cliff face before hurling themselves over the edge, without hesitation or deviation, into the Arctic Ocean.

It won an Oscar for Disney -- but it has been disclosed recently that it was stage-managed. A revolving platform was constructed in Canada, not arctic Norway, and the small, furry creatures were herded over the edge.

The myth of lemmings committing mass suicide is just that, a myth. But we trusted Disney. We grew up believing that Snow White stood for all that was honest and kind. We thought that Mickey Mouse wouldn't tell a lie.

We were like the Minister of Finance, who used to trust the figures given to him by the banks. Now he says he doesn't trust them at all. (Did you really think I wasn't going to talk about banks?)

Both the main banks have been in existence for around 200 years, overcoming a civil war, two world wars, famine, global economic depression, the swinging Sixties and heavy-metal music -- to name but some of the more serious threats to civilisation.

They prided themselves in taking the long view, in nurturing a culture of prudence, and argued that having Irish-owned banks looking after Irish people was of strategic national importance.

Yet at some point in their very recent history, Irish banks decided to disregard 200 years of collected wisdom, and grossly inflated their balance sheets by concentrating an unparalleled amount of credit into the Irish property sector. In so doing, they put one of our key economic legacies at risk -- financial independence.

While the Disney lemming documentary may have been based on fake film footage, it has at least given us a good metaphor for some human financial behaviour.

Despite the repeated exhortations by the Government, the banks are still reluctant to help small business

Can you remember what you did last summer? Me neither. Did you think then that we should have solved the banking crisis by the time the holidays came around again? Probably not.

However, just to jog your memory, here are three things we didn't know last summer about Irish banking.

First, we didn't know that Anglo Irish Bank would post the largest loss ever recorded in the history of world banking, and we didn't realise that the figures it had supplied to Nama and the Department of Finance would turn out to be substantially unreliable.

Yet despite this ignominy, as regular readers of this column will know, this is the bank that still refuses to answer a senator's reasonable questions in the Oireachtas.

To echo the chairman of Anglo Irish Bank's fondness for French quotation: "Plus ca change, plus c'est la meme chose."

GMAC of the US posted the second highest banking loss in the world last year. It has decided to undergo a corporate identity makeover and now prominently displays the slogan, "Being upfront means having nothing to hide."

Useful advice for any bank seeking to recover some credibility. At least it has recognised the need to change and has adopted a new set of behaviours.

Second, the main objective in the refinancing of the banks was to ensure that credit flowed in the economy, particularly to small business.

We didn't know last summer that despite repeated exhortations by the Government, the banks would still appear to be reluctant to help small business.

In the United States, the same issue was tackled in a more commercial manner.

Banks that received government funding were charged a lower rate if those funds were actually lent to small business and a higher, more prohibitive rate if the funds were merely used to bolster the balance sheet. A neat bankers' solution to the problem.

Last, despite last summer's protestations that the bank guarantee was a no-cost option, we now know that the banking failure has increased the cost of borrowing to extremely high levels.

While credit is claimed for some positive comments from international agencies about the way Ireland has tackled the crisis, the one number that really matters is flashing red. The cost of government borrowing to pay for the banking bailout is now more than 5.5 per cent -- practically the highest in the eurozone.

We should have paid more attention last summer -- or the summer before last.

So what can be done about our 'too big to fail' banks?

The risk we now face is that when rescued banks can still expect to profit from the upside without worrying about the cost of their failures, a bank failure in the future is almost certain.

We clearly need a 'canary in the coal mine' device for banks. Internationally, regulators have made a number of sensible proposals, including linking executive rewards more closely to long-term profitability.

Our own regulator has published a thoughtful con-sultation document on corporate governance. One would expect unanimous support for these proposals.

However, despite the fact that the safety systems in the banks have clearly failed, the industry itself has not displayed any appetite to accept wholeheartedly what amounts to a set of very reasonable reforms.

The lesson from watching any nature documentary is clear. Unless you adapt and change, you will not survive.

Using Nama to force the banks to recognise their losses is one thing. Ensuring that the systems are in place to make sure it cannot happen again is quite another.

We are approaching the second anniversary of the banking crisis and there is little evidence of real change.

Meanwhile, banks that have been rescued have the expectation that they will be rescued all over again next time they get into trouble.

Only lemmings would continue to meekly accept the status quo.

Shane Ross is on holidays

Sunday Independent

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