Departing foreign lenders will leave credit hole in their wake
THEY provided one-third of all loans in boom-time Ireland, but now there are increasing signs many of them are preparing to exit the market.
Foreign lenders have the potential to do significant damage to the Irish economy as a result, not just in terms of causing job losses, but also because of the severe credit contraction they're going to leave in their wake. In essence, this is the next phase of Ireland's financial crisis.
Foreign banks, from NIB to ACC, and Ulster Bank to Bank of Scotland (Ireland), are either rationing credit or not providing it at all due to the near collapse of the Irish economy. There is plenty of logic for their course of action, of course.
Foreign lenders in Ireland have become hugely leveraged and hugely compromised by bad debts, much of it caused by indiscriminate property lending.
This has led many of them to conclude that there is little point in engaging in additional Irish lending and little point in maintaining the expensive infrastructure of being a retail bank.
Bank of Scotland (Ireland), by closing its 44 Halifax branches, has accepted this undeniable logic.
The major UK bank groups, Lloyds and Royal Bank of Scotland, are in some ways retrenching back to their home market, which makes some sense considering both institutions now count the UK Treasury among their larger shareholders.
If these decisions simply meant a few foreign banks were cutting back on branches, it would matter little to Ireland Inc or the Irish Government. But as branches shrink, so too will credit, according to most analysts. The international body, the Bank of International Settlements, has described this trend as 'home bias'. In other words, banks will now primarily serve their own home markets and leave smaller, non-core markets. Of course, departures cannot be absolute, loan books come attached with customers, but, overall, the amount of new credit will be hit.
The problem with future credit is that there is no way that AIB and Bank of Ireland can fill the hole being left by retreating foreign lenders. The more the incumbents try to fill the hole, the more there is a danger they could incur a new wave of bad debts. NAMA will help to make filling this hole a little easier, but it seems to be held up in interminable delays at present, adding to a sense of paralysis in the banking sector.
Foreign lenders are likely to view the Bank of Scotland (Ireland) announcement with interest.
Ireland is a small banking market and not very profitable, so the attractions of keeping commercial roots here are hard to see.
David Went, the ex-Irish Life & Permanent chief executive, once called foreign lenders, including Bank of Scotland (Ireland), 'suitcase bankers', only interested in short-term profits and grabbing market share. At the time, these comments were dismissed as unfair, defensive and inaccurate. But Went's point was a more simple one: when recessions come, capital tends to flow back home.