Alarm bells ringing at State efforts to reform the banks
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IT started off as an apparently simple idea. The Government would raise funds, either by borrowing or raiding the national pension fund, and put it into the banks in the form of new capital.
Some, or all, of the smaller banks would merge with the two biggies, AIB and Bank of Ireland. This would improve the banks' own ability to borrow and their capacity to lend to struggling businesses.
What is now emerging is anything but simple and will be hugely controversial. The first official statement, if you like, came yesterday from Bank of Ireland, when it said it had received "unsolicited" approaches from a number of parties interested in investing in the bank.
Strictly speaking, that may be true, but it conceals far more than it reveals. The Government has been intimately involved with the "number of parties", while the bank bosses themselves, as we know, have been hugger-mugging with Finance Minister Brian Lenihan up in Farmleigh House. Unsolicited or not, this has all the hallmarks of a government plan.
As far as we can judge, a number of foreign private investment funds, which would normally be rivals, have come together to offer to invest in Bank of Ireland. They were brought together by a smaller fund run by two Irishmen, one of whom learned his trade at the feet of that financial master Dermot Desmond.
All of this is very different from that simple idea of government investment in the banks, and it is already causing alarm in all kinds of quarters. The Opposition parties have been joined by several analysts in warning that this sort of capital is not the best kind to ensure the Government's stated objective of improving the flow of credit.
Such funds, they point out, typically look for an exit strategy in five or six years, by which time they will hope to have earned up to 20pc a year on their investments. This hardly seems a recipe for improving the access of small widget-makers to bank finance.
The bank officials' union is up in arms over the idea that only two major banks might be left, saying this would cost thousands of jobs as duplicate facilities were axed.
The smaller banks do not want to be swallowed up, with Irish Life & Permanent trying to do a merger with the EBS building society, and the boss of Anglo Irish Bank telling staff it will remain independent.
These objectors have now been joined, in an unlikely alliance, by the big pension and insurance investment institutions which are the major shareholders in the Irish banks.
They are furious, because they would expect that, as is usual, they would be given the right of first refusal to match any offer. It is not at all clear that this will happen.
It is a measure of their concern that the head of the body which represents Irish institutions went on television to complain. Some are already consulting the lawyers. Legal action cannot be ruled out if they feel their rights have been trampled upon.
If that were to happen, the whole business could be delayed for a very long time. All of which raises the question as to why things are being done this way, and not in the apparently simpler way of straight government investment -- as has happened in Britain?
The short answer to that is that we do not know. The suspicion -- bolstered by several statements by Mr Lenihan -- is that public investment is the Government's last option, to be avoided if at all possible.
Cutting a deal with the private funds may allow it to avoid putting up cash, but may also require cutting out existing shareholders.
The only plausible reason for courting all this trouble and strife is that the Department of Finance set its face against borrowing the billions required. Investing in the banks, though, is not like other government borrowing, where the money has to be spent.
Judging from the British model, the new shares in the banks might pay interest of 12pc. In that case, the taxpayer would be earning €70m a year per billion borrowed, and could reasonably hope to make a profit on top of that.
Direct investment would also seem to give the Government more influence on bank activities than if it merely facilitates investment in the banks, or gives guarantees. And that, after all, is the purpose of the exercise -- to free up credit to the economy.
That will require more than just new money. The banks' weight of existing loans is just too heavy to allow for normal expansion of credit. Some other mechanism will be needed, such as government-guaranteed lending, or a government fund the banks could administer.
Either would be a bold move and, the way things are going, there seems little chance of that.
- Brendan Keenan
