Banks have been back in the news of late. AIB is being prepared for partial privatisation, Bank of Ireland reported bumper profits, and PTSB’s boss, Jeremy Masding, has been whingeing about excessive regulations on banks.
This reflects growing calls in the sector — both here and internationally — for a reversal of regulations introduced following the (finance-caused) Great Recession.
“Don’t tear down a wall until you know why it was put up,” wrote American poet Robert Frost. He was quoted last week in Dublin by Sabine Lautenschlager, a member of the six-person executive council of the European Central Bank and, arguably, Europe’s top banking regulator.
She was speaking at the Institute of International and European Affairs (where I work) on the subject of bank regulation and, among other things, on financiers’ push back against post-2008 regulation. She is not for pushing back. Masding and his counterparts are not about to bask in the profitable glow of a bonfire of regulation. Lautenschlager said that she believed strong rules foster trust in financial markets and that without rules banks would enter into a race to the bottom in capital adequacy. She is absolutely right.
If Europe is not going back to the days of regulation based on the notion that financial markets are efficient and self-regulating, there are still enormous issues outstanding — at national, European and global levels. The intention of the new US administration to repeal much of that country’s post-crisis legislation further complicates matters. But even with the myriad of new rules that have been put in place, many of the problems that were much discussed at the time of the crisis have not been resolved. That includes the problem of institutions that are too big to fail, something that is perhaps an even bigger problem now in Ireland than a decade ago owing to decline in competition and increase in concentration in the banking sector.
That is reflected in some of the metrics on the state of the banking system. In a nutshell, those figures show good, bad and ugly aspects. The good is that corporate lending is recovering. The bad is that the system still has far too many dud loans on its books. The ugly is that businesses and individuals are getting one of the rawest deals in Europe when it comes to the interest they pay for loans and the interest they earn on their deposits.
Let’s start with the better news. New lending to small and medium-sized companies has been on a strong upward trend since 2013, its post-crash low point. Businesses in agriculture and services, such as accountancy, have been broadly stable in terms of the amounts of new lending they are accessing. SMEs in consumer-led sectors, particularly distribution and hospitality, have increased the amount of fresh bank debt they are taking on. In the first nine months of last year, new lending to hotels and restaurants stood at €235m, up almost two-thirds on the same period two years earlier. The growth figure for wholesale and retail businesses over the same period was 38pc.
But the real driver of growth in new lending to the SME sector has been property-related. By the third quarter of last year it was accounting for 40pc of all new lending to SMEs in the economy. While funding is needed in the sector, it does raise concerns that the Irish banking system is still too focused on lending to a single sector.
The bad news from banks’ balance sheets is that the clean up from excessive lending to that very sector in the past still has a long way to go. As of the third quarter of last year, just under 15pc of the domestic banks’ collective loan book was non-performing. This is an extraordinarily high level of bad loans by any historical or comparative standard. Although it is coming down, it remains one of the highest in Europe.
And now for the ugly. There are plenty of people who grumble bitterly when they hear that we are living in an era of unprecedentedly low interest rates. Over the past three years, borrowing rates across the eurozone have fallen to reflect near-zero ECB bases rates and other non-standard measures taken by Frankfurt aimed at reducing borrowing costs. But across the range of retail rates in Ireland, there has been little or no appreciable decline.
According to the Central Bank and data collected across the eurozone by other national central banks and the ECB, Irish borrowers across the spectrum are being charged some of the highest interest rates — often the highest interest rates — in the eurozone.
And it is not only on borrowings that Irish consumers are getting fleeced. In January, new corporate deposits earned interest of just 0.01pc. Across the eurozone on average it was 14 times higher. Admittedly, 14 times of almost nothing amounts to very little, but it is further sign of the absence of competition in the market and the bad deal customers get as a result.
While some of the larger European economies are overbanked and require the sector to consolidate, Ireland is now underbanked. The withdrawal from the market of some of the foreign banks has led to the long dominant big two — AIB and Bank of Ireland — becoming even more dominant. Not only has the led to reduced competition, it has actually worsened the too big to fail problem. If, heaven forbid, there were to be another banking crisis, it is highly likely that any administration would again have to stand behind the banking system.
About the only hope for consumers of banking products and the taxpayer (in the event of another crisis) is fintech. Technological advances and innovations have the potential to disrupt the financial services industry all the way down to the most basic of banking services. Indeed, it is the most basic banking services that could be most disrupted. If that happens, if offers the prospect of more competition and lower prices for consumers. It also gives hope of less systemic risk and even a solution to the too-big-to-fail problem. Fingers crossed for fintech.