Government faced with painful job decision at the overstaffed banks
The Government these days claims to be all in favour of 'burden sharing' at the banks -- shareholders have already lost out on share value and dividends, taxpayers have been press ganged into providing billions in fresh capital and now certain subordinated bondholders are to be hit with a 'haircut' that could see them losing 70pc of their investment, according to market speculation.
But how far is the Government prepared to go when sharing the burden of inadequate bank capital? Senior bondholders are sacrosanct apparently, even in Anglo, so what of the other stakeholders in the banks themselves -- the staff?
AIB and Bank of Ireland alone are employing almost 40,000 staff (including foreign subsidiaries) in companies that are shrinking rapidly. As the Government edges closer to 90pc ownership of AIB, it can no longer avoid the question of whether staff overheads at the two biggest banks must shrink in line with contracting balance sheets and more crucially profits.
The takeover of AIB and the 36pc shareholding the NTMA has in Bank of Ireland forces the Government to face the issue directly -- Irish banks are overstaffed and the additional cost they are bearing exacerbates losses and consequently depletes their capital.
The numbers suggest Bank of Ireland has as big, if not bigger, a problem than AIB. Staff and related "administrative costs'' at Bank of Ireland made up 63pc of bank's net interest income in the last financial results, with AIB's staff and related costs mopping up 59pc of its income.
The banks have already taken costs out in the last two years, mainly via natural wastage, bonus restrictions and the letting-go of temporary and contract staff. But the substantial job of slimming down the banks remains undone and while the Government never really took to departing AIB chief executive Colm Doherty, he will leave a nasty surprise for them.
Doherty said the following when he unveiled the bank's half-year results: "Our cost base will reflect a smaller bank, employing less people post disposals and business re-organisation." After this week's M&T disposal the moment of reckoning on cost issues draws nearer.
The Government's banking policy has been built on a certain level of fudging to date where all key "stakeholders'' are given mutual respect, but that now gets stripped away by the decision to effectively nationalise AIB.
The Government asserts that it wants to minimise the cost of bank recapitalisations as much as possible and this will mean returning as much value to the public purse when the institutions are sold back into the private sector, a few years hence.
If that is the case, and it's a sizeable if, the Government has no choice but to shrink staffing costs and build up equity in AIB (and Bank of Ireland) by reducing the cost-to-income ratio very aggressively.
But that seems to cut across another stated government objective -- the preservation of employment in financial services.
Will Brian Lenihan find a way to resolve these huge contradictions?