EC policy on bank funding forces costs up for SMEs and families
THE European Commission's decision to let member states save their own banks is bad for local companies and families because small banks must pay more to borrow and they then pass these costs on to individuals and small companies, the ESRI said yesterday.
Europe and the United States have taken different approaches to saving their respective banks. EU banking rules mean that it falls to governments to rescue their own banks.
In the US, where banking regulation is a Federal responsibility, there has been no move to return to a system of smaller 'state' banks.
"The different approaches to dealing with the financial crises in the EU and the US will also probably favour growth in the US economy in the medium term," the report warns.
The retreat by European banks to their home markets reverses a long-standing policy of expansion that had been particularly good for smaller countries by promoting competition and access to cheap funds.
"The benefit of this growth in 'European' banks was expected to arise from both efficiency gains within the sector and also from a more efficient allocation of capital across wider European economy, all leading to higher growth," the ESRI said in a summary of the main report. "Experience has shown that the expected changes in the banking sector within the EU did, in fact, translate into welfare benefits for consumers in the period prior to the current crisis."
Smaller national banks must pay more to borrow money and must then pass on these costs to companies and individuals through higher interest rates. This is one reason why new mortgages are cheaper in countries such as Germany than they are here.
Large companies are spared these higher costs because they can shop elsewhere for credit, tapping the bond markets or banks in other counties, the ESRI report added. Cavan-based insulation company Kingspan proved the point last week when it bypassed the country's banks to raise €140m through the sale of bonds to a group of US financial institutions with an interest rate of 5.25pc a year.
This will cause many economies to slow in the years ahead.
Ireland will be hit by this trend, although the fact that a substantial share of domestic output is accounted for by multinational companies means that the State will insulated from the full effects.