Sunday 19 January 2020

Matthew Elderfield: Regulator warns of lending amnesia

Financial Regulator Matthew Elderfield insists he is not strangling life out of housing market

Daniel McConnell

Matthew Elderfield, the Cambridge-educated Financial Regulator is quickly becoming a hate figure to the Irish people, in stark contrast to the white knight persona he enjoyed on his arrival here in 2009.

He entered as the man to fix our banks but growing numbers of people are now saying he is strangling any chance of recovery in the housing market by over regulating the banks and by being too cautious.

Many within the banks are now echoing the comments of the public that they are unable to lend because of the overly strict regulatory regime imposed on them by Mr Elderfield.

So, given this rise in opposition, I asked him for his view. Is the lack of credit a result of overly strict regulation, as some have suggested? Has the pendulum swung too far from the no-regulation climate that led to the crisis?

He strongly rejects claims that he is strangling the market. Those levelling criticisms at him, he maintains, are suffering from "amnesia" as to the extent of the damage done through reckless lending in Ireland during the boom.

"Tim Geithner [the US treasury secretary] has talked about industry amnesia about the financial crisis. I certainly hope that isn't happening here. It's right to keep challenging yourself about balance as a regulator, but the Irish crisis has been so devastating and there is still a lot to fix," he says.

Then why are the banks still not lending after devouring more than €64bn of taxpayers' money?

His response is fascinating. "The Irish banks have had huge support from the taxpayer and Central Bank so they can start lending. We have been careful not to impose regulatory restrictions on their core lending to Irish homebuyers or small businesses. I think one problem is that they still need to do more to work through their existing book of troubled loans, so they have a better idea of where they stand and their capacity for new lending. We are particularly pressing for that to happen for mortgage portfolios," he says.

So even after three years and the establishment of Nama, banks are still not lending because the money they were given to lend is actually being used to shore up their legacy dodgy loan books. Therefore, until these dodgy loans are cleaned up, there can be no realistic expectation of the market returning to normal.

On a more positive note, Mr Elderfield last week confirmed that he has granted permission for the banks to offer negative equity mortgages to those who are in need of bigger houses. "Such a mortgage might be provided to facilitate a move to a different part of the country to change jobs or to move up to a larger property in case of a growing family.

"Negative equity mortgages do pose consumer protection issues, as they may involve a home owner trading up to a larger home and taking on increased debt," he said.

But why has opinion turned on him?

The banks aren't lending, say the people. Oh yes they are, says the Government.

Oh no, they are not, say the people once again in anger.

For 18 months-plus this ridiculous pantomime show has been played out.

Countless families, business owners large and small, young couples looking for their first mortgage across Ireland have screamed they cannot get any money out of the banks.

This is despite them receiving more than €64bn in taxpayers' money since 2008 to stay in existence.

They accuse the banks of retaining the cash to improve their balance sheets and saying to hell with the economy.

In response, the banks insist they are lending. The level of refusals are modest, they say. They are meeting lending targets set down for them by the Government.

For those who are refused, there is John Trethowan's Credit Review Office to try to force the banks to lend.

Finance Minister Michael Noonan has given them €3bn each a year to lend to small businesses, which they claim they are giving out.

Politically, the 'Punch and Judy' show continues, too. Countless backbenchers from all parties tell tales of people being refused money or having their overdrafts removed by immovable bank managers.

Yet, at ministerial level, the story is different. Banks are lending we are told, and when they are countered with such examples of credit tightening, ministers say it is a matter for the banks and not up to them.

Benjamin Franklin famously once said: "Tricks and treachery are the practice of fools, that don't have brains enough to be honest."

To many across the country, in every city, town and village, the rescued banks are the treacherous fools playing havoc with the lives of the very people who saved them through their taxes.

So what is actually going on?

Well, let's look at the facts.

The level of mortgage lending given out in 2011 was more than 90 per cent lower than the peak of 2006, at just €2.34bn.

"A normal functioning market would require lending in the order of €11bn per annum," says Sherry FitzGerald economist Marian Finnegan.

Even if you adopt the attitude that "she would say that" given she works in the industry, and split the difference of what she is calling for and what actually was lent last year, lending would have to treble to restore parity.

If you were to believe Trethowan, the man charged with overseeing the level of credit being given to SMEs every year, the banks are lending to "viable" businesses, and have met all the targets.

The contrast in the views between the people and the banks/Government couldn't be greater.

The big question is what criteria are being applied to determine viability both in the cases of those seeking mortgages and those looking for credit for their businesses?

According to the latest report, three- quarters of first-time buyers say they have enough money to pay a deposit on a home -- and half say they plan to buy a property in the next 12 months.

However, two-thirds of the country's 768,917 homeowners believe the banks are not lending, with 43 per cent of these believing that the institutions are over-regulated or over-cautious when granting mortgage approval.

As a result, house prices continue to fall. On average, house prices are now down 50 per cent from peak levels, while apartment prices have plunged by more than 65 per cent. Because of the price falls, at least 145,000 properties in Ireland are now in negative equity, a huge burden on the shoulders of an entire generation.

So what about the banks?

Insiders within banks have said that they are under strict instructions not to lend to any new customers, but only to existing ones. "We have people coming in every day looking for money to extend their house, start a business or whatever, and I am here waving them goodbye and sending them on their way, it's madness," one bank insider said.

Sunday Independent

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