Reckless banks want free umbrella back so they can soak borrowers

BANKS give you a free umbrella during the sunny days but take it back from you as soon as it starts to rain.

The economic rain clouds have been gathering for some time and, predictably, as the deluge of bad news has begun the banks have acted as they have always done through history when this happens, leaving many customers to get soaked. Those umbrellas weren’t the gifts you thought they were, but merely on loan.

The banks doubtless would describe this analysis as unhelpful melodrama. They are businesses that have to protect the best interests of their shareholders and that means maintaining profitability. Changed circumstances mean they cannot be as “generous” any longer in offering loans they perceive may run the risk of not being repaid, no matter how much they might like to help people or companies who come to them.

According to Goodbody Stockbrokers, the four stock market-quoted Irish banks — AIB, Bank of Ireland, Irish Life and Permanent and Anglo Irish Bank — had combined bad debts of €387 million last year. The brokers reckon that by 2010 this will have risen to €2.2 billion.

More pertinently, however, the banks are finding it more expensive to get money themselves. Therefore they must charge more for loans to protect their profit margins, the difference between the price at which they borrow and lend money.

Much is being spoken about a loss of confidence among consumers and an unwillingness by many to spend as much as they once did, especially on assets such as houses that may lose some value.

But the reality is the greater issue lies with the behaviour of the banks. What we have is a credit crisis that has caused much of the consumer confidence crisis, not the other way around.

Having lent recklessly for years and having inflated the property bubble in doing so, some banks are now exacerbating the speed of the economic decline by dramatically curtailing credit.

Having showered people with mortgages — often for amounts even larger than the value placed on a property, in anticipation that the value would rise to more than cover the size of the loan — and for terms as long as 40 years, the banks have suddenly changed policy. The best most can offer is 90% of the value of a property and for apartments, some banks are giving no more than 80% of the purchase price. The latter figure is very worrying because it suggests the banks believe apartments are overvalued even after recent falls in prices.

The interest rates being charged on the loans are going up, too, notwithstanding the inaction of the European Central Bank (ECB) on changing base rates and the widespread hope earlier this year that it would reduce rates at least once in 2008.

Interest rate cuts aren’t coming as long as inflation in the eurozone remains stubbornly high, even if the value of the euro continues to appreciate against both the dollar and sterling. Even if the ECB bends to the will of politicians and does cut rates, there is no guarantee the banks would pass on any of the benefits.

While existing customers will continue to enjoy the benefit of previously agreed tracker mortgages — where the rate of interest is fixed at an amount above the prevailing ECB rate — no more such deals will be offered by the banks. Higher rates of interest will be charged on new loans heretofore.

What happens in residential property lending is likely to be replicated in other areas, too. The market for investment properties — where people buy to let to others — has dried up, meaning there is no demand for unsold, empty new properties and no need to build new ones.

Hence, the construction slowdown and the huge job losses, which in turn feeds into other parts of the economy. Some jobs could be available in home improvement, but again the banks may be reluctant to lend at prices that consumers find attractive. Car loans, holiday loans, student loans and much else are likely to become more expensive and as nervous consumers try to reduce credit card debts, those who struggle to meet monthly repayments will end up paying more as the banks seek to prop up their profits.

What’s happening in the business market may be even more worrying. Again a double whammy effect is coming into play. The banks are having the same problem when it comes to obtaining finance to lend to corporate customers: it is more expensive, so they are charging more for loans. The banks are worried also about the ability of companies to make sufficient profits to meet loan repayments and are being more careful about giving out money. I’ve heard stories from senior businessmen of banks trying to renegotiate the terms of loans they have given previously and of being told non-too-politely to go away.

The current relationship between banks and property developers is fascinating, especially when the developers borrowed heavily to buy land at hugely inflated prices in recent years. Some house and apartment builders have been forced by their banks to sell properties more cheaply than they had intended merely to generate cash to meet repayments. But that isn’t always possible because of a lack of buyers to whom the banks are more reluctant to lend. Instead, many of the builders have been forced to become landlords just to generate an income flow. The hope is these houses can be sold later to first-time buyers who won’t have to pay stamp duty. But there is a fly in this particular salving ointment, too — it appears a reversal of the immigration flow has started. That means demand for housing is about to fall and rent levels will follow.

The problems for commercial developers are more acute because such developments are built to generate rental that may not be available. The demand for office and industrial space may be sated at present. I’m aware of one big Munster developer who is effectively in quasi-receivership now. Instead of appointing an outsider to run the business, the main bank has taken control of the business to ensure it gets back as much of its money as it can.

I HAVE heard of one large Dublin land deal on an industrial estate that has gone so badly wrong it has made the price of recently purchased adjoining land look insane. I’ve been told of a number of hotels that are in big difficulty as the cashflow from bookings fails to meet the amount demanded in bank repayments. Unfortunately, much of this was inevitable. The amount of construction activity in this country over the past five years was unsustainable. It was supply-led and much of the demand for new properties was generated artificially, especially by the availability of cheap money.

The banks may argue the case of caveat emptor — buyer beware — and that they were only facilitating people and companies rather than inflating the bubble. This is nonsense.

The banks actively sought business and many — with some honourable exceptions who refused to breach old safeguards — were reckless in the way they lent. And their own reckless investments — in extremely dodgy overseas loans they could not properly assess — have caused the credit crisis, but they are making the customers pay for their own excess.

With many banks it is always a case of too little or too much.

* The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.