Growth of Irish banks left economy exposed
With both institutions currently on their knees, the future of the Irish banks has become the subject of open debate.
Colm McCarthy, in a recent piece on the Irish Economy website, lamented that the Irish banks had not been taken out in a pan-European consolidation before the credit crunch ended their short period in the sun. For years the argument went that we needed a healthy number of Irish banks in order to keep them on their toes.
Successive governments had banged on about the need for a competitive environment to keep driving the economy to greater success.
In reality, most people had embraced the free market as the answer to all our previous ills and indeed the guarantee of a good life for generations to come.
It was very instructive then, when some years back Rabobank stunned the Irish banks when it swooped on Ireland, offering internet banking and mortgage rates 1% or more under the best borrowing rates available from Irish banks and building societies, who were busy making millions in a booming market while expressing amazement at anyone with the temerity to demand they deliver cheaper mortgages to people struggling under the pressures of heavy debt.
Instead, they offered 100% mortgages, facilitating house purchases by the most vulnerable when markets were at their peak.
They changed their tune pretty quickly once the Rabo offering started to impact on their own figures as people realised they were being had by a well-managed cartel.
That exploded the myth that our banks were playing an intrinsic role in building up this economy to new peaks of achievement.
In the later stages of the boom, the banks cranked up their lending to enormous levels, with Bank of Ireland doubling its assets from €100 billion to €200bn in a four-year period.
Nobody saw anything wrong with that at the time; in fact very few noticed.
In the aftermath of the banking collapse it is now very obvious the Irish banks over-stretched themselves.
They had ratios that were seriously out of line with international banks, who themselves had gone well over the top in terms of safe or sensible lending.
Traditionally, banks had lent about 120% of their deposit book.
Back in 1997 bank lending stood at 60% of GNP in Ireland, modestly below the European average.
By 2007 bank lending had risen to 200% of national income, which by then was twice the European average and left us dangerously exposed to what followed.
The notion of benchmarking lending against deposits had been abandoned and banks here helped themselves to money available short-term on the global markets. Some of it was in bonds that mature for repayment this year, as former Fine Gael leader John Bruton has pointed out.
It means Irish banks are grossly under-funded and under severe pressure to repay their borrowings, raising the spectre of further Government funding having to be injected into the banks.
On top of that the NAMA situation looks to be getting worse by the day as property and land values continue to fall.
It comes as no surprise then that Bruton and McCarthy forsee a much smaller role for Irish banks.
The European Union needs to build a common European banking system to complement its European currency, so smaller member states share the economic recovery of the bigger ones, Bruton believes.
The reality is that Irish banks got too big and left the economy and the country seriously exposed.
