The new banking union proposals that are now emerging from the wreckage of the European economy are to be given a very cautious welcome.
It’s clear that once again this is a win for mainly German banking interests. They have not wasted a good crisis, unlike our hapless crew of permanent and transitory governments.
A banking union required three essential elements: A common supervisor, a common system of deposit insurance or assurance, and a common method to resolve problems. What we have here is the first, and it’s as good a place to start as any. The power in European banking has now shifted decisively to Frankfurt — already building a new tower block at a cost of over €1bn. As currently proposed, the effect of the new regulator will be to shift regulatory control of AIB, IBRC, and Bank of Ireland to Frankfurt. What that will mean for the newly beefed-up regulator’s office in Dame St is unclear.
Two issues that emerge from this require us to think long and hard — the future funding of SMEs and those vile promissory notes.
On SME funding the Irish banks are in a bind. They need to continue to deliver, and the only way to do that is progressively increase the deposit base (costly) and/or reduce outstanding loans. Lending to SMEs is inherently more risky than to more established sectors.
Evidence from the ECB biannual survey on access to finance found that, along with Greece, Irish SMEs are the most likely to be discouraged from applying for credit. Since Mar 2010, when the data series begins, excluding property and financial services-related lending, lending to the SME sector has fallen 24%, while in the overall economy it has fallen 22%. It’s hard to see how this is justified given the job creation engine that the SME sector can be. As banks’ regulatory oversight moves more and more remote it is likely that the existing centralisation of lending decisions at HQ will intensify. If we wish to reduce discouragement in applicants we need to be very nimble in negotiating the parameters of this new regulatory regime. It’s a good job we have a history of nimble negotiators with the ECB.
The creation of the regulatory framework was a quid pro quo for the establishment of the new ESM lending framework. This will lend to banks for new capital needs, finally breaking the link between the sovereign and the banking sector. However, this is of little use to Ireland. We have invested €24bn in the pillar banks and €30bn via the wretched promissory note in IBRC. The proposal on the table will not give us any relief on these.
The Government in Mar 2012 engaged in a complex shell game to avoid payment of the note but this was on a one-year basis. A solution to the deferred €3.1bn and the regular €3.1bn needs to be found before March.
All indications are that this will involve a restructuring of the repayment schedule, to cut the amount of money destroyed from €3.1bn to perhaps €1bn per annum.
That anyone outside a lunatic asylum would consider it acceptable for a State so broke that it is cutting respite care grants to destroy €1bn shows how degraded our political debate has become. After Pat Rabbitte said we would not pay in March I asked the Central Bank, ECB, and the Government for a statement.
Despite being the ultimate loser in any refusal to pay, the bank declined to comment. The ECB reiterated the statement by its president that it was Frankfurt’s way all the way, while the Government press office reiterated that we hadn’t paid in 2012 and were seeking a deal. None of these give any hope that a meaningful reduction in the outstanding debt, as opposed to some restructuring of the payment schedule, is in the offing.
* Brian Lucey is professor of finance at Trinity College Dublin
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