Notwithstanding the fact that the current difficulties in the Irish economy and the Irish banking system are to a large extent due to excessive credit creation in the economy in the period up to 2007, an adequate supply of credit is a vital ingredient for economic and commercial activity.
In any functioning system there are savers whose income is greater than their expenditure, and there are borrowers whose expenditure is greater than their income.
The role of the banking system is first and foremost to intermediate between savers and borrowers and ensure that credit flows to those who want to borrow. Unfortunately since 2008 the banking system has become totally dysfunctional and is not fulfilling its role as an intermediary between savers and borrowers. In fact the Irish economy is currently being subjected to one of the biggest credit squeezes that any developed economy has ever experienced.
The fact is that it is impossible to talk about or envisage economic recovery in Ireland until we get adequate credit flowing in the system. The banking industry consistently claims it is open for business and cites evidence of the low level of credit application rejections to support its case.
I am constantly told stories by individuals and businesses who are being refused credit or who are having their credit conditions reviewed. It also appears that following a discussion with the bank manager to sound out the likelihood of having a loan approved, many are discouraged from doing so and consequently do not appear in the statistics for loan applications rejected.
Granted, in a recession every borrowing proposition is more risky by definition, but the banks have gone from a situation where they clearly had no understanding of risk, to a situation where they are utterly risk averse.
There are some exceptions — it is clear that credit has been flowing relatively freely to some farmers, particularly those engaged in milk production. Dairy farmers are being facilitated to ramp up production potential in advance of the abolition of milk quotas. I would have concerns that the banks could get carried away with this policy. Banks have a long tradition of creating dangerous bubbles in farming. Farmers should beware of bankers bearing gifts.
Notwithstanding a few exceptions, however, credit is very scarce and this is acting as serious impediment to job creation and economic recovery. This week two economists from the Central Bank of Ireland produced a report on credit conditions in Ireland. Their findings put paid to the lies bankers are propagating about being open for business as normal.
The picture painted by the two economists was based on the European Commission and ECB Survey of Access to Finance of Small and Medium Enterprises (SAFE) and the Mazars lending demand survey. Their key conclusions are pretty stark — rejection rates for SME loan and overdraft applications in Ireland are the second highest in the euro area, behind Greece; changes in terms and conditions of bank credit in Ireland are amongst the least favourable in the euro area; and Ireland has the second highest share of discouraged borrowers in the euro area.
The banking industry has, not surprisingly, reacted quite angrily and aggressively to this research. One spokesperson even went as far as to cast doubt on the objectivity and integrity of the authors of the report. Such a suggestion directed at independent economists in the Central Bank is absurd and should be taken for what it is — a cheap shot.
It is high times the banks come clean in an honest fashion and admit just how dysfunctional they are at the moment. Until that fact is established, we have little hope of moving forward.
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