Options for the banks - Changes at the top are unavoidable

OVER the past two years the Bank of Ireland has presided over the single greatest destruction of wealth in the short history of this State.

At last year’s high point the 74,000 people who own up to 10,000 shares in the bank had shares worth €18. Yesterday morning those once-envied shares closed at just 83c.

This level of collapse, this decimation of small-investor capital must have an effect on the lives of those who imagined they were combining conservative opportunity and reasonable security in their investments.

Institutional investors, and those depending on them for a retirement income must be equally concerned.

Since February 2007, investor dissatisfaction and uncertainty with the Bank of Ireland has seen the business marked down by €16bn. Effectively, investors have gone on strike as far as Irish banks are concerned.

Founded in 1783, the Bank of Ireland once had a reputation for being instinctively cautious, even too conservative. The speed and depth of the collapse are so spectacular as to be almost incomprehensible.

Interim figures published last week show the consequences the recent change in culture at the bank. The bank conceded that €9.8bn of their loans has “increased risk profiles” and is subject to closer monitoring and supervision. Other loans, not in arrears but described as “lower quality” and amounting to €1.4bn, require a “workout of the relationship”. Moving the goal posts to try to cut your losses might be a more appropriate use of diversionary jargon.

It is such a calamity that for the first time in living memory investors have been told that they will not be paid a dividend. And still there is no hint, not the slightest whiff of the endgame. No hint of where the Bank of Ireland collapse might end.

There is, however, an indication of what is needed to give any prospective rejuvenation a chance of becoming a reality. The Bank of Ireland risk policy is set by the board. Of the 10 non-executive officers and directors on the board only two people have relevant banking experience. Trophy directorships might have been kosher in more buoyant times, but now we cannot afford them. There is just too much at stake. Senior management figures are also culpable and they must face the inevitable censure, including removal.

As these frightening figures become more everyday, they undermine any degree of confidence that remains in our financial systems. Allied to that are strengthening calls for re-capitalisation.

Most experts have accepted that it is a matter of when rather than if. Recapitalisation by Government, or with Government support, must come with strings attached. These constraints must do all they can to safeguard any investment and convince investors that these banks are worth investing in. Investors will not change their mind without a change in leadership in these banks; they will not throw good money after bad.

All of a sudden, events have conspired to give a new relevance to the inauguration speech made by American president Franklin Delano Roosevelt in January, 1937.

Then he told the world that “we have always known that heedless self-interest was bad morals; we know now that it is bad economics”. As Barack Obama prepares for challenges even greater than those faced by FDR when first elected in 1933, it cannot be beyond our capacity to confront either bad morals or bad economics.