Brendan Hoban: Irish banks are up to their usual old tricks                                

Western People 22.8.2023

For institutions a sense of entitlement can be the first step to oblivion. We’re special. We’re different. We’re not ‘like other men’. (Luke 18.11) Thus the pharisees, the Catholic Church, the banks. The way of all flesh.

Let’s go back a bit – to 1984, when AIB got into difficulty. As I remember it, they gave out mortgages without ensuring that that the usual safeguards were present. They bought the Insurance Corporation of Ireland and its exposure to unforeseen liabilities threatened the future of AIB. The government of the day, a Fine Gael and Labour coalition, bailed out AIB, as it had to be and the tax-payer footed the bill.

Let’s move in a bit to the early hours of that Tuesday morning at the tail-end of the Celtic Tiger when the then Taoiseach, Brian Cowen, and his advisors met the chief executives of the two main banks, Bank of Ireland and AIB. The decision was to expose the country to more that £400 billion in bank liabilities.

The problem that demanded that quick fix was that the financial system – if that part of it that was at risk wasn’t rescued – would have devastating repercussions. It took a lot of explaining to the ordinary punter. One comedian hit the nail on the head: ‘It’s quite simple, really. We screw up, we pay. The banks screw up, we pay.’

No matter how you look at it, the banks have a charmed life. Banks get into trouble because they take chances. Risk is part of what they do. But well-managed banks balance the risk. They don’t over-expose themselves by unacceptable risk-taking. But they do as we know and have done before heading for the tax-payer.

No one doubts but that Brian Cowen, to avoid a melt-down of the banking system that would have sent the Irish economy into a downward spiral,  had no choice but to accept the bill on behalf of the taxpayer.

Who gained from the Irish citizens protecting the banks’ asserts? One, the citizens of the State because so much was at risk it would have been unconscionable not to rescue the banks. And, two, the bank shareholders (owners) who without the State’s intervention, would have lost their investments.

After the tide turned and the country was bailed out and ‘normality’ was restored, was the tax-payer happy with their investment? Yes, in the sense that the investment did what it was supposed to do – it kept the ship of state afloat. No, in the sense that generally the banks seemed to take the tax-payer for granted and that those who made the wrong decisions were not held properly to account.

Now, we’re in a different place. The respected economic commentator, David McWilliams, in his Saturday column in the Irish Times, in his direct way, explained our ongoing relationship with the banks:

Fifteen years after being bailed out by the public, the Irish banks are at it again: screwing the public. Today, Irish banks are the most rapacious in Europe when it comes to lending and borrowing. Irish banks pass on less of the benefit of higher interest rates to savers and squeeze more of the burden of higher interest rates out of borrowers. They are taking the mick.

McWilliams draws what he describes as a clear lesson: left to their own devices, the Irish banks can’t be trusted. They imperilled the country through appalling management that required a massive injection of people’s money to avoid mass destruction of the nation’s savings.

McWilliams computes what the bank’s present policy is costing the Irish taxpayer – about €120 million each month:

Irish banks have passed on to Irish savers just 7% of the recent ECB rate rises as opposed to UK banks who have passed on 43%of the Bank of England’s increases to British savers. The €150 billion on deposit in Ireland’s banks is earning a maximum of around 1.5%, whereas other banks within the euro zone are offering as high as 3.5%. Irish savers are being fleeced.

McWilliams suggests that the Irish taxpayers are being ‘cheated’ and he uses that word purposely: ‘When the ECB raises interest rates, it is increasing the return on savings. This income is supposed to go to the people who save, not the institution that is holding those savings in trust’.

How can this be happening? We never had more competent (it seems) oversight of the financial system than that of the dream team of Michael McGrath and Paschal Donohoe who might be expected to ensure that financial institutions would manage their affairs not only prudently but with the interests of the people in mind.
It’s not clear that this is actually happening. It is clear that Irish borrowers are being overcharged by the banks. The average interest rate on new mortgages in Ireland (4% per cent) is the 11th highest in the euro area. Over the past five years, when interest rates were rock bottom, Irish borrowers paid more to the banks in interest charges than our Eurozone partners, paying around 1.2% more than our neighbours.

This is happening at a time when the top three Irish banks, were, estimated by one authority, as €1.73 billion in total net income. So why is the government so coy about what looks at what seems, on the face of it, unethical behaviour in the banking sector? The reason is that the State has shares in the banks and is looking to unload them in he future at the highest possible price – even if it means that the tax-payers are again paying the cost.

I have no doubt but that the policy can be defended but while it may serve the State in the long run in enhancing our investment in the banks, it is also doing the same for the private investors, at the taxpayer’s cost. It just doesn’t feel right.