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Brendan Keenan: ‘Problem with our banking system goes deeper than trying to change its culture’


Perhaps more can be made of the results of the Central Bank’s own initiatives to improve matters, where director-general Derville Rowland oversees financial conduct in the banks
Perhaps more can be made of the results of the Central Bank’s own initiatives to improve matters, where director-general Derville Rowland oversees financial conduct in the banks

Barely a trace of the Great Recession of 2008-11 can be found in last week’s ‘Stability Programme Update’ (SPU) from the Government. Looking for one feels like some archaeologist hunting in a lush tropical forest for signs of ancient ruins.

Who would ever have thought it? Only two relics of the recent disasters are clearly visible – debt and banking.

Public debt is very much a topic for the SPU. It has been transformed by growth as well. From a peak of 165pc of adjusted national income (GNI*) in 2012, it has fallen to 107pc.

That is still high by international comparisons. But, using the argument of Prof Larry Summers, as mentioned last week – that it is more important to look at interest payments as a proportion of tax revenues – the ratio is forecast to fall to an affordable 5.5pc of revenues this year, and remain steady at just under 5pc thereafter.

Instead there is the banks to blame as the never-ending source of all our ills, or so the story goes. They are without doubt the most visible relic of the crash, as arguably the sector which has recovered least. Not just in terms of money – although there is that – but in being restored to the role and position they enjoyed before.

The developers are back, in the middle of a commercial property boom as good as any. The public sector unions have unsheathed their swords and Government looks as cowed as ever. People say they are worried but the Vat receipts soar. The banks often seem like onlookers.

Ten years on, like their counterparts elsewhere, the banks are still trying to clear away the wreckage. But the very act of doing so keeps them in the headlines for all the wrong reasons.

Having been blamed, justifiably enough, for contributing in no small measure to the crash, they are now blamed, with a good deal less justification, for repairing the damage. Selling dud loans to whoever will pay the best price, and taking back assets from those who cannot or will not finance them, can never be popular but it is the rational thing to do.

Wilfully ignoring contracts in tracker mortgages is not. From a banking perspective, breaking rules, or even the law, is deeply irrational. To use the words of special counsel Robert Mueller, if they don’t have integrity, nothing else matters.

That is clear from the way in which the tracker scandal removed any chance of a credible defence of loan sales and repossessions. It will be a long road back from here.

The longest journey, they say, starts with a first step. The banks’ has been the extraordinary one of establishing the Orwellian-named Irish Banking Culture Board (IBCB), under the retired, and distinctly plain-speaking judge, John Hedigan.

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One might have thought they would steer away from something which sounds so much like IBRC, the clean-up mechanism for the disgraced Anglo-Irish Bank. We got clear evidence of what the culture was like in Anglo from those gripping tape-recordings, but it would be wrong to think that it is all about sense culture.

It is hard to draw firm conclusions from the survey of staff conducted by the new body. Sixty per cent took part, so it is not entirely representative, but the finding that more than a third had concerns about things which had happened in the previous year does seem large. The fact that two in five decided to say nothing about it is probably fairly typical of most organisations, and better than some.

Perhaps more can be made of the results of the Central Bank own initiatives to improve matters, where director-general Derville Rowland oversees financial conduct in the banks. Not just their financial health, but conduct as well.

At the IBCB launch, Minister of State Michael D’Arcy acknowledged that improving culture was no substitute for effective regulation. The trouble is that the failures of regulation were partly due to the legitimate objective of keeping the banks out of financial difficulty. It may have been a debacle, but the problem of looking out for both banks and their customers remains.

Nowhere more so than in the current trouble over the ‘No Consent, No Sale’ Bill, where the central bank, with the ECB behind it, finds itself again on the side of the banks’ financial well-being, at the risk of appearing not to be on the side of their customers.

It has nothing to do with culture. The Sinn Fein legislation would prevent the sale by banks of loans to outside institutions (think “vulture”) without the consent of the borrower. Central Bank governor Philip Lane told the Oireachtas Joint Committee on Finance, Public Expenditure and Reform of his “grave concerns” that the bill would severely damage the resilience of the financial system.

It could do so by making it harder for the banks to clean up their books by reducing provisions for non-performing loans, topped up with the cash which comes from the sales. That would make it more difficult and expensive for the banks to raise funds for other lending.

At some point we will need the Irish banks to play a bigger role in financing the economy than they are doing at present. Mr Lane gave the standard defence that keeping the banks healthy is in the interest of its customers. We know after 2008 how true that is, but we seem not to have drawn any great conclusions from it.

That failure includes the banks and their regulators. Sinn Fein’s Pearse Doherty pointed to the flaw in this particular case – a flaw which is typical of the banking authorities’ well-established policy of masking uncomfortable truths.

This was that the first line of the banks’ voluntary code states baldly that a loan secured by a mortgage on a residential property cannot be transferred without the permission of the borrower.

The governor could only reply that there is a difference between a voluntary and a statutory code, because of the compulsion and sanctions which accompany a statutory one; which appears to mean that it is not just the code that is voluntary, but its contents as well.

Then came the key point – the code includes an exception for conditions of financial distress. It is possible to envisage regulators and monitoring bodies keeping everything hunky-dory between banks and customers when things are fine. But when the chips are down, the survival of the banks comes first.

Maybe that is as it should be. Examining the wreckage of 2008, it is still an open question whether those whose banking systems collapsed did better or worse than those where the banks were rescued, even at gigantic cost.

But if that is as it should be, it is time central banks and other regulators stopped spoofing about culture and behaviour and were honest that their primary duty is to safeguard the banks. But they must mean it in the wider sense, not just the size of the bottom line.

There been a change in banking culture since the time when, for many, the first rule was that rules must be obeyed, in the letter and the spirit, even if it costs the bank money. Now, it comes second to the objective of making money and finding ways to bend the rules to that purpose.

That means more responsibility falls on regulators than in the days of cosy chats over tea. In good times, it may require them to reduce the profitability of banks and prevent them buying and selling stuff they dearly want to buy and sell. Any regulator which is not thoroughly disliked, and feared, by its client banks will not be doing its job.

Equally, a regulator which is the darling of bank customers probably won’t be either. That is why they need genuine independence from politicians.

All of which is made more difficult because banking is not as safe and profitable as it used to be. In the case of the Irish banks, both non-performing loans and costs as a percentage of income are above the Euro average.

Low interest rates make it difficult to increase income, especially since Irish banks already charge higher loan rates than the euro average. Cutting costs in a unionised industry is expensive. Getting rid of loans is controversial.

In fact, all three remedies for getting the banks back to top ratings are controversial.

All in all, one could not really blame a regulator, even a banker, who on hearing the word “culture,” wants to reach for a revolver.

Indo Business

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