Ulster Bank and KBC’s high-profile exit from the Irish market has made our uncompetitive banking system even more uncompetitive.
You might reasonably wonder why two of Europe’s largest lenders (Ulster Bank is owned by the UK’s second largest bank NatWest, KBC is Belgium’s second largest lender) are so keen to exit what is the fastest-growing economy in Europe. Banks typically thrive in such environs.
From a banking perspective there is something distinctly unattractive about the Irish market and it’s something that gets little airtime, largely because the dominant narrative here is that banks are bad and whatever befalls them their sins are infinitely worse. More than any other institution they dragged us down a financial wormhole in 2008. And after being bailed out by the taxpayer they repaid us by illegally overcharging more than 40,000 tracker mortgage holders, a scandal that went on under the nose of the regulator for several years.
If they’re not squeezing us on price (they typically charge a 1 per cent premium on mortgage products over and above the euro area average), so the narrative goes, they’re closing branches or providing an infuriating and ever-shrinking level of customer service.
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But if they can charge higher interest rates in a richer-than-average nation with the most positive growth outlook in Europe, why are they so keen to get out?
Part of the reason – and there are several – is the legal system. It has acted as a bulwark against house repossession since the crash, effectively upending the notion of secured lending.
Secured lending – when an asset, a car or a property, is used as collateral for a loan – is a nonsense if getting at the underlying collateral when the borrower doesn’t pay is thwarted by the courts and when it takes literally years, in some instances over a decade, to retrieve the asset. The legal fees and the resources involved are prohibitive.
Hence banks have been selling off their non-performing loans (NPLs) to third-party vulture funds at a steep discount even as the value of underlying assets rises.
According to ratings agency Standard & Poor’s, the legal process for repossession here takes on average 42 months (many say that’s an underestimate) compared to just 18 months in the UK, which has essentially the same legal system.
Central Bank statistics show that since 2009 there have been just 3,300 home repossessions on foot of a court order in the Republic, a veritable trickle in the context of a financial crisis that left over 150,000 mortgage accounts, approximately a fifth of the total, in arrears, and when you think of the near weekly warnings about an incoming tsunami of repossessions we were getting back in the day.
Even today, 13 years after the crash, there are over 5,400 mortgage accounts in arrears of over 10 years. In most countries arrears cases exceeding two years are so rare they’re not reported on.
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A 2015 report – entitled “What Really Goes on in the Repossession Courts” – by Brendan Burgess, Séamus Coffey and Karl Deeter (the trio attended over 150 hearings) – detailed a very tricky legal landscape for the banks to navigate, where most orders are “granted against borrowers who have not engaged, who have paid nothing and who don’t show up in court”.
Their report noted that “borrowers who pay something and show up in court almost always get an adjournment, no matter how deep their arrears are”.
Perhaps the most illustrative statistic, from a banking perspective, comes from a recent European Banking Authority (EBA) report which compares EU jurisdictions in terms of enforcement on collateral. It found that Irish banks typically recovered less than 12 per cent of the original loan value following repossession compared to an EU average of 44 per cent.
A reason often cited by banks here as to why they charge an interest rate premium on mortgage products is that they are forced by the EBA to carry a greater amount of capital against their mortgage loan books because of the high level of NPLs still in the system.
But that’s just the other side of the repossession coin. We wouldn’t have as many NPLs or banks wouldn’t be so keen to offload them if there was a functioning repossession process.
According to consumer advocate Brendan Burgess, Ireland has never had an adult conversation about repossession and so we have a dysfunctional mortgage market as a result. Why this is so is an open question.
Might the image of a bailed-out bank removing families from their homes be too repellent given the actions of banks prior to 2008? Might the notion of repossession run deeper in our psyche, evoking the calamity of eviction that convulsed the country in the mid-19th century. One of the organisations currently assisting people calls itself the Land League group.
That’s not to say banks here don’t squeeze us on price. Despite the difficult repossession process some Irish lenders charge the same rate on 50 per cent mortgages as they do on 90 per cent mortgages, ignoring the risk differential. And there are other examples of uncompetitive pricing that can’t be explained by the reasons above.
But the narrative that Irish banks are intrinsically uncompetitive for reasons of their own internal workings or because they’re profiteering is too simple.
