During the financial crisis, the State had to step in to rescue the banking system. The plan afterwards was to gradually withdraw and let the banks return to private ownership, under Central Bank regulation; the State has already sold most of its stake in Bank of Ireland and was planning to start offloading AIB.
Now, however, it looks like we could be heading towards Soviet-style state control of the banking system. The AIB sale has been “delayed” and politicians are trying to grab more and more control over what the banks are up to, and how they are regulated.
Consider what we have seen in the last couple of weeks. The Dáil has approved a Fianna Fáil Bill that will allow the Central Bank to cap mortgage rates and be much more active in telling banks what to charge – and this will now be considered before an Oireachtas committee. Plans by Ulster Bank to sell 900 mortgages, as part of a sell-off of loans, led to calls for the State to step in and buy the mortgages, and repeated statements that whatever happened nobody should be “thrown out of their home”.
That there might be some contradiction between simultaneously calling for no repossessions and rock bottom interest rates never seems to strike anyone.
Of course there is a bit of a Hobson’s choice here. Do we want bankers running our banks, or politicians?
Neither may seem a very attractive proposition. The bankers have shown little contrition for their rescue and are happily back charging what they can get away with, and warning quietly that the caps on their pay will have to be reconsidered. I mean, how could one possibly live on €500,000?
But the prospect of political control is even worse. Nothing will happen. The banking sector will remain in a state of suspended animation, unable to deal with any bad loans and subject to all kinds of controls on how it operates. There will be no significant additional competition and AIB will never be sold.
There are no free choices here, but as in some much of public debate at the moment, the trade-offs are simply ignored in a welter of outrage. Nowhere is the dilemma more acute than in the area of mortgages in arrears. On Claire Byrne's television programme on RTÉ last Monday, a Sinn Féin councillor declared that nobody should lose their home. On the face of it, it seems reasonable.
But what about the person who just doesn’t pay and refuses to engage with the bank? Or the person who just decides not to pay and to see how long they can get away with it? Or the household which simply can’t afford to make any significant repayment and is unlikely to be able to do so for the foreseeable future?
There isn’t an easy answer to any of these – apart perhaps from the “strategic” defaulter who is chancing their arm. And the housing crisis is, of course, a key background issue. If someone loses their home, there is a real risk that there is nowhere for them to go.
Optional payment
But the point of a bank taking security on a home is that, in some cases at least, this will be exercised, after all other avenues have been explored. If we decide that this will never happen – then we abandon the concept of a mortgage, and home loans will get a good deal more expensive. Are we already moving towards the position where paying your mortgage, like paying your water charges, is seen as somehow optional?
The difficulty for banks of gaining repossession is one reason why variable mortgage rates are a couple of percentage points above the euro-zone norm. But it’s not the only reason. The lack of competition following the wholesale withdrawal of foreign players from the market after the crash has allowed banks to boost their profit margin. Under the previous government, there were periodic “talkings-to” from the Minister for Finance to the banks, but everyone knew that this was more about show than substance.
Strategy backfires
Now, however, the pressure is on. The banks have milked it for too long. Finally there has been the start of a move downwards in variable rates, but strategically the banks have messed up here. They should have done a bit more, a bit sooner. Instead they have invited the wrath of the politicians and a proposed Bill that would give the Central Bank powers that it doesn’t want, but it has said it will, if called on, implement.
If we go down this route, we will never sell AIB out of State ownership and new entrants will walk away from the market here. Already the Government is delaying the AIB sale, warning of market conditions and so on – the reality is that the political mood means it cannot now happen.
We will also, as former IMF senior executive Donal Donovan warned this week, threaten the independence of the Central Bank, not something which worked very well the last time it was tried.
Of course there is a balance here. Banks need to be regulated. There is an urgent need for more competition in the market here, and some signs it may finally, slowly appear. There remains a huge remaining job to rebuild the banking system into something that works properly – dealing with the historic bad loans in the process – and is able to charge reasonable interest rates. Whatever way we do this it won’t be easy. But a move back towards socialisation of the banking system is surely not the way to go. The one thing worse than having bankers running our banks would be having politicians do it.