ANALYSIS:The consultants say there's no liquidity problem with the banks. So why are the meetings continuing?
THE 20 CONSULTANTS who were sent into the banks have now reported. Their conclusions about recapitalisation and the extent of bad debts are deemed to be confidential and commercially sensitive. Yet, in the official announcement, we are told very good news indeed. The consultants' report apparently confirms that the capital position of each of the institutions reviewed is in excess of regulatory requirements as at September 30th, 2008. We are also assured that even in certain stress scenarios, the capital levels will remain within regulatory requirements in the period to 2011.
We are not told how these exercises were done or even what assumptions were made about future land and property prices. On the face of it, however, the findings are positive, and completely contradict the negativity of speculators and various non-establishment commentators who never had access to the books of the banks.
As well as all of this good news (this is not deemed to be confidential or commercially sensitive), the Minister for Finance further assures us that the Government guarantee scheme has been successful in safeguarding the stability of banks and restoring their liquidity.
A cynic might suggest that consultants are unlikely to contradict views already enunciated publicly by the Government, the Central Bank, Financial Regulator and the chief executives of the banks. If contrary conclusions had been reached, it would have been dreadfully embarrassing. As matters stand, everyone's blushes will be spared.
But if the consultants and the establishment are right, then what on earth is all the fuss about and why are the meetings continuing? The banks have been given an excellent bill of health with regard to liquidity and capital adequacy. Their shock-absorbing capacity has been tested as far out as 2011 and has received the thumbs up. This confirms what the regulator has told us about the results of several stress-testing exercises.
So why are discussions continuing about radical forms of consolidation, massive injections of capital either by Government or by private-equity firms? If the expert consultants and the entire establishment are right, there is no need for any of this strong medicine because the "patient" is in rude good health.
Is it conceivable that the Government wants the banks' capital to be more than adequate, as is now the case in the UK? What does "more than adequate" even mean? Is there a belief that additional - and unnecessary - capital is required to restore investor confidence in the banks?
If this is the motivation, it could be regarded as a form of share manipulation that serves no macro-economic purpose. If the "vulture capitalists" provided the banks with more capital, it is not even certain what effect that might have on share values.
If indeed the banks are in rude good health - and fully compliant with the rigorous Basle regulations - then the shares will recover in due course when the speculators recover their senses.
The Government seems to believe that if the banks had more capital, they would lend more to small and medium enterprises (SMEs). This does not follow at all. And in fact it has not happened in the UK after major recapitalisation. Banks will only lend to good credit risks, regardless of the amount of capital they have at their disposal.
We are currently in the grip of a deep recession and one that may continue for a number of years. The unfortunate fact of the matter is that many SMEs are in financial trouble because of the recession, and bank loans may not save them. For many of these companies, the problems are more serious than cashflow.
As we know, banks lend you an umbrella when the sun is shining but ignore you when it rains, which it is at present. That said, total credit to the private sector, though decelerating, is still growing by 9 per cent per annum, even though the growth in nominal GDP is zero. This doesn't sound like a credit crunch exactly.
Clearly, the banks are continuing to lend, though they are cherry-picking their customers. That is what banks do, especially in a recession, regardless of the size of their capital base. After years of super-normal growth, there must be several SMEs that have ample profits and reserves. It is not clear how developed the inter-company credit market is in Ireland, but it should be possible for some companies to lend directly to other companies without going through banks. Maybe this is an area the Government and representative bodies could examine. It would also provide more competition to the banks by developing direct lending from company to company on wholesale terms.
If we look at the demand side, there are many companies that are already highly borrowed. It is unlikely that they would even want to take on more bank debt, especially if their order books are depleted.
If the Government does help the banks - even though they don't seem to need it - will the Government force the banks to take on bad debts again and run an Irish version of the subprime fiasco? That would be the equivalent of pouring taxpayers' money down the drain.
In short, the consultants, Central Bank, Financial Regulator and the entire establishment, including the banks themselves, have now told us that there are no problems of liquidity or of capital. Why then are the meetings with the Government continuing? Either the good news is not quite so good or is there something else we are not being told about? It may all simply reflect a natural human desire to be seen to be doing something.
Michael Casey is a former chief economist with the Central Bank and a former member of the board of the International Monetary Fund