More change needed in Irish banks - Boyle

Green Party Chairman Dan Boyle said today that change had not come quickly enough to the appointments systems in financial institutions. Speaking this afternoon at the MacGill Summer School in Glenties, Donegal, the Green Party's finance spokesman welcomed that the new Financial Regulator and Central Bank Governor were individuals from outside the 'incestuous circle of Irish financial services,' but he said that the same could not be said of the financial institutions themselves.

"These appointments have hardly represented a new broom approach," he said. "As we further peel the onion of what has gone wrong in the Irish banking system there also has to be expectation that further departures from Irish banks, even among those recently promoted, must be expected."

Senator Boyle also said that the failures of Irish Nationwide are proportionately more catastrophic than Anglo. "The Commission of Inquiry into Banking needs to asks particular questions of Irish Nationwide," he said, And those who have had responsibility for the decisions and actions of Irish Nationwide should account for themselves in the appropriate setting, including before our Courts if it is found that crimes have been committed."

In his speech, the Deputy Leader of Seanad Éireann praised Central Bank Governor Patrick Honohan and Financial Regulator Matthew Elderfield, who have shown a willingness not to pull punches, he said. The reports commissioned by the Government from Professor Honohan and international experts Regling and Watson have been models of clarity, and their bluntness has surprised many, he added.

The full text of Senator Boyle's speech follows.

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Building a Better Banking System

Speech by Senator Dan Boyle to the MacGill Summer School
Glenties Co. Donegal – July 20th, 2010.

In the almost two years since the introduction by the government of the wide ranging Bank Guarantee Scheme, change in the Irish banking sector has been fitful, fragmented and frustratingly slow. There has been change and much of it has been positive. The chief executives and chairs of boards of many of the institutions have moved on. Under legislation passed the entire board membership of these institutions will have changed within a very short time.

Key appointments have been made a new Governor of the Central Bank, Professor Patrick Honohan, with whom I had the privilege of sharing a platform at this Summer School last year along with Alan Dukes; and the appointment of Matthew Elderfield as Chief Executive to the Office of the Financial Regulator. Both these appointments were significant as much as for the manner they occurred as for the quality of the people being appointed.

Patrick Honohan’s appointment as an outside academic being brought into the top position in the Central Bank, broke the Buggins’s turn arrangement of the Secretary General of the Department of Finance being assumed into that position. His previous role as a questioning, albeit a constructively questioning outside observer, offering an alternative to, and where necessary a refinement of, government policy decisions made him an ideal choice for this role.

Matthew Elderfield, outside of his obvious experience and qualifications for the role and the impressive way he has taken to his task since his appointment, has had one key advantage in being appointed. He isn’t Irish. Speaking at this Summer School last year I outlined my position and that of my party, that the vacancy of Chief Executive at the Office of the Financial Regulator had to be filled from someone who was outside of the incestuous circle of Irish financial services and those who had been involved in their regulation.

Since his appointment he has shown a willingness not to pull punches. His decisions on the Quinn Insurance Group and that company’s relationship with Anglo Irish Bank showed an individual with ability to operate beyond political pressures and put prudential principles to the fore. Professor Honohan and Matthew Elderfield have both demonstrated their desire to operate in ways that their predecessors chose not to.

Legislation, in the form of The Central Bank Reform Bill, has helped to achieve a better balance in the relationship between the Central Bank and the Office of the Financial Regulator. I believe the Bill helps have the information flow and more importantly accountability levels better defined. That said I have concerns that there might be a sidelining of the consumer protection role in our regulatory framework. In putting aside our failed system of regulation we need to remember that it was the prudential regulation that failed us most, and where we identified bad banking practice it was more often than not through the consumer protection side of the Financial Regulator’s office.

We need also to remember that previous legislation while imbalanced contained many powers that were never used, that if used would have led to the establishment of a more effective system of regulation. With this legislation there remains a leap of faith that the powers contained within the Bill are used by those entrusted to exercise those powers. Such people are in place now and we need to ensure that they are there in place into the future.

Where change has been less obvious has been in the subsequent appointments in several financial institutions. These appointments have hardly represented a new broom approach, and have a feel of meet the new boss same as the old boss about them. As we further peel the onion of what has gone wrong in the Irish banking system there also has to be expectation that further departures from Irish banks, even among those recently promoted, must be expected.

This and other factors feed the cynicism among the general public that change isn’t really happening and may never properly occur. Most frustration exists at the lack of prosecutions for activity that the public, justifiably believes has been criminal. We can bemoan our legal system, talk about the burden of proof and the need to establish water tight cases, but the longer the period in which no prosecutions take place, the less likely they are to ever take place.

I don’t see this as political protection of those who need to be prosecuted. It is more a culture that those who inhabit a certain strata of Irish society, committing particular types of crimes are somehow seen as being immune from prosecution. In order to move on as a society, and to assist economic recovery, this is a culture that we need to put behind us and soon.

We are learning. The model chosen to reveal what has brought to where we are, has itself been slow, but valuable investigations have occurred and are still occurring, that should help us take on board the lessons we need to learn. The reports commissioned by the government from Professor Honohan and international experts Reigling and Watson have been models of clarity, and their bluntness has surprised many.

Being told that we are mostly responsible for our own economic problems and that the banks have been most negligent in bringing this about, implies that there are many who remain in key positions in Irish financial services who have yet to take responsibility for their actions, Further questions to have yet to be asked. The appointment of the former Finnish civil servant, Mr. Peter Nyberg, to head a Commission of Inquiry into Banking, with his remit to report within six months, will help identify the extent to which Irish banks distorted the system and which of their executives were involved in the making of those decisions.

Parallel investigations by the Joint Oireachtas Committee on Finance into the policy decisions made by the government, and the systems review of operations within the Department of Finance, should help give us a more complete picture. The Dáil Public Accounts Committee is also playing a valuable role in this process, with their scrutiny of the documentation that informed the decision to implement a Bank Guarantee Scheme in September 2008.

This scrutiny needs to be more detailed than the superficial analysis that has so far accompanied the public publication of the documentation. The Bank Guarantee Scheme along with the establishment of the National Asset Management Agency, NAMA, has each achieved something of a mythical status as the touchstones of public and political ire. I believe this to be somewhat misplaced. The Bank Guarantee and NAMA are not the major problems we have to face. At worst they are symptoms of the problems. In reality I believe they should be seen responses to the problem. Whether they structured appropriately is a matter for legitimate public and political debate, but to be misidentified as the core problems themselves is to obscure from proper attention the very real problems that continue to beset Irish financial services.

To some the Bank Guarantee has been a reckless decision that has put the Irish economy at risk to the tune of some €400 and possibly €500 billion. In essence it is an insurance scheme but in terms of public perception it has become a bill that has yet to be paid. In hindsight the need to strengthen and extend the Guarantee has been accepted, the best criticism, and this in retrospect, can be found in the Patrick Honohan report. He has argued that it isn’t a question of whether the Bank Guarantee should have been extended but more a question of how the guarantee should be extended and in what way.

The questions that now need to be asked are whether all classifications of creditors should have been included, and if all the financial institutions should have been included to the same extent. What is clear is that the decision that was made in September 2008 was the right decision that was made for the right reasons, if not on the basis of the right information. The review of whether the Guarantee should be extended is where these questions should be asked.

The genesis of NAMA has had a similar route towards misrepresentation. According to its critics NAMA would artificially inflate the property market. It would overpay for the distressed loans of the banks and it would offer succour to developers. That the property market has continued to fall despite the establishment and the initial manifestation of NAMA gives lie to the first assertion. The talked about 30% haircut on the value of the distressed loans was never realistic and after stress testing of the banks’ loan books, revealing the misinformation given by the banks, a 49% discount has been far more realistic. The third element on whether developers will receive special treatment from NAMA, time will tell, but indications are that in its initial phase NAMA will be stricter on those who owe on outstanding loans than those who originally owed such monies to the banks.

There remain too many conflicting colossal figures that are feeding public resentment, and perhaps the scale of those figures has led to a sense of powerlessness that tends to magnify the problems even more. However where anger is more than justified is in relation to the dead money that the taxpayer has been required to pump into Anglo Irish Bank and the Irish Nationwide Building Society. The costs of these interventions has increased due to the all embracing nature of the bank guarantee, but what seems to be lost in the argumentation about these institutions is that even without such a bank guarantee, as licensed financial institutions that were too loosely, if at all, regulated, the State acquires a liability for their negligence. We may be paying more than we need to be, but there has been no way, other than default, of avoiding most of the billions upon billions these institutions have cost this country.

Increasingly debate has centred on Anglo Irish Bank and its future, or whether it has a future. Again a subtext implies that Anglo is being maintained for political reasons. As far as the Green Party as a part of government is concerned, there is no political purpose for maintaining Anglo Irish Bank, or however it is to rebranded, for the sake of it being maintained. The thinking behind the current policy has solely been based on achieving a minimum cost to the taxpayer. However we may be coming close to a time when the alternative of phasing out the bank over a shorter time period will become the more cost effective option. Anglo Irish is a failed bank, a now notoriously failed bank. The policy priority has to be about cutting losses and not about rescuing the bank in whatever form.

The story of Irish Nationwide is one that does not seem to rate as high in public consciousness as that of Anglo. Yet in proportionate terms its failure has been far more catastrophic. That it was a mutual building society that engaged in this type and scale of lending is beyond belief. The Commission of Inquiry into banking needs to asks particular questions of Irish Nationwide. The answering of these questions I believe should see those who have had responsibility for the decisions and actions of Irish Nationwide have to account for themselves before our Courts.

In some respects what my party has argued for in extracting the country from the abyss we have been brought to by the banks is being progressed. The Green Party was the first to call the resignation of our last Financial Regulator and his replacement by someone other than an Irish national so that appropriate distance could be established in our system, or as was our non-system, of financial regulation. Before others, and in the face on initial reluctance, we called for a Banking Inquiry to be conducted quickly, independently and with large scale public inputs. As far we have been concerned this has been about a process dedicated not only towards getting the right answers but also in getting those answers in the right way.

Banking policy compromises of three distinct phases, the first of which the seeking of answers to provide lessons we can learn from I have been spending of great deal of time detailing here. The second phase is to move towards getting the banks in engage again in lending and spending activities that help the economy to recover. In this regard there has been much legitimate criticism of how banks are failing to protect homeowners who having purchased at the height of the market, or those whose circumstances have changed, and are now unable to meet mortgage payments. In the wider economy there is a continuing problem of credit to small and medium size enterprises. Businesses are experiencing these problems at the level of not being able to maintain overdrafts for cash flows purposes and few seem to be able to access loans for development purposes.

My Green Party colleague, Eamon Ryan, has been working closely with the Minister for Finance to deal with these difficulties. The establishment of the Credit Risk review group has very much been a Green Party initiative. Its recent interim report makes standard practices that have been developing in this area, and it is hoped that its further report will overcome many of the remaining difficulties.

It may be that banks by their nature are meant to be cautionary institutions. The recklessness displayed in recent years could be countered by their belief that in dealing with property they were working with an activity that ordinarily could be described as safe. This culture of banking is one that needs to be challenged strongly. There has never been a real tradition within Irish banking to support through seed capital, innovation and risk taking in developing new areas of the economy, and never has there been as great a need to bring this about.

A good example of this has been the slow availability from the major two banks, AIB and Bank of Ireland, of lending to Green economy initiatives even though €100 million of such lending was legislated for under the original recapitalisation legislation. Government policy for economic development is predicated upon The Smart Economy document, in which many areas of the new economy, a Green economy are being promoted, and this demands that our financial institutions recognise that it is here rather than in the property based economy of the past where investment is needed.

The third phase of policies relating to Irish banking concern the structures of the institutions themselves. As much of the attention to date has been in fire brigade actions to rescue the banking system, now thought has to be given to the type of banks we need into the future. The first question that needs to be addressed is how many banks a country of our size needs. The Swedish government, a country with more than twice our population, when it was dealing with its banking crisis of the early 1990s was dealing with seven banks, which it then reduced down to five.

In Ireland we certainly require a large scale retail bank. For the interest of the consumer it would be best if there were two such competing banks, although with the presence of other non Irish owned retail banks, this may not be as obvious. We need an development/investment bank but one as far removed from the Anglo model as it is possible to be. I would argue that such an investment bank should be a Green investment model. The inclusion of such a bank in the new Conservative/Liberal Democrat programme for government shows that this is direction that is already being followed internationally. There are also good commercial examples of such banks and in this regard I would instance the Triodos Bank, a UK bank that has already established a small scale but significant presence in Ireland.

Most importantly there is a need for a small savers, small scale lending bank run on mutual co-operative principles. We have been badly served by our mutual building societies but other models exist in the economy, such as credit unions and it could also provide a future role for Post Bank and the wide scale network it could help put in place. A combination of all these bodies could provide a viable, alternative third banking sector this economy needs. Encouraging small savers and lending in small amounts would be just the stimulus for the economy. This third sector could provide the type of small scale lending that can help meet short term needs of people, who in turn by spending more contribute in the economy more, and in so doing help create more jobs. As an economy I believe it would become more balanced.

A restored banking system depends on public confidence. As of now we seem be as far away from that sense of confidence than at any time since the start of this collapse. However that would be to ignore the work that has been done so far and the analysis of mistakes that have been made and the requirement to initiate a debate about the type of banking system we need and require. It has become something of a cliché that crises help bring about opportunities, but it is a fine line in which we also have to acknowledge that crises can also create deeper crises.

We shouldn’t be afraid to learn from the opinions of others outside of the State, those from international agencies, who tells those things we sometimes may not want to hear. Regardless of the fact that in the last decade many of these agencies have also been caught up in the false euphoria of the casino years in the international economy; the current views of the European Commission, the European Central Bank, the OECD, and most particularly the recent report of the International Monetary Fund, need to be heeded.

The particular banking recommendations in that IMF report such as an earlier than intended imposition of a bank levy, and the instigation of a new tax on bank executives pay point to some of the means the taxpayer can recoup the hugely unwarranted amounts of money they have had to commit. We should also give consideration to transactional taxes such as levies on currency speculation, a Tobin Tax, or on stock exchange transactions. Some of these charges would have to be transnational in their implementation but some could fit quite neatly into our national system of taxation.

Despite coming through the sharpest fall the Irish economy has known and with it the near destruction of our financial services sector, we cannot now retreat from the requirement that that sector needs a top down change. That change must include a change of structure, a change of systems, a change of culture, and most importantly a change of purpose. This won’t happen merely because many of us wish it to happen, but we must work to make it happen. If we do this right we will have a better banking system that will become a more effective hub for our economy and maybe as a nation we can show ourselves that we are able to learn from our economic and political mistakes;

The future of our economy, and with that our financial services, is largely ours to determine. We need to think medium and long term. We need to avoid the pitfalls of knee jerks politics and the questionable instant analysis of ratings agencies. Better banking is possible, better banking is necessary, better banking is what the people of this country deserve and those who tainted that service must stand aside and allow for better standards to prevail.