David McWilliams: Irish banks are at it again, cheating savers out of their money

Fifteen years after being bailed out by the public, the Irish banks are at it again: screwing the public. The management of the Irish banks during the Celtic Tiger years was so appalling that they imperilled the entire country with a bank run, requiring a massive injection of people’s money to avoid mass destruction of the nation’s savings. The policy choices in the midst of a bank run are never between good and bad, but between bad and worse. The lesson was clear - left to their own devices, Irish banks can’t be trusted. All were taken into public ownership, either partially or entirely. The hope was that they’d be managed not only prudently but with the interests of the country in mind. So much for optimism.

Today, Irish banks are the most rapacious in Europe when it comes to lending and borrowing. Irish banks pass on less of the benefit of higher interest rates to savers and squeeze more of the burden of higher interest rates out of borrowers. They are taking the mick. Irish banks have passed on to Irish savers just 7 per cent of the recent ECB rate rises as opposed to UK banks who have passed on 43 per cent of the Bank of England’s increases to British savers. The €150 billion on deposit in Ireland’s banks is earning a maximum of around 1.5 per cent, whereas other banks within the Eurozone are offering as high as 3.5 per cent. Irish savers are being fleeced.

You’ve heard the expression ‘fattening up the pig’ ... The Irish authorities are at the same game

Analysts estimate that the failure of Irish banks to pass on recent ECB rate hikes to their customers means Irish savers are being cheated by the banks out of about €120 million each month. The word “cheated” is precise. When the ECB raises interest rates, it is increasing the return on savings. This income is supposed to go to the people who save, not the institution that is holding those savings in trust. If the institution breaks that trust by taking that money for itself and its shareholders, it is cheating its customers out of income. It is taking money that isn’t theirs. It is a form of robbery, in any language. If you earn money and I take it, I’m robbing you! Is there any other way of looking at it?

On the other side of the balance sheet, Irish borrowers are being overcharged by the banks. The average interest rate on new mortgages in Ireland (4 per cent) is the 11th highest in the Euro area. Over the past five years, when interest rates were rock bottom, Irish borrowers paid more to the banks in interest charges than our Eurozone partners, paying around 1.2 per cent more than our neighbours.

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Taking money that isn’t theirs from the public and overcharging the same public for the pleasure of taking out a loan means that the Irish banks are making out like bandits. As it happens, just last week Ireland’s top three banks revealed their “exceptionally strong results” as of Q2, raking in a total €1.73 billion in total net income according to DBRS Morningstar. This so-called “profit” is largely the result of cheating savers out of their money.

Why does the State preside over such unethical behaviour? Because it is trying to sell its shares in the same banks. Let’s look into the muddled thinking of the Department of Finance and the Central Bank of Ireland, the two agencies of the State that oversee the banking sector, by considering AIB, where the State owns about half the shares and wants to sell them.

You’ve heard the expression “fattening up the pig”. In the old days when people could only afford to eat meat at festive times, normally Christmas, the pig would be fattened during spring and summer, so that there’d be more meat to go around after the poor animal was slaughtered. Traditional ham at Christmas harks back to this custom. The Irish authorities are at the same game. They are encouraging the banks to make as much profit as possible, in order to sell the State’s shares in the bank at the highest possible price. But the way the banks, with a captive market, make money is by cheating their customers. So the State is in on the heist. And who benefits? The private owners of the banks because the “profit” is a direct transfer to them as income in terms of dividends and wealth in terms of capital gain. As for the State, it’s only a transfer from one part of the balance sheet to another, therefore “net net” it means almost nothing. For the savers, however, it is stolen money, money that is earned on their deposits that the banks are trousering. Not only is the State presiding over this scam, it is encouraging it despite owning the very same banks on behalf of the people, the very same savers who are being cheated!

If banking in Ireland is so profitable and the State is facilitating this easy money, why don’t foreign banks come in and set up shop?

Here’s where it gets tricky and the banks have a fair case to raise. During the crash, the courts sided with defaulting homeowners over the banks that were trying to kick them out of their homes for failing to pay their mortgages. In 2018, the Central Bank estimated that just 8,400 Irish mortgage holders had seen their homes repossessed since the crash, a very low figure in the context of a market of around 750,000 mortgages, of which over 100,000 were in default in 2013. Of course this is the humane thing to do, but from a business perspective, if a bank can’t recover bad loans and sell those homes to other people, it will need to raise that capital somewhere else, necessitating more stringent capital requirements in Ireland than elsewhere.

Furthermore, it is estimated that foreclosure took from 42 to 81 months. This compares with 18 months in the UK, Denmark, Norway and Sweden, 24 months in Finland and the Netherlands, and 30 months in Austria and Germany. In Ireland, if a loan isn’t being repaid and a bank goes to take action in court, they’re only successful about 11 per cent of the time. This is significantly lower than the EU average of 46 per cent. Some countries, such as the Netherlands and Luxembourg, have a repossession success rate of as high as 80-90 per cent.

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The banks therefore argue that they are being prevented from doing “normal” business and their best argument to substantiate that point is that no foreign banks will touch Ireland with a barge pole.

The solution to this twin problem of cheating and defaults is obvious. Introduce a windfall tax of excess profits that stem from cheating the punters (very easy as the figures are in the accounts), while at the same time introduce legislation that brings Irish foreclosure practices into line immediately with normal practice in Europe. Savers would be paid, while defaulters would be penalised and borrowers/mortgage holders would benefit from lower borrowing costs, while the State should retain its share in AIB to oversee the process, from the inside.

That can’t be too difficult, can it?