It is time to be less deferential to the banks

To track or not to track? That was the question faced by many seeking mortgages in a banking market dizzy with offers in the early noughties. Bank of Scotland was the first to offer tracker mortgages on the Irish market in 2001; by 2003 it had been joined by numerous others.

At that time, many mortgage brokers were unambiguous in their praise of them as they guaranteed to fix interest rates at a set percentage above the ECB rate. One such mortgage broker, Liam Ferguson, referred to them as “one of the best products to come into the mortgage market for many years” while another, Sara Wellband, asserted: “They’re a very good product because they’re very transparent.”

And why wouldn’t they have made those claims? There was indeed much that was attractive in such clarity. As Laura Slattery, writing in this newspaper about banking put it in 2003: “In financial advertising, ‘guaranteed’ is a magic word, automatically triggering feelings of comfort and reassurance.” But enthusiasm for tracker mortgages was also based on the assumption that the institutions offering them would be transparent and we are now all too aware of what a sick joke that was.

Why did some of these institutions treat so many with such contempt and why are some still doing that? Part of the answer, surely, has to do with the way banks for decades have been allowed to do what they want without fear of meaningful interference. Historian Joe Lee has noted that in the 1930s, “the occasional small farmer spokesman, and the occasional cleric, would wax indignant against bankers. But they roused only muted popular response.”

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‘Dogged’

Even when politicians in powerful positions did much more than “wax indignant” they still got nowhere. Fianna Fáil’s Frank Aiken, when minister for finance in 1945, was regarded by contemporaries as “dogged and inquisitive” and had attitudes deemed to be “more independent and unorthodox than any of his predecessors”, which was enough to ensure numerous barriers were put in his way. JJ McElligott, the secretary of the department of finance, was so alarmed at Aiken’s pugnaciousness that he got the young TK Whitaker to sit on him as his “personal adviser on monetary theory”.

The year Aiken was appointed was one of financial pressure for the State and the government wanted a loan from the banks to cover the final quarter of the financial year, which was not without precedent, and the way it had been dealt with previously was through exchequer bills. But in this instance, the banks refused to take up these bills at the same rate paid for treasury bills in London, as desired by Aiken, because in Ireland the banks’ rates were higher than English deposit rates and they would lose out by lending at the English rate. Aiken “flew into a rage” and even made a “thinly veiled threat of bank nationalisation”. He told McElligott, “I regard their turning down of the request… as an act of undeclared war upon our people”, and he suggested the Central Bank, then in its infancy, should impose penal measures.

Immutable opposition

He faced immutable opposition both from the department of finance and the Central Bank. Aiken even invoked the Constitution to bolster his case, specifically article 45 – “to ensure that, in what pertains to the control of credit, the constant and predominant aim shall be the welfare of the people as a whole” – but it was pointed out to him that this clause did not direct the Oireachtas to guarantee this; the words were merely “for the general guidance” of the Oireachtas. As Joe Lee observes, these words in the Constitution “meant nothing in the real world of finance” and it was McElligott, not Aiken, who “held the whip hand”.

And so the culture endured, and despite all that has been experienced in relation to national and personal finances in more recent times, the whip is still too often in the wrong hands, to the extent that this week, all the Government would say is that it had lost patience with the “scandalous” behaviour of the rogue institutions, that Minister for Finance Paschal Donohue will call the bankers in next week to “admonish” them and that there might be further consequences.

For far too long, governments have done nothing but indulge, when forced, in mock outrage about egregious banking practices; anything bolder, it was maintained, would “threaten” the banks “recovery”. And what of the Central Bank? It has been investigating for two years and insists it will continue to “challenge” the lenders on their obfuscation. That doesn’t sound like much of a whip. This is the same Central Bank whose boom time governor, John Hurley, told the banking inquiry in January 2015 there should have been “a greater degree of intrusiveness and assertiveness and a less deferential approach to the banking industry”. That, and much more, is required now. Waxing indignant is not enough.