Inside the world of business

Government in a pickle over banks

THE GOVERNMENT appears to be getting into a right muddle over mortgages. Having foolishly given a hostage to fortune by threatening legislation to force banks to pass on European Central Bank reductions in interest rates, the Government now finds its bluff called. State-owned AIB said yesterday after a meeting with Taoiseach Enda Kenny that it will not pass on the rate cut.

It was always likely (a) that the next move in interest rates would be downwards and (b) that banks under pressure on margins would not uniformly pass on such a cut. Despite its bluster, the Government did nothing to ensure legislation was in place – or even drafted – to deliver on its threat.

There is, in any case, a question about the wisdom of such a move. First, only variable mortgages are affected by this commitment. In the Irish market, variable mortgages tend to be older, have lower loan to value ratios and are less likely to be in distress. Homeowners under pressure are generally those who bought in the last five or six years. Most of this cohort are on either tracker or fixed rates.

As it happens, tracker mortgages are a not inconsiderable part of the banks’ problems. Accounting for the largest element of the residential mortgage market, they are lossmaking and will continue to be a drain on banks’ resources for many years.

It is somewhat ironic that we are now looking to force the same lenders effectively to turn variable rate mortgages into trackers – worse still, one-way trackers that follow rates down but not up. Taxpayers have already been told the crippled banks require up to €70 billion of their money to allow them some prospect of survival or orderly wind-down.

It is hard to see how forcing the banks to assume even more losses will help them recoup at least part of those funds or drive the required structural reform of the banking sector.

Innovative thinking on credit for businesses

ASK ANY business owner in the State and they will tell you the banks are far from fixed and the lack of credit continues to be one of the main inhibitors to the domestic demand economy returning to normality.

For their part the two “pillar banks”, AIB and Bank of Ireland, point out that they met their commitment to former minister of finance Brian Lenihan to provide €3 billion each in new lending to small and medium businesses by last April.

In fact John Trethowan’s Credit Review Office (CRO) found that the banks had lent a total of €8 billion to SMEs – €2 billion more than the target.

But that figure includes restructuring. No one other than the banks knows how much of it is overdraft facilities that have been converted to term loans, effectively strangling a source of cash flow for many seasonal businesses.

While the CRO might be doing its best, the simple fact is that small firms are simply not applying for loans that they know they are not going to get.

The last report from the CRO shows it is has received just 98 appeals from businesses who have been refused loans.

Clearly more innovative thinking is needed if business is to get the credit it needs to thrive.

The Coalition has been touting a loan guarantee scheme for some months now but there is still no detail as to when and how this might be introduced.

New players, such as mid-size British finance house Close Brothers, who yesterday announced a move into asset financing, need to be encouraged into the market.

Given the Government’s big funding commitment to venture capital, could incentives be provided to invest in areas other than high-tech? Micro-finance schemes have been revolutionary for developing economies; couldn’t the diaspora be encouraged to take part in such a scheme here?

Viable businesses are needlessly going to the wall while the banks continue to conserve their capital and there is little light at the end of the tunnel.

TOMORROW

The Government will announce the outcome of its Capital Spending Review.

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