OPINION:The State must not lose sight of the need for the banking industry to be Irish-owned and Irish-run, writes John McManus
SUPERFICIALLY AT least it has all the elements of a Hollywood ending. Even the names work. The damsel in distress, the fragrant Princess Boi, is about to fall into the arms of the evil villain Malabraca when the shining night Sir Iaim rides to the rescue.
Things, unfortunately, are not quite that simple. Not least because Bank of Ireland and Irish banking in general more closely resembles an accomplished courtesan whose best years are behind her than a beautiful young damsel.
But, without a doubt, the entry of the domestic investment institutions, fronted by the Irish Association of Investment Managers (IAIM) into the debate about how best to recapitalise the banks is welcome.
If nothing else, it gives the Government a yardstick by which to judge the only other offers on the table - the private equity-based proposals from Malabraca, KKR and TPG. Or, to use the parlance of the market, it introduces some "pricing tension" into the process.
To date we have only had the bare bones of how the IAIM proposal would work. And one glaring problem is apparent at this stage: the €2 billion or so which they believe they can lay their hands on hardly knocks a hole in the €10 billion-plus figure the market believes the Irish banks will need by way of fresh capital before we see the other side of the current crisis.
But the fact that the main players in the IAIM proposal are Irish-owned institutional investors goes some way towards dispelling concerns over the ownership and character of the banks, post-recapitalisation.
Malabraca and the other private equity houses face the opposite problem. They would appear to have access to a deep pool of money, but there is a great deal of understandable concern about handing over the banks to private equity, with its focus on short-term returns and an exit.
It's an interesting question as to which group's problem is most easily fixed.
It will be hard for IAIM to expand its pool without tapping private equity. One suspects that if the IAIM proposal does travel the distance it will evolve into some sort of hybrid; likewise the private equity proposals, which could solve some of their problems by wrapping themselves up with an Irish institution or two.
All this will no doubt play out in the coming weeks, but as things stand, the Government has reason to be pleased with itself. The Irish banks have been galvanised into action and are confronting the reality that they will not all survive the process as independent entities. The second is that they have managed to turn what could have been a fire sale of the banks into something that has an element of competition and the prospect of only a minimal need for Government funds.
Whether they arrived at this juncture by accident or design is not terribly relevant, but what is important is that from here on out they do not lose sight of the need for the banking industry to remain Irish-owned and Irish-run.
The Government seems fairly sanguine on this point, the argument being that what is important is to get the banks sorted out and lending once again, at minimum cost to taxpayers. Freeing up credit is the priority, and it will involve more than just recapitalising the banks. Hence the Government's resources have to be channelled in that direction, and provided the worst excesses of private equity can be coralled in some way, then one style of ownership is as good as the next.
The main argument for continued Irish ownership suffers because it is really an argument that relates to what happens after the crisis is resolved, private equity has come and gone and the restructured Irish banks have been flipped on into foreign ownership.
It's about the long-term benefits of strong domestic banks, and its main plank is that Irish-owned banks are more inclined to lend to Irish business.
There are several reasons for this - the main one being that Irish subsidiaries of international banks have to compete for a share of their parent's risk capital and will lose out to subsidiaries in home markets and bigger markets. It's summed up by the question: what German bank is going to lend to the Irish agriculture sector via its Irish subsidiary, ahead of lending through its domestic network to medium-sized German engineering businesses?
It would be good to know where the Government stands on the issue, but declaring its hand now would weaken the surprisingly strong position it finds itself in.
