BUSINESS OPINION:If Swedish banks didn't learn their lesson in the 1990s, why should ours now?
THE DEVALUATION crisis in Latvia and neighbouring Baltic states may have abated for the moment, but there is a salutary lesson for Ireland in what happened. There are probably several, but we’ll stick to just one.
As part of the measures put in place last week, the European Central Bank (ECB) agreed to loan the Swedish central bank some €3 billion. The money was to help it backstop the Swedish banks which are very heavily exposed to Latvia and the other Baltic economies.
What’s worrying about all this from an Irish perspective is that these are presumably the same Swedish banks that had to be rescued by the Swedish Government in the 1990s after they over-extended themselves in the property market.
The story of how Sweden rescued its banks has assumed almost mythological status in the current crisis. Indeed, the Swedish solution – mass nationalisation and managed writedowns of property assets – informed the thinking behind the decision to establish the National Asset Management Agency (Nama).
The Swedish rescue was by all accounts a success. The banks were eventually refloated at something approaching a profit to the Swedish government, and sanity returned to the property market.
But now Sweden’s banks seem to have gone and done it all again, lending huge amounts to customers in the Baltic states, mostly in euro and other foreign currencies. As a result they will be in serious trouble if the Latvians – and eventually the Estonians and Lithuanians – devalue, making it even harder for their citizens and companies to service their foreign currency borrowings from Swedish banks.
The Swedish financial regulator says its banks have the capital to take the hit, except in extreme scenarios. Sound familiar?
Purists would say this simply goes to prove the point about moral hazard. If bankers know they are not going to have to carry the can at the end of the day, they will take excessive risks.
A more charitable analysis would be that the scale of the global meltdown turned what was prudent lending in neighbouring states into a nightmare.
The truth no doubt lies somewhere between the two. But the net point from the Irish perspective is that there is absolutely no basis to presume that our banks will come out of the Nama process as reformed institutions.
Hopefully the two worst offenders, Anglo Irish Bank and Irish Nationwide Building Society, will have been effectively wound up. But the remaining banks are unlikely to have undergone a cultural transformation. The same goes for the foreign-owned banks, Ulster, Halifax-Bank of Scotland (Ireland) and KBC, none of whom have covered themselves in glory and whose parent banks have been rescued by their own governments.
The banks will no doubt be chastened and significantly smaller when they come out of the Nama process, but like their Swedish peers they will be looking for the next big killing.
It’s clear that some of them are already thinking about what they are going to do with the all the cash they will raise by using the bonds they will get from Nama as collateral to borrow cheaply from the ECB. Hence the comment attributed to Bank of Ireland chief executive Richie Boucher that he wants to stay friends with the big developers.
There is not too much point getting worked up about this; it is in effect the essence of banking.
People don’t join banks to make the world a better place, and their owners do not normally see them as anything other than money-making machines.
What the Swedish banks’ latest frolic at the taxpayers’ expense does do is remind us, if we really needed it, of the necessity to regulate properly the systemically important banks.
Regulation on a global level has failed, but in the Irish context it has been a particular failure.
The main problem has been identified as the decision to go for a principles-based approach, which turned out to be dramatically unsuited for Irish banking culture.
The trend globally is now back towards a more rules-based and less trusting approach, and no doubt Ireland will follow. But will we also find ourselves torn between the two camps now developing in Europe?
The importance of the financial services industry – and hedge funds in particular – to our economy would suggest we are better off siding with the British, who will be fighting the City of London’s corner. But the size of our banking sector relative to our economy – and its ability to bring the whole house down – would argue for us supporting the Germans and the French in their drive for tougher regulation.
Needless to say, discussion on the issue is non-existent, and Government policy seems to be a return to the system that failed before the current system failed.
The current plan – for which no coherent argument has been made – is to do away with the quasi-independent Financial Regulator and concentrate power again in the Central Bank proper.
Having botched an attempt to improve regulation by not properly separating the regulator from the bank, the Government is simply going back to the system which gave us Ansbacher, NIB and a host of other disasters.
The icing on the cake will no doubt be the instalment shortly – and in time-honoured fashion – of another Department of Finance insider as the next governor of the new/old Central Bank.
Then it will just be a question of how long before the Irish banks find their Latvia.
