A GROUP of chastened bankers came before an Oireachtas committee on Wednesday, betraying a firm purpose of amendment and a determination – in the words of one of them – not to “repeat the errors of the past”. Some 18 months ago, however, some of these executives reassured the same committee that lending by the State’s three largest financial institutions had been prudent and responsible. Two months later, the Government had to rescue the banking system.
Since then, the State has provided a guarantee for the liabilities of Irish banks. It has helped to recapitalise the three largest with an investment of more than €10 billion and has nationalised Anglo Irish Bank. And it has set up the National Asset Management Agency (Nama) to take property development-related loans (amounting to an estimated €54 billion) off banks’ balance sheets.
Having got it wrong for so long, hubris has been replaced by a measure of humility among bankers. But the public, now paying for their recklessness, have good reason to be sceptical about the judgments they make and the assurances they offer about assisting borrowers in difficulty and facilitating new lending to business.
The European Central Bank’s (ECB) quarterly survey of bank lending last month showed the ninth successive tightening of credit standards by Irish banks to Irish business. The reluctance of banks to lend reflects a number of factors: their weak balance sheets, the cost of funding and the weak state of the Irish economy. In struggling to contain existing bad debts and to rebuild balance sheets, they have become more risk averse. As borrowers see it, reckless lending has been replaced by excessive caution, giving rise to minimal lending.
Clearly, banks have obligations to shareholders, stakeholders and customers. By accepting the benefits of Nama, they must honour also the terms of their agreement with the Government. These include a commitment to raise lending capacity to first-time house buyers and to increase the availability of credit to small and medium enterprises.
However, the pressure to lend more comes at a difficult time. The ECB is expected shortly to announce a winding down of the one-year loan facility offered to euro-zone banks. This has enabled Irish banks to borrow at one per cent, a much lower loan rate than is available elsewhere. The ECB move will mean that banks will have to pay more for their funding in future. That will mean higher interest charges for borrowers on loans already proving difficult to secure.