OPINION:Public money should not be given to the banks until their bad debts are hived off – otherwise the Government's recapitalisation plan risks throwing taxpayer billions into an international financial abyss, writes RICHARD BRUTON.
THE ECONOMY cannot recover without a functioning banking system that enjoys the trust of depositors, international markets and the community at large.
Since last October, Fine Gael has been calling for a bank recapitalisation plan when it became clear that tightening lending conditions were destroying thousands of jobs. We wanted a recapitalisation scheme to secure our banking system, open up credit lines and ultimately protect jobs. The real risk now is that the Government’s reported scheme will not achieve these goals.
Estimates of bad debts in both AIB and Bank of Ireland have now worsened to the extent that the Government’s plan to give each bank at least €3.5 billion appears unlikely to sufficiently restore their financial strength to get them lending again, while also leaving the taxpayer massively exposed to losses.
There is a real risk that the only result will be to allow the existing banks to nurse along their reckless property loans while continuing to starve viable businesses of access to the credit they so badly need. At a time when public service pay and spending on services and infrastructure are being slashed, we cannot pour taxpayers’ money into a huge hole of unknown depth.
It is time, therefore, to look at other, more creative, alternatives for recapitalisation that offer a better chance of success and that better protect the taxpayer.
This is why Fine Gael is proposing the creation of brand new “good banks” with clean balance sheets, capitalised by a combination of public and private funds. Germany is now looking at variants of this model.
This would involve separating from within each bank a new bank, with a separate legal structure, which would hold all the State guaranteed deposits and other short-term liabilities and which would buy from the existing parent bank the branch network and all those parts of the loan book which can be easily valued, such as residential mortgages and business overdrafts.
These would constitute new “good banks” with clean balance sheets. They could be called “New AIB” and “New Bank of Ireland”. Their capital would be provided by the taxpayer, hopefully with other private capital, and some small shareholding could be given to the existing shareholders. These new banks would then be well capitalised with a clean balance sheet and fully open to resume lending.
A legacy bank would be left behind in each case which would no longer engage in any new lending. Its role would be to manage the remainder of the loan book and recoup maximum value from it over time. It would be managed in the interest of the existing capital owners and other creditors, such as long-term bond investors, that have not received a State guarantee. If enough money is recovered from property developers and other debtors to the banks, they would be fully repaid.
This model does not require the State to insure the banks against their bad debts, nor to buy bad loans from the banks. These ideas have been mooted by the banks themselves, but both require the State to put a price on bank assets that cannot be valued in current market conditions, and lead to the likelihood that the taxpayer will end up paying over the odds, which would be a bail-out by stealth.
But the main advantage of this model is that it offers a much better chance of kick-starting the economy and protecting jobs. This is because it uses scarce taxpayers’ resources for stimulating new lending by banks, rather than for absorbing the losses from the banks’ existing loan book.
No doubt the first instinct of the banks and their long-term creditors would be to scream blue murder. They are currently demanding, and expecting, continued State support in one form or another. But it is self-defeating for bank investors to be hitched to a broken financial system that is strangling the economy.
Moreover, why should the taxpayer should be exposed to potentially massive bad bank debts that could cripple the economy and take a whole generation to pay off?
In my view, it is only right that bank losses are absorbed first and foremost by those who took on the risk of funding the risky lending policies of the banks.
These are not just the ordinary shareholders (who could be given an opportunity to participate in the new “good banks” and recover some of their losses), but the professional investors from Dame Street, the City of London and Wall Street who own tens of billions in other forms of capital (such as dated subordinated debt) and long-term bonds in both banks. They did the lending and made the investments; they should now share in the losses.
Valuable Irish taxpayers’ money, on the other hand, should go into protecting Irish jobs and not into an international financial abyss. The Government should be seeking a better deal from our banking system; the Fine Gael proposal offers the way forward.
Richard Bruton is deputy leader of Fine Gael and the party’s spokesman on finance