I don’t say this very often but here goes. Fine Gael has put forward a very positive proposal regarding the banking crisis; and once teased out (and implemented) could see us jump free of this particular crisis and back on the road to economic activity (one crisis down, 99 to go). Fine Gael? Well, a good idea is a good idea – and hopefully this one will get legs.
Richard Bruton, writing in the Irish Times, laid out the bones of the proposal:
‘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.’
In many respects, this does the same thing as ‘bad’ bank proposals (or ‘legacy banks’ as Bruton calls them) in which all toxic assets would be placed. In this scenario, the toxic assets wouldn’t move – nor would the shareholders, creditors and senior executives – but everything else would; into new banks with clean balance sheets and no encumbrances.
Bruton claims it would be cheaper to capitalise new, clean banks than trying to, Sisyphus-like’, recacapitalise existing banks. He’s probably right. Davy Stockbrokers expects AIB and Bank of Ireland to write off €5.8 billion and €5.2 billion respectively over the next three years. That more than cancels out the Government’s recapitalisation – which is being kept deliberately low out of fear that a higher amount would effectively nationalise the two major banks.
And nationalisation, or public ownership, or public control is now the only option. Fine Gael accepts this, even if Bruton works hard to avoid using these phrases. For the establishment of ‘clean’ or ‘good’ banks is a bold interventionist initiative. It will be initiated by the state and funded by the state (‘Their capital would be provided by the taxpayer, hopefully with other private capital . . . ‘). In effect, it would be state-owned, at least in the short-term. Even sans the leftist phraseology, Bruton recognises what is at stake:
‘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 . . . 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? 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.
Well said. In fact, so well said one might be surprised that it came from Fine Gael. But we shouldn’t fall into the mistake of thinking that Fine Gael is merely an Irish articulation of Thatcherism. It is isn’t (would a real Thatcherite propose subsidising shareholders who took a bath on privatisation as Fine Gael did in 2002 for Eircom?). Yes, it is fiscally conservative; but that isn’t the litmus test of neo-liberalism. After all, their predecessors could quite easily reconcile a vicious policy that took a shilling off the pensioners, a Minister for Industry who said that people starving in the ditches may have to be price for balancing the budget, with the establishment of a state company, the ESB, to electrify the country when the private sector failed to do so (and be branded ‘Bolsheviks’ for doing so). Bruton’s proposal comes from that same vein. It’s not that he is espousing social democracy, never mind a leftist takeover of the commanding heights of the economy – but he is espousing good sense, even if of necessity.
Fine Gael’s proposals make for an interesting contrast with Labour, which published its own banking proposals. While there is much that is good here, the main problem is that it accepts the current framework or architecture. Labour will support the Government’s recapitalisation plan if it contains:
- dedicated pools of funds ring-fenced for lending to small business
- realistic and credible statement of the scale of bad debts
- a write-down of impaired assets
- a Banking Commission
- a cap of €250,000 in executive pay
- a full investigation of Anglo-Irish Bank, and
- a moratorium of two-years on family home repossessions (the Government is proposing one year)
- retention of building societies
All these should be implemented, post-haste. The core problem, however, is that even if the Government accedes to these demands, the €7 billion capitalisation will still fail, will still be a waste of money. Put another way, the house is beyond repair. We can re-roof it, remove (but only temporarily) the wet-rot, shore up the foundations – it will still collapse. Best to find new accommodation somewhere else and start over (in this respect, while Labour refers positively to ‘good’ and ‘bad’ bank proposals, it only suggests the Government ‘examine’ them).
Fine Gael understands the need for a completely new model under public accountability. And, going beyond declamation and mere opposition, has put forward a new framework – a new abode, if you will, to move the economy into. It doesn’t answer all the questions – no one Irish Times article can – but it addresses the fundamental issue in the banking crisis in a creative way.
It would be self-defeating to ignore it.