TODAY MARKS the first anniversary of the earthquake in the global economy that brought the Irish banks to the brink of collapse – the failure of US bank Lehman Brothers.
No one expected the US government and central bank, the Federal Reserve, to allow the fourth-largest bank on Wall Street, a 158-year-old institution, to go under. When it did, the impact was devastating, including for the Irish banks. Fear gripped the financial markets as depositors and investors, who provided the Irish banks with € 400 billion in funding that kept them in business, fled to safer havens.
Anglo Irish Bank, which had a heavy exposure to the faltering property market, was the most exposed. It later emerged that in the 12 days following the bankruptcy of Lehman, Anglo lost more than € 5 billion, a massive haemorrhaging of cash that no bank could withstand.
Banks worldwide could not take the pressure and governments stepped in to save them with multibillion euro bailouts. By September 29th, the future of Anglo Irish was on a knife-edge as its share price nose-dived. Forced to act, the Government decided against nationalising the bank fearing that a wider solution was required lest other Irish banks be targeted.
The Government agreed to guarantee € 440 billion of deposits and bonds to stem the loss of funding. The move restarted the flow of oxygen into a system gasping for funding.
One year on, what has changed? The benefit of the September 30th State bank guarantee has diminished dramatically over the last 12 months as the banks suffer under the drag of € 90 billion in bad and suspect loans, including the most toxic loans (to the property development sector), and concerns about whether the banks have enough capital to absorb spiralling losses on loans.
The Irish banking system’s reliance on the European Central Bank for the life support of discounted funding has surged over the past 12 months.
The Government has so far invested € 10.8 billion into Bank of Ireland (BoI), Allied Irish Bank (AIB) and Anglo, which was ultimately taken into State ownership after a spate of controversies brought it to its knees last January.
The heavy investment has proven to be insufficient and the purchase of € 90 billion in bad loans by the State’s “bad bank”, the National Asset Management Agency (Nama), will lead to further capital injections and to the State taking large shareholdings, possible majority stakes, in the two biggest banks, BoI and AIB.
Shareholders in the Irish banks have seen € 11 billion wiped off the value of their investments over the past year – in addition to just over € 40 billion already lost since bank shares peak in the first half of 2008 – though stocks recently recovered from last February’s unprecedented lows.
Top management at the banks has mostly changed, though many of the faces at the boardroom tables remain the same. At the six guaranteed institutions, five chief executives have gone or are going, and five chairmen have stepped down.
Under changes to Nama legislation, the Green Party is seeking a boardroom clearout of any directors appointed before 2008, which will lead to the departures of the up to 25 directors.
Bankers’ pay has been slashed as bonuses have been cancelled and salaries frozen. Performance-related pay fell 65 per cent in the year to the end of March. The country’s most senior bankers have seen their annual salaries halve to about € 500,000.
Almost 12 months after the guarantee, the Government has yet to remove the bad loans clogging up the banks and to address the shortage of capital that is forcing the banks to hoard cash and curb their lending at normal levels into a credit-starved economy.
One senior banker who has departed the scene criticised the pace of the Government rescue since the recapitalisation of the two main banks last February and for the failure to increase the supply of credit into the economy. “From February to now, there has been a vacuum,” he said. “This has caused huge uncertainty surrounding the banks and it has stigmatised the sector.”
More than 40,000 people work within the Irish banking sector and, despite the dramatic falls in activity across the banks, the reduction in staff numbers have been limited to recruitment freezes where departing staff are not replaced. The shrinking effect of Nama, which will cut the size of the lenders dramatically, will lead to mergers that will change the face of Irish banking and will lead to an estimated 5,000 job losses.
The sector has effectively become State-controlled. Economic nationalism across the banking world, sparked by the Irish Government guarantee, has forced foreign banks to retreat to their home markets and focus their lending on the very taxpayers who are bailing them out.
This poses a long-term problem for Ireland as competition wanes, leaving the domestic banks to carve up the Irish banking market for themselves, widening their profit margins and exposing customers to higher charges and fees on their loans and mortgages.
Larry Broderick, secretary general of the Irish Bank Officials Association, says there needs to be a radical restructuring of bank boards and financial regulation. “I believe the banks have not got the message. It has not yet sunk in that they have been bailed out – they are continuing as if it was business as usual.”
