Chartered Accountants Ireland Annual Conference
Turning the Corner
Friday, May 7th, 2010
Speech by Pat Farrell, Chief Executive, Irish Banking Federation
Every person in this room – and every person outside it – wants to move beyond the financial crisis. The uncertainty, the instability and the hardship that this period has brought with it has affected all of us – whatever we do, wherever we live, whoever we are.
To be blunt, these last two years have been a time of immense pressure and extraordinary pain: for the economy, for industry but – most importantly – for the people of this country.
We want to move on. And, for the future of Ireland, we have to move on. However, this can’t and won’t happen overnight. Moving on will take time. It will take work. And, it will take perseverance – and the determination to regain the trust that has been lost and rebuild the confidence that has been sapped.
I am very happy to be here today and to be speaking on the topic ‘Beyond the Financial Crisis’. It is vital for our economy and for our country that we look beyond our current problems, severe as they may be, and plan for a recovery that will lead to growth, stability and a return to higher employment and production.
However, to move forward tomorrow we must acknowledge where we are today. That means accepting that, by our actions in more recent times, the banking sector has suffered a major loss of confidence and trust across society. People are certainly disappointed in the banks for the contribution that we have made to the painful economic crisis that has gripped this country.
But, more than this, people are justifiably angry: angry that they, the taxpayers, have been called on to write a very large cheque to stabilise the banks: angry that, at a time of austerity and hardship, the banks have required this support; and angry that, as professionals, we did not see the trouble coming down the tracks.
Through the decades the banking sector has played a pivotal role in supporting businesses and consumers in Ireland. Now more than ever, we need to return to a stable banking system which can help viable businesses to deal with today’s challenges and which will support start-ups and SMEs – the future backbone of our prosperity. We need a strong banking sector which can support homeowners in difficulty. And we need a profitable banking sector which can repay the debt it owes to the taxpayer and to the country.
These three issues are critical to rebuilding trust and confidence, and I will address them one by one.
The first issue is lending to business. Businesses and SMEs are the backbone of our economy – they are productive, generate employment, drive exports and offer services in all parts of Ireland. And, with their range of activities, SMEs are a vital part of the banking business in this country.
The issue of credit for SMEs has received much attention recently. However, the most recent Mazars report on lending illustrates the level of financial support being provided by the banking sector to viable SME businesses. The report shows that almost €1.6 billion in loans was approved across 29,000 credit applications in Q4, 2009. This brought the total of credit outstanding to the SME sector to €32.3 billion. In addition, the report showed that four out of five applications for credit are being approved by the banks.
This does not negate the underlying challenging environment that many businesses are operating in today. Approximately one third of all SME loans are currently in the ‘impaired’ category, meaning that they are 30 or more days overdue. However, the remainder shows signs of stabilisation – which is very welcome – and it should be noted that almost half (48%) of all approved overdraft limits are unutilised.
We recognise that our sector has a real challenge to provide the necessary support for viable businesses up and down the country – particularly those in emerging industry sectors – and to invest in developing the sectoral expertise and services that Irish SMEs trading internationally will need. In a forthcoming article in our publication, About Banking, Enterprise Ireland Chairman, Hugh Cooney, writes that it is imperative that banks place themselves at the centre of an export-led recovery and future wealth generation by supporting sectors that will lead Ireland’s economic recovery: sectors such as clean technologies, medical devices, software, financial services, prepared consumer and specialist functional food, life sciences and high-level manufacturing.
For our part, we are fully committed to doing all that we can in response to the Minister for Finance’s recent request for the IBF to work with member banks and Enterprise Ireland in the development of sectoral expertise in the modern growth sectors of our economy; just as we have been working constructively to date with the various stakeholders on the Government’s Credit Supply Clearing Group.
The second issue is working with customers and homeowners. Today, Ireland’s banks are working with customers who find themselves in difficulty with mortgage repayments, and we have made a clear Pledge to such homeowners.
This Pledge makes clear that legal action to repossess a home will not be commenced by IBF creditors as long as the customer talks to the lender at the earliest opportunity. We want to make sure that a mutually-acceptable agreement can be agreed with any homeowner in difficulty, and that this agreement can be maintained and reviewed frequently. Representatives of the Money Advice and Budgeting Service (MABS) and the IBF, under the independent chairmanship of Prof. Martin O’Donoghue, are monitoring the application of this Pledge.
Communication is critical. All of our members are working with their customers to stabilise the effects of 2009 and to rebuild in 2010 and 2011, but customers in difficulty must communicate with their lenders.
The IBF has also established a new website – www.helpinghomeowners.ie – which has been developed to provide information and guidance to mortgage borrowers who may be experiencing financial difficulties. The initiative is in partnership with the country’s 12 mainstream mortgage lenders.
In addition, a Protocol on Debt Management agreed between the IBF and MABS enables IBF creditors and MABS money advisers to work together effectively to help personal customers to address and manage debt problems and, wherever possible, to formulate a mutually-acceptable, affordable and sustainable repayment plan.
The IBF welcomes the establishment by Government of an expert group to examine the issue of mortgage and consumer debt and to make appropriate policy recommendations. We are participating directly in the work of the group and bringing our experience in the development of debt management solutions for consumers to the group for the benefit of all participants.
The third issue is repaying the debt that is owed to the taxpayers by those institutions that have benefitted from government recapitalisation. This will be critical for the future standing of the banking sector. Over the coming years there will be a clear, continued focus on the steps being taken by the relevant institutions to repay the substantial support that the taxpayers of this country have extended to them.
Repaying this debt will be possible when the banking sector stabilises, the economy grows and the international financial and economic situation improves significantly. Repaying this debt is an obligation that is keenly felt by all concerned.
Each of these issues is significant. They cannot be addressed in isolation from one another and they cannot be addressed overnight; nor can they be allowed to overwhelm us. However, whilst addressing these three key issues, we must also focus on the future.
In the years ahead, all sectors of the economy will have to adapt to our changed reality – banking is no exception. Through decades of economic development in Ireland the banking sector has been a pivotal and driving force, and in the years ahead a renewed and reformed banking sector will be instrumental in Ireland’s recovery and renewed prosperity.
From the outset, this means that Irish banking needs to seriously re-assess the model by which it operates, and from this assessment develop a new set of values – values which reflect that we appreciate the impact of our actions: not only on the bottom line, but on taxpayers, families, consumers and broader society.
At its heart, this means that the banking sector needs to be more caring of the consequences of its activities. This – undoubtedly – is new language for banking, but it is appropriate language. And, we must also recognise that Irish banks – and our international counterparts – are now operating in a changed world.
Recognising this, we now should consider what the future banking sector will look like? What impact will regulation, future growth and the cost of credit, the need to balance investment, ‘smart’ and ‘green’ economy developments and financial market innovations have on our banking sector, and banking internationally?
Firstly, regulation has been much discussed in recent months. The IBF broadly supports the new regulatory structures being developed at national level. Earlier this year, we welcomed the appointments of both Patrick Honohan and Matthew Elderfield, and also welcomed the decision to move the role of information and education for the public to the National Consumer Agency.
The Minister for Finance and the Financial Regulator have set the ground rules on the recapitalisation of our banking system – which is necessary to create fully functioning banks that are fit to drive and sustain economic growth. This is a real challenge for the banking sector, but one with which it must work as a platform on which to build out a successful future. And that future can best be secured with the assistance of a competitive banking sector that is commensurate with the needs of an economy in growth again; a competitive marketplace in which a diverse range of providers vigorously contest the market by offering distinct value propositions and real choice across all segments.
It is very important that the key focuses for the new regulatory approach are financial stability, effective prudential and market supervision, and consumer protection. Each of these must be delivered through a regulatory approach that fosters a competitive domestic economy and underpins the reputation of Ireland as an attractive location for international financial services.
It is also important that the cumulative impact of all of these measures are carefully analysed and calibrated, so that we do not dampen or unnecessarily constrain badly-needed economic recovery. As the International Monetary Fund has clearly stated recently: “In moving forward with regulatory reforms to address systemic risk, care will be needed to ensure that the combination of measures strikes the right balance between the safety of the financial system and its innovation and efficiency” – and by extension its lending capacity.
All of this is with a view to making sure that history does not repeat itself. The checks and balances that were missing or inadequate in recent years should be strengthened. Put simply, we need to make sure that we ask ourselves the tough questions when tough questions need to be asked – the type of questions that we didn’t ask during the boom.
Secondly, the remarkable levels of growth that this country enjoyed in the earlier years of this decade were fuelled on the easy availability of cheap credit. This has changed – credit is unlikely to be as cheap again. And, along with requirements on the banks to hold more capital, this will impact on how we live in the years ahead.
The banking sector has no option now but to price appropriately for risk and the inevitable consequence of this will be higher levels of interest rates which have been artificially low in Ireland for some time now. The provision to customers of products and services at prices that scarcely cover costs is no longer sustainable. Unless banks price commercially they will not return to profitability and will not be the engine for growth that the economy so badly needs or indeed be able to repay the capital they have received from the Government and the taxpayer.
Ireland will return to growth; however, we will have to get used to lower rates of growth in the future. The circumstances – and the fuel – which drove the turbo-charged growth of our recent past no longer exist.
This needs to be understood – by us, by our partners and customers, by the Government and within the real economy.
Thirdly, it has become abundantly clear that investment in the construction sector was disproportionate in recent years especially, leading to serious issues that we are dealing with day-by-day.
Ireland’s construction sector will never again – and must never again – make up a quarter of our economy. The extraordinary extent to which our economy was supported by the property sector has made the recent decline all the more serious. This has to call into question the level of funding that will be available for development in the future.
Supporting home ownership will remain a fundamental part of the banking business. However, lending for second, third or fourth properties will have to be scrutinised to a far greater extent, and negative responses to requests for credit in these circumstances may become the norm in the years ahead – not the exception.
This, of course, will be in stark contrast to how these matters were dealt with in the recent past. However, the level to which the banking sector invested in property has added considerably to the difficulties that Irish banks now face. We must never again be faced with a similar situation.
And, finally, the impact of the ‘smart’ and ‘green’ economy and financial market innovations will also shape the banking sector of the future.
Looking forward, the challenge for our country now is to create jobs. The extraordinary shocks that we have experienced in the last two years have highlighted the weaknesses in our economic model, and have driven up unemployment. This has caused – and is causing – great hardship to many people in all parts of the country.
Banking has a real role to play in moving Ireland forward. A shift of focus from property-based speculation will actually allow for us all – both the banking sector and the wider economy – to focus on new developments in the ‘smart’ and ‘green’ economy which could actually deliver sustainable, reasonable growth and the jobs we badly need – in the medium to long term.
Financial services can make a considerable contribution. Ireland has had significant success with the IFSC model, but we now need to further develop the centre to meet the needs of a changed world. One such development is the growing requirement for Sharia-compliant funds, which the IFSC is excellently placed to manage.
However, to capitalise on opportunities like this we have to be focused on the future. If we allow ourselves to be trapped in the past then this – and other developments that present Ireland with great opportunities for employment creation – will be snapped up by the financial and banking sectors in other countries.
Coping with the challenges of the recent two years has been the main focus for us all – that is easy to understand. However, the new challenge is how we move forward, how we rebuild and repair in a way that allows for responsible growth, stability and job creation.
It is right that we should look to the future. In addition to responding to the immediate problems that we face, we must plan for the development of a strong, viable and profitable banking sector. This will be vital for our future economic development, for SMEs in all parts of the country, and for the families and individuals who bank with us.
To do this, everything must be on the table and open for discussion – the values by which we operate, the type of regulation that is put in place, and the direction in which we want to develop our banking sector and the entire economy. Only with this open engagement will trust be rebuilt and confidence be restored, allowing us all to move forward.
Looking beyond the financial crisis, I believe that the fundamentals of banking – such as supporting SMEs and supporting home ownership – will return to renewed strength. And, in addition, the role of the banking sector as innovators – and as a sector that can open up new opportunities for the economy as a whole – will be recast around the new needs of our changed world.