Banks Preparing for the Credit Guarantee Scheme

The IBF and a number of the country’s leading banks have been working closely with officials in the Department of Jobs, Enterprise and Innovation and with the scheme operator, Capita Asset Services, in preparing for the successful delivery of the Credit Guarantee Scheme which the Government has launched today. Work by banks is ongoing in preparation for the Scheme going live next week.

The Credit Guarantee Scheme and the recently announced Microenterprise Loan Fund both have the potential to address the demand for credit from small businesses and microenterprises that do not satisfy conventional bank lending criteria. The IBF is committed to working with Government in support of these important initiatives and to continuing its focus on reinforcing and enhancing the bank-SME relationship.

Central Bank data confirms that banks provided some €2.1 billion in additional lending to core SMEs in the past twelve months. Banks are supporting viable businesses and IBF strongly encourages SMEs to apply for credit where they believe they have a sound business proposition.

IBF President sets out path to restoring confidence and rebuilding trust

Welcome Address to the IBF Annual Conference 2012
John Reynolds, IBF President
and Chief Executive, KBC Bank Ireland

Thank you Richard and good morning Ladies and Gentlemen. 
I am very pleased to welcome you to this IBF National Conference. I wish to thank you for attending in such large numbers from across the banking sector and beyond – a clear indication of the seriousness with which you regard our theme, Restoring Confidence, Rebuilding Trust. I am particularly grateful to Minister Pat Rabbitte for opening proceedings, stepping in as he did at short notice in place of his Government colleague, Eamon Gilmore, Tánaiste and Minister for Foreign Affairs and Trade, who has had to travel to Brussels to attend a number of important Ministerial meetings. The Minister’s opening address has established a good context for our deliberations this morning.

The beneficial impact of the Government’s corrective measures to recapitalise and restructure the domestic banking sector and to address the public finances is evident internationally in the reduced cost of borrowing and domestically in renewed growth in key sectors of the economy.

The cost to taxpayers of the State’s bank recapitalisation programme and the daily challenges faced by banks’ personal and business customers in the current economic environment are of a scale previously beyond contemplation. The banking sector’s role in the unfolding of these circumstances is a cause for profound regret and acknowledgment. In the circumstances, it is understandable and correct that much of the focus of public debate has been on the wider social obligations banks should have – not just in respect of their customers but the wider communities in which they operate. This is indeed a valid standpoint but it needs to be considered hand in hand with the question of sustainability. Our banks cannot be socially sustainable if they are not first economically sustainable. And it is only by being economically sustainable that banks can be purposeful in terms of their central role as the facilitators and drivers of economic activity and growth. The path to economic sustainability however must be an enlightened one where social considerations are taken into account. The banks are, as they should be, devoting huge resources to customers in difficulty and while the results of this engagement are frustratingly slow to be evident in published statistics due to the scale of the problem, the measures being taken will prove to be effective in addressing the majority of difficult situations within our communities over time.

To become economically sustainable again, banks here and elsewhere need to appropriately re-price their raw material – money – to reflect costs, risk and margin. The fact that they have not been doing this in the past is evidenced by many instances today where advertised deposit rates exceed lending rates and is reflected in the fact that average net interest margins for banks here are at unsustainably low levels long term. Banks continue to re-price and to rebuild net interest margins in their efforts to return to profitability and long-term sustainability.

However, economic sustainability is not just about pricing, it is also about cost management and containment. In line with the realities of the post crash market place banks here are finding it necessary to restructure their operations to make them sustainable in a new era. A much lower cost base is required to support smaller balance sheets and lower volumes of business and this is inevitably leading to a reduction in staffing levels and other support resources across the sector. At the same time, a de-leveraged balance sheet is a requirement of today’s prudential regime. Deleverage is necessary because on the one hand, money markets will no longer support banks’ balance sheets to the extent they did in the pre-crash era. That funding is simply no longer there. Secondly, all banks need to replenish their capital reserves supporting their balance sheet, whether to repay taxpayers who bailed them out and/or to facilitate future growth in a tougher regulated environment requiring much higher capital ratios.

Of course, banks can only be as sustainable and as sound as the economies in which they operate. This consideration often seems to be lost sight of in the ongoing debate – here and abroad – around the vexed issue of bank support for small and medium sized businesses.

The unfortunate reality is that the level of financial distress across the SME sector in Ireland is at an all-time high and there are multiple factors at play to account for this. Many business owners have seen demand for their goods and services shrink in line with a dramatic decline in consumer sentiment and general purchasing capacity across both the public and private sectors. Many have seen default or slow payment by debtors. In some sectors over capacity is a major problem. Many owners of good solid SMEs engaged in speculative property investment during the growth years. The resulting entanglement of this latter business with the wealth producing business is a drag on the overall credit worthiness of the business and must be factored in by banks when making credit decisions. In none of these cases is the extension of credit a panacea for the fundamental and underlying problems in the business.

The unique role which SMEs play in the Irish economy is unquestioned and they deserve the maximum support possible from the banking sector. It is for this very reason that banks have reaffirmed their commitment to maximise the supply of credit to viable businesses with a sustainable future. As part of this commitment, the pillar banks have restructured their business lines to ensure that Government lending targets are met and to date they have succeeded in this regard.

More broadly, our business lending banks have a renewed commitment to promoting productive SME customer/bank engagement, shifting the focus to cash flow lending, increasing their understanding of some of the new growth sectors and rebalancing the debt/equity ratio. With regard to this latter point specifically, it is notable from ECB data produced earlier this year that the dependency of Irish SMEs on bank overdrafts and loans is amongst the highest in the euro area. The scope for a greater role for equity finance and other sources of finance is an area that merits closer collective consideration.

Dublin Chamber of Commerce President, Patrick Coveney at the Chamber’s Annual Dinner last Thursday evening invited stakeholders: banks, government, Central Bank and representative bodies to convene in a constructive forum to determine where realistic progress can be made in the area of business credit. We in the IBF welcome such an engagement and are willing to assist in liaising with stakeholders in that regard.

In the meantime, the level of interest shown by banks in two related professional training programmes – the Professional Certificate in SME Credit and Assessing SME Viability in a Distressed Economy – recently launched by the Institute of Bankers is further testament to their commitment to the bank/SME relationship.

The provision of mortgage credit is another area in which much heated debate has been generated, essentially around the following key question: Is current lending activity the result of subdued demand or restricted lending? We remain firmly of the view that it is primarily an issue of demand as determined by such factors as consumer sentiment, employment prospects and perceptions as to where house prices are going. The new property price register is welcome in providing helpful transparency here and the IBF will shortly commence publication of a new lead indicator on the level of mortgage approvals which should help to provide further insight into trends. As in the SME sector, the level of lending reflects the environment in which we find ourselves. That said, the most recent IBF/PwC Mortgage Market Profile has shown evidence of stabilisation in mortgage market activity, while recent commentary from property economists has signalled some stabilisation in house prices. The next set of mortgage lending data will be awaited with added interest.

The interdependencies between the banking sector and other key players in the economy is such that banks rely significantly on policy makers, legislators and regulators to facilitate an environment that is economically healthy and sound. However, the collective confidence that is a prerequisite for renewed growth is a shared responsibility.

We have signaled our areas of concern in regard to the impending insolvency legislation. We have been clear that the €3m limit is too high for legislation that purports to support people staying in their homes. We think it must explicitly discourage those who won’t as opposed to can’t pay so as to avoid the majority ending up paying for the minority. Our position on this, is so as to ensure, that there is a sustainable finance market in the future while recognising that legislation is necessary to assist the genuinely needy. We also point to the need to address once and for all the unintended consequences of the Justice Dunne decision.

We have to continually deliver on our commitment to making things better and, in doing so, to believe that other parties will reciprocate accordingly. For, if we don’t, we could find ourselves in the situation described earlier this year by John Gapper, Associate Editor of the Financial Times when he wrote:

“Unless they (banks) can find a way to demonstrate their usefulness clearly, and to curb the practices that most alienate outsiders, banks face a long, debilitating trench war against new regulation. For economies, this could limit the beneficial aspects of a thriving and focused financial sector.” [10 Jan’12]

In the area of mortgage arrears management the IBF and its members have devoted considerable resources to supporting borrowers in difficulty – having already restructured some 85,000 mortgages. We are now intensifying our focus on the following key actions.
• We are piloting and implementing new loan modification and resolution measures as recently proposed to the Central Bank in accordance with each bank’s Mortgage Arrears Resolution Strategy (MARS). In line with the recommendations of the Inter-Departmental Mortgage Arrears Working Group (Keane Report), these measures will help to maximise the number of customer mortgages that can be sustained over time.
• We are rolling out comprehensive outreach programmes to communicate and liaise with customers who are or may be experiencing difficulties with their mortgage repayments and to strongly encourage early customer contact with their lenders.
• We are supporting the operation of the independent Information and Advice Service for mortgage customers in arrears and working closely with the Citizens Information Board in the marketing and provision of this service through a number of channels – including a website and a telephone helpdesk. The sector will also support the independent delivery of a face-to-face advisory service to mortgage arrears customers.
• We are preparing staff, systems and processes for the forthcoming personal insolvency and bankruptcy regime.

With regard to support for small business and microenterprises we have been working on a range of initiatives to support the bank/SME relationship, which includes the following.
• We are strongly encouraging the use by city and country enterprise boards and other relevant parties of the Business Plan and Cashflow Guidance for SMEs and mircroenterprises which we developed with the various accountancy bodies (CCAB-I). The feedback has been very positive indeed.
• We are promoting awareness and usage of , the new website which we jointly developed with Chambers Ireland as a comprehensive source of information on small business finance. The most recent statistics show a further significant uplift in the use made of this resource.
• We are supporting and assisting the government in the implementation of the Credit Guarantee Scheme and Microenterprise Loan Fund – together with exchequer money, this fund is being part-financed by a number of banks.
• We are facilitating the use of the standard credit application form which the Credit Review Office developed with our assistance. This form has streamlined the application process for credit applicants.

This is simply a flavour of the collaborative work in which the IBF and our members are involved in conjunction with various stakeholders. Our work agenda has never been greater or more important. And as we face into Ireland’s Presidency of the EU, this agenda will further intensify around issues that will have particularly significant implications for Ireland: including proposals on a banking union and the European Stability Mechanism, on a crisis management framework and resolution mechanism, on new liquidity and capital rules under CRD IV, as well as on deposit guarantee schemes.
To conclude, I believe that we will successfully build, step by step, on the progress that has been made to date in restoring confidence and rebuilding trust in our sector. With the considerable and valuable assistance of governments and taxpayers, our banks have been put on a much sounder and more stable footing. Now it’s over to us to demonstrate that we can take this renewed lease of life and put it to good, purposeful use in the interests of our customers, our stakeholders and the wider economy. How can we best do that? And how can we get the balance right between the various interests to whom we are accountable? I look forward to hearing some interesting insights in the course of this morning on these and related questions from our strong line-up of speakers. I wish to thank them for giving us their time and their thoughts.

I would also like to thank those of the IBF staff who organised today’s event and to our sponsors – PwC, Accenture and HP – for helping to make it happen.

Thank you for your attention and I wish you a productive and successful conference.