Banks supporting homeowners and SMEs
Irish Banking Federation
Speech to Leinster Society, Chartered Accountants Ireland
Wednesday, February 10th, 2010
Last December 31st very few people were sorry to see the end of 2009. The year started badly – following the turmoil of late 2008 – and went downhill from there. Emergency budgets, rising unemployment, and cutbacks – there was talk of little else.
In short, it was a year of immense pressure and extraordinary pain: for the economy, for industry but – most importantly – for the people of this country.
2009 will be remembered as the year of bad news. Long-accepted wisdoms – about money, the generation of wealth, and even the basis of our economic growth – were turned on their head. And when they turned – and tumbled – they highlighted the fragility of our economy.
Long after our memories of the better times at the start of this decade have faded, our recollections of the recent 18 months will remain sharp.
However, we cannot become trapped in the past. What is important is that we learn lessons from our mistakes, and that we rebuild what has been broken. If 2008 was the year that things started to go wrong, and 2009 was the year of bad news, then 2010 must be the year that we start to put things right again.
That will mean different things for different sectors. For us in the banking sector, putting things right means getting back to the real business of banking.
Banking is many things. We have a diversity of expertise and experience within our sector. However, when I say that we need to return to the real business of banking this means a renewed focus on two key areas – working with SMEs and supporting homeowners.
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 some considerable attention recently. Throughout 2009 there was a drop in demand for credit from SMEs – in the nine month period to last September there was a decline of 23% in applications for credit. However, during the same time period at least three-quarters of all SME applications for credit were approved by Irish banks, notwithstanding the serious contraction which had taken place in the Irish economy.
That equals 70,000 approved credit applications and a drawdown of more than €2.6 billion in loans, finance and leasing in that period.
At an overall level the recently published independent Mazars report clearly highlighted that there is a very substantial €32.7 billion in total credit outstanding to SMEs which again reflects the sector’s view that we see SMEs as vital in driving future growth in our economy.
The IBF supports the independent Credit Review Process, established recently by Government. We welcome any fair and independent assessment of the supply of credit to SMEs and, indeed, the facts and figures regarding the viability and repayment capacity of business proposals from SMEs. The more transparency and scrutiny that exists in this key area the more likely we are to quickly rebuild trust which is vital to an effective working relationship.
The IBF also supports the concept of a Government-backed SME loan guarantee scheme and the role it can play in helping to underpin small businesses as they seek to manage their way through the current turbulence. The reality is that SMEs are vital in driving future economic growth in our economy, and the banking sector and Government have a responsibility to assist SMEs in this regard.
In addition, Ireland’s banks are working with homeowners who are in difficulty. Today, approximately 30,000 mortgage holders are being accommodated by their lenders in some form. All of the members of the Irish Banking Federation are working with their customers to stabilise the effects of 2009 and to rebuild in 2010.
We currently have various initiatives from Government and the Regulator and of course the sector itself which has committed not to take legal action where homeowners engage with their financial provider.
We in Ireland’s banking sector recognise that we need to look after people who have problems whilst retaining a pragmatic and sensible approach to our business. We will engage constructively and proactively – with the Minister and with other stakeholders – to develop solutions that are socially and economically responsible and which assist in the overall goal of economic recovery.
In these ways the banking sector is appropriately shouldering some of the burden. We’re working – with our partners, our customers, and the Government – to help the economy to move and flow, to support homeowners in difficulty, and to develop a stronger, better banking sector for Ireland as a whole.
However, just as we cannot become trapped in the past, we also cannot live entirely in the present. We also need to focus on the future.
For this future all sectors of the economy will have to adapt to our changed reality – banking is no exception.
From the outset, this means that Irish banking needs to seriously assess the model by which it operates, and from this assessment develop a new set of values – values that 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, moving beyond language, it is already informing our actions – today and for the future.
We must also recognise that Irish banks – and our international counterparts – are now operating in a changed world.
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 will never 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.
Ireland will return to growth; however, for the future, we will have to get used to lower rates of growth. 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.
In addition, I believe that Ireland now needs to seriously consider how to proceed in terms of our deeply-held obsession with property. There is no better time than now to raise this issue.
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.
To be clear, it must be recognised that supporting home ownership is a fundamental part of the banking business and will remain so. 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 be the norm – not the exception.
This, of course, will be in stark contrast to how these matters were dealt with in the recent past. However, it is also clear that the level to which the banking sector had invested in property in recent years has added considerably to the difficulties that Irish banks now face.
This is where a new approach to regulation has a real role to play.
It is very important that the key focuses for the new regulatory mandate 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 international financial services centre.
The IBF broadly supports the new regulatory structure being developed at national level. The appointments of both Patrick Honohan and Matthew Elderfield are both welcome, as is the decision to move the role of information and education for the public to the National Consumer Agency.
The approach being taken is welcome as it is seeking at the outset to get the balance right in managing what are competing concerns and mandates – market, prudential and conduct of business rules.
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.
This makes sense for all of us – the banking sector, the regulatory environment, and society as a whole.
Looking forward, the challenge for our country now is to create jobs. The extraordinary shocks that we have experienced in the recent 18 months 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 move away 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 itself is a key contributor in this regard. 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. IBF is actively involved with other stakeholders in promoting Ireland’s place in the global economy and as an attractive location for new business opportunities in international financial services with the right skill sets to drive these out. In this regard we particularly welcome provisions in the Finance Bill for the development of Sharia-compliant financing activities and for enhancing the remittance scheme to attract highly skilled individuals.
However, to capitalise on opportunities like this we have to be focussed 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.
We can’t be complacent and in reality we need to re-double our efforts to re-position the IFSC. In this context IBF are currently actively engaged with our key stakeholders to identify a suitable ambassador who would proactively champion the next phase of development of the IFSC in the key international markets.
Coping with the challenges of the year gone by has been the main focus of 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.
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.
For the future, I believe that the fundamentals of banking will return to our core functions – supporting SMEs and supporting home ownership. 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 – must be recast around the new needs of our changed world