Govt intervention must ring changes for banks

Ireland"s banks have lost as much as €56 billion of their market capitalisation since the stock market peak in the early months of 2007. Everyone is now aware that the country"s major financial institutions face huge bad debts on their loan books from property-related lending to developers and builders, but the market is still telling the banks it does not believe they are coming completely clean with the black holes on their balance sheets. With the collapse in property prices, banks are having to face up to the fact that they are going to have to write off tens of billions of euro in bad debt. With their existing capital having disappeared, they are unable to lend and so must seek a substantial fresh injection of new capital to oil the wheels of lending once again. This, in a nutshell, is what lies behind this week"s plan by the Government to belatedly recapitalise the Irish banking system. The move is aimed at primarily restoring confidence in the banks and to encourage them to lend funds once again to businesses which are hurting because of a lack of liquidity. One plan is to use up to €10 billion of the €18bn stashed away in the National Pensions Reserve Fund, alongside new private investors and existing investors, to pump money into those banks that want it. Galling as it may seem to some, given that unwise and apparently unregulated lending practices by the banks during the years of Ireland"s boom have got the country into this mess, banks do attract a special status in any economy and that is why they are being bailed out when other companies would be allowed to fail. Simply, the economy cannot function without access to the credit they provide. However, this benign attitude by the Government brings with it special responsibilities and the cash injection being contemplated must come with strings attached. Certainly, loosening up of credit must occur rapidly and there must be proper monitoring, transparency and oversight by any new investors. The banks must be run on a proper commercial basis if they are being effectively part-nationalised, but must also be managed independently of politicians. There are still many questions which surround how the scheme will work in practice. It has been variously described by the Opposition as lacking in detail and being vague. It may be short on detail but most economic commentators agree this recapitalisation project needs to be done. Before any Government economic recovery plan can hope to work, the Irish banking system must be out of intensive care and able to breathe again without the aid of a respirator. A vibrant banking sector is vital to the effective functioning of business and a successful recapitalisation of the country"s banks will ideally create badly needed stability and allow companies, especially those in the SME sector, access to finance once again. With a weakening world economy, falling asset prices, tightening credit and declining confidence, firms and consumers are unwilling or unable to spend. Banks hoarding what cash they hold and scaling back lending is good for no-one. The Government has not indicated the banks in which it will invest nor whether it will force individual institutions to merge as the price to pay for the support of taxpayers. However, it will surely demand changes into how banks in this country go about their business in order to prevent the 'eggs in one basket" philosophy which was allowed to go unchecked for years in Ireland - where loans were thrown at developers as soon as they walked in the door even while property prices were dropping - from happening again. Those changes should also include the removal of senior management figures who presided over this catastrophic implosion of the financial system and which has brought about a collapse in share prices and a wipeout of wealth for many investors, particularly pensioners. Falling on their swords would be a more honourable exit at this juncture than the unedifying spectacle of bank bosses desperately clinging on in the hope of survival before being ignominiously but inevitably booted out by their boards.