Not Too Late To Save Public Banking

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From top: AIB and Permanent tsb remain in state hands;; Michael Taft

It is curious how little debate there has been regarding Ireland’s banking system (apart from being scandalised by continuous scandals).

The bank guarantee was brought in practically overnight while the Dáil debate over the nationalisation of Anglo-Irish took only six hours.

On the other side of the crisis there has been little debate over the privatisation of AIB and Permanent TSB. It seems that, when it comes to banking, we proceed by reflex.

Well, it’s not too late to start that debate. And it’s not too late to champion the cause of public banking. What are the advantages of public banking?

First, while operating in a competitive commercially environment, it is not bound by short-term shareholder value. This frees the bank to engage in longer-term lending with patient capital.

Second, it can be rooted more locally with a mandate to lend into the productive economy – businesses and households; steering away from property and financial products.

Third, through decentralisation it can engage in relationship-based lending based on knowledge of local markets and individual borrowers (advantaging SMEs), compared to transactional-based lending with its centralised and near-algorithmic approach.

Fourth, public banks can be more amenable to political scrutiny and public accountability. A case in point is the current debate over the sale of mortgages to vulture funds.

Fifth and most importantly, would be its governance. The New Economics Foundation has proposed a trustee-based model to transform RBS into a local public bank. It would look like this…

The Board of Trustees – made up of employee, public appointees, and business and consumer representatives -would be responsible for overall policy while the Management Board would be charged with day-to-day implementation of that policy.

There are other potential positives:

A public bank could be regionally based focussing on activities in the province they serve (e.g. Munster, Connaught). However, even within the province the banks could be branded in a way to show their commitment to the local areas (e.g. Bank of Kerry, Bank of Offaly, etc.).

The Central Bank has acknowledged continuing problems with ‘banking culture’ and if this 18th century pamphlet – Observations on, and a Short History of Irish Banks and Bankers – highlighted by Diarmaid Ferriter is anything to go by this is a long-term, probably endemic issue.

‘ . . . the abuse of the public confidence by bankers . . . the fatal calamities which have befallen this kingdom by the abuses of private banking . . . is there an evil, which can arise from the monopoly of money, which they have not produced? And how partial the little good which the community has reaped from them . . . the public can never rely upon the fidelity of bankers under the present regulations’.

Regulation can go far, but only so far. A public bank can provide competition with private banks on many grounds; in particular, ‘culture’, emphasising customer relations and service.

A re-investment in regions and communities could be undertaken by opening up branches – but doing so in imaginative ways. These branches could be one-stop shops housing post-offices, credit unions, MABS advisory centres, etc. This could be combined with community out-reach programmes such as local financial-education initiatives.

To provide for democratic input, customers could elect their consumer representatives on the Board of Trustees through postal ballots. With public banking there is any number of initiatives and practices that could be considered to democratise this space.

Some would point out that we have had two banks under public ownership for years and nothing on this scale has emerged. That is true but the state, while ‘owning’ the banks, never acted like an owner.

The state acted more like a concierge, opening the door and tipping their cap to any investor who happened to wander in. T

he day after these banks were brought into public ownership, the state plotted to get rid of them. We had public ownership but not public banking.

As to whether AIB or Permanent tsb should be the public bank of choice needs to be discussed. AIB might be a better fit given its size and reach throughout the country.

Or it may be decided that a smaller option – with the ability to grow – would be preferable; thus Permanent tsb. There are pluses and minuses with both; for instance, both banks have high levels of non-performing loans, but Permanent tsb’s profile is higher.

In both cases, consideration would have to be given to buying back the shares sold to private investors. This would be an upfront cost but one that could be paid for by removing the banks’ ability to carry forward losses and write them off their tax bills. This is another dubious cash subsidy to banks which are directly responsible for their own losses.

There is one more objection: if either bank remains in public hands, how would we recoup the bank bail-out subsidies which, in the case of AIB, is considerable (approximately €10 billion is still outstanding)? There are two responses:

First, one may recoup the full-cost of the bail-out but there may be a bigger long-term price; namely, that selling the bank back to the same class of investors imbued with a short-termist perspective, the wider economic benefits would be lower than a public bank. That we cannot immediately monetise that difference doesn’t mean it wouldn’t have a real, negative impact.

Second, the public bank would still be required to pay back the bail-out subsidies but over a longer-term, with the repayment constituting a type of ‘bail-out dividend’.

None of this is straight-forward nor open to easy answers. That is why we need a full and detailed debate. Let’s have the Oireachtas hearings, let’s examine models that work in Europe and the US. If there is an argument that privatising the two banks can still meet the goals of a public bank, let’s give it consideration.

The Left should not be silent on this or let the issue pass by default. If we’re talking about an economics of recovery, public banking could be a crucial element in that.

But most of all, let’s have the debate. For once the two public-owned banks are privatised, it will be even more difficult to argue the case for, never mind introduce, public banking.

Michael Taft is an economic analyst and author of the political economy blog, Notes on the Front.


56 thoughts on “Not Too Late To Save Public Banking

  1. qwerty123

    I think that should be an option and a rival to the private operators. Not the only show in town. However, the issue in Ireland is lack of competition mainly due to the legacy of the crash. New operators are not entering as if a borrower defaults there is sweet FA they can do if it is a family home.

    I always notice people never mention the bail out of BOI, where the state made a profit on the bail out, I would say similar will happen with AIB.

    Also, credit unions fill a lot of the above space, apart form mortgages, but look at the complete mismanagement of these over the years!!

    1. Aaaa

      Wasn’t the BOI bailout only ‘profitable’ due to NAMA taking the loss on the under performing loans? I always understood it that the government ‘bought’ BOI after NAMA had so kindly taken all of the toxic stuff out of it. Then the government technically made a profit, if you count NAMA outside the whole thing. Which it obviously isn’t.

      1. b

        I guess that’s true, but considering NAMA is ending up in surplus too, the point is probably valid that the bailout of BOI made money

      2. qwerty123

        Nah, government brought pref shares at x, sold for y. y was greater than x to the tune of 50%. Made around 2bn on it. BOI sold loans to NAMA in its own right. So the loss would be on BOI’s books at time of transfer. Since then BOI has done very well for itself. NAMA is also going to be in surplus too.

        1. Cian

          BoI ‘sold’ €1.93bn worth of loans to NAMA for €1.26bn (35% discount) in April 2010. So BoI made a loss of €670m on these loans.

          1. Cian

            @qwerty123: sorry, it wasn’t a dig.
            I was trying to say (badly) that that the €2bn the government made on BoI was a hell of a lot more than the €670m that BoI lost on property that eventually went into NAMA.

        2. johnny

          it was 16 BILLION of loans,purchased by NAMA at various dates not 2!
          the impairment/loss were crystalized in year off purchase by NAMA.

    1. b

      I would like that too, but that’s incompatible with wanting public owned banks and preventing a lender having recourse to the property in case of default.

        1. Rob_G

          I imagine that our interest rates are so high precisely because our rate of repossessions of properties with delinquent mortgages is so low.

          If people don’t pay their mortgages, the banks need to get the money from the people who do pay.

          1. Rob_G

            Low relative to other countries in the EU.

            Repossessions in other countries take a few months, rather than a few years; as a consequence, the cost of lending is lower.

          2. Rob_G

            Well, perhaps no-one has told you, but Ireland is in fact in the EU…


            We have much higher rates of mortgage arrears as people realise that even if they stop paying the mortgage, they are unlikely to lose their home (at least not for a very long time).

            The money lost on these non-performing loans has to be made up somewhere; so everyone on a variable rate mortgage ends up paying it.

        2. johnny

          its hardly news that there’s an arrears issue due to awful,careless underwriting and negligent lending,no data on repos/foreclosures in your link.
          the bankruptcy laws are more borrower friendly in EU/UK why not compare them ?
          why would a new lender contemplating entering the market give a sh*t about legacy loan issues from bad and negligent lending practices ?

          1. Rob_G

            “no data on repos/foreclosures in your link.”

            – there was loads(?)

            “why would a new lender contemplating entering the market give a sh*t about legacy loan issues…”

            – lenders know that, in the event that a borrower stops paying their mortgage, it will take years for the property to be repossessed, if at all. Why would they want to enter the Irish market while there are other markets where the risks are way less?

          2. johnny

            the data was relating to arrears NOT foreclosures/repos nor was there any comparison to other EU members.
            this may come as news but lenders DON’T contemplate not getting paid back when they approve a loan,they accept as part of turning on the lights a certain level off non-payment,but they don’t exactly plan for it,its called underwriting.
            if they are that concerned about non-payment whereby they are studying repossession/foreclosure levels from simply awful legacy,lending practices don’t make the loan……

          3. Andy

            Why would a new entrant enter the irish market?

            1. The market is tiny- only 4.5mm people with two incumbent large domestic operators.
            2. It costs a fortune and takes an age to repossess a house when a borrower defaults.

            Your comment that Bank’s don’t consider legacy defaults or arrears when considering launching new products is rubbish.
            1. Historical default rates are used to calculated the go forward probability of default. Whether that be at a point in time or through-the-cycle analysis.
            2. (a) The legal, operational & recovery costs incurred to realize collateral and (b) the time it takes to recover the final net collateral proceeds from the date of default, are used to calculate Loss Given Default.

          4. johnny

            it is/was a black swan event,why are there so many commercial lenders,many are new entrants,given the much higher historical default rates ?
            most of the products like subprime or very high leverage loans have been discontinued,do you think banks contemplating making loans study that data ?

          5. Andy

            Because commercial lending is largely individual investment risk versus consumer lending which is portfolio regression and diversification based.

            Because commercial lending is so much easier than consumer lending. Average ticket sizes are way higher – easier & cheaper to do 2 x €2mm loans than 10 x €400k loans.

            Because they’re largely lending on investment & commercial properties which requires much less work than lending to a consumer or a business. Both from a regulatory & reporting perspective and from an actual underwriting & risk management perspective.

            Because they’re not competing on price. They’re competing on terms & conditions (LTV’s, interest only). Add in they’re charging arrangement fees on all deals which makes a big impact on cash ROEs.

          6. Johnny

            Thanks for the eh insights,still don’t understand why you think historical loan default data from subprime,high leverage,bubble lending is a criteria utilized by lenders today-it’s not.

          7. Andy

            What sub prime?

            PTSB was a prime lender. So was AIB & BOI. The PTSB mortgage book being sold is comprised of former “prime” consumer mortgages, BTL mortgages & SME loans that have gone bad.

            Are you suggesting that only subprime went bad? Also what’s you definition of “High leverage” – currently FTB LTV’s are permitted up to 90%. Is that high or low leverage to you?

          8. johnny

            lost me-lot off the loans that went bad were the result off predatory lending,lose credit and high leverage,ah the good old days:)
            lenders do not base decisions made today on the performance or otherwise of these ‘bubble’ loans-sub-prime,ninja etc
            existing borrowers or new borrowers are not penalized by lenders,via higher rates due to historical loan performance metrics or difficulty with foreclosure/repo legislation,they are myths or urban legends perpetuated by financially illiterate commentators.
            theres no ‘shame’ in not paying your mortgage,it happens for lots reasons.

          9. Andy

            Mate, you are spoofing.

            When someone reaches phrases like “predatory lending” you know they’re talking through their hat. Ninja mortgages were a US phenomenon; nothing to do with ireland. PTSB was a prime lender. Not a subprime or predatory lender.

            If you honestly think lenders don’t conduct portfolio modeling using empirical data for high volume products (mortgages, credit cards, unsecured personal loans) and include assumptions for foreclosure and recovery times & costs and portfolio seasoning data (based on their existing book) then you’re away with the fairies.

            Hell, just look at the S&P RMBS ratings methodology for ireland – assumed foreclosure period is 42months, foreclosure costs are 7% of loan value. Look at the accounting section of any bank 10k or annual report – it’ll explain how they derive their general or unreported loss provisions.

            Anyway, keep up the good fight. You seem to know best

          10. Johnny

            Who is Springboard Mortgages ?
            When was the last time an irish bank securitized irish resi mortgages?
            Of course they use data,but not the data your referencing.
            Given all this wonderful analysis it’s amaxing they managed make such a b**ls off it,did the models not work ?

  2. Jake38

    A public bank means political control over lending etc. In this country that would be a disaster. A public bank would quickly become a monstrosity of incompetence, political chicanery and public service torpor on the scale of the HSE.

    The appalling performance of private banks in Ireland can only be addressed when it’s clear to those who work in them that they and the bank will be let go to the wall and/or prison next time they screw up.

    1. Cian

      Anybody remember a previous Taoiseach that got hundreds of thousands of loans written off (worth over a million Euro in today’s money)?
      How would you prevent this happening in a State-run bank?

  3. Cian

    If the State tried to do that they not would be in breach of EU competition laws and state aid laws? “Under EU law, state aid is illegal where it tends to distort normal competition in markets for goods or services.”

    NAMA was brought to the European Union competition directorate by the building industry when they (NAMA) tried to start building 20,000 houses (aside: the builders lost – but it’s a minefield).

    1. johnny

      B*llocks, Agricultural Credit Corporation (Corparáid an Chairde Talmhaíochta),was govt owned and operated successfully for years.

        1. johnny

          most what you post is based on a quick ‘google’ search,look up public banking in Irl.
          EU comp law has fupp all to do with it,asTaft pointed out this will be govt owned/run so logically non competitive-duh !

          1. Cian

            non competitive? Taft explicitly states “A public bank can provide competition with private banks on many grounds”.

            If it is lending money at a cheaper rate than the private banks (it can afford to do this because it doesn’t need to pay shareholders) then it is undercutting them and that is State Aid.

            “this will be govt owned/run so logically non competitive-duh !” again with the childish insults?

            Please explain how you got from ‘govt owned/run’ to ‘non competitive’?

          2. johnny

            ok then what is state aid is this ?
            “The interest rate represented a subsidy. I cannot understand why this is not a factor, given that more money would have had to be borrowed to purchase the company. As I understand it, it was the State-owned AIB which put up the money for the purchase of Siteserv to Millington. I must say I find it really astonishing. Surely it is clear that the proposed review is not only conflicted; it is just not wide enough to give a true picture.”


          3. Cian

            @johnny: what is your point?

            This thread is about Taft’s proposal to create a Public Bank. And I’m asking if this would not fall foul under the EU laws on state aid.

            Would his public bank not distort normal competition? and if so, would this not be considered illegal state aid?

    2. SOMK

      Good question.

      You hear claims about the EU being an implicitly neoliberal project, pro-privatisation (not just from the left, one of the most common Irish Water arguments was it was an EU/Troika directive).

      Corbyn came out with similar rhetoric regarding how staying in the EU would scupper privatisation efforts last Autumn, and the response to it seemed mixed, some legal experts saying he was wrong (granted if Corbyn said “the sky is blue”, there’d be a phonebook’s worth of opinion pieces the arguing it was pink), others not.

      From what I can tell the legislation is anti-monopoly, as long as private banks still operate, no monopoly. WTO trade rules also effect levels of state aid, but we pumped 97 billion into the banks and there was nary a peep from them.

      According to the EU’s official website:

      “State aid may be permitted in the following cases:

      -help for small businesses
      -promoting entrepreneurship
      -research, development and innovation
      -regional development
      -risk capital
      -job creation
      -protecting the environment”

      I think Taft’s proposal fits many of these criteria, especially regional development, for example Germany has 431 regional Sparkase (savings) banks, so it looks like it wouldn’t be an issue.

  4. Frill the 8th

    we do have Public Banking
    they’re called Credit Unions

    you’ll not get a better or more reliable promise to protect your interests than The Common Bond

    And its all walks of life sit on their Boards

    no ol’ bhoys or pals or promises

  5. johnny

    anything but this has to be considered, the rates are usurious and the partner is not considered a good corporate citizen by many.The Irish govt via various disguises is already an active lender.

    “The Ireland Strategic Investment Fund (ISIF), managed by the National Treasury Management Agency (NTMA), together with KKR Credit, have today announced the launch of a new €500 million joint venture, which transforms the funding options available to the Irish house building sector and will be capable of financing the construction of over 11,000 new homes in Ireland.”

    1. Cian

      anything but this has to be considered[why?], the rates are usurious[citation needed] and the partner is not considered a good corporate citizen by many[by whom?]. The Irish govt via various disguises is already an active lender[citation needed].

      1. johnny

        the SEC for one…..

        “The Securities and Exchange Commission today charged Kohlberg Kravis Roberts & Co. (KKR) with misallocating more than $17 million in so-called “broken deal” expenses to its flagship private equity funds in breach of its fiduciary duty.
        KKR agreed to pay nearly $30 million to settle the charges, including a $10 million penalty.”

        “Activate will provide up to 90% of project funding and will provide funding for both the acquisition of land and to bring projects through the planning process. The Activate base lending rate is approximately 10% and, as would be expected for projects of this nature, there is participation in equity upside if projects are successful so that the fund shares in any gains alongside the project promoter. The pricing for Activate facilities reflects the provision of up to 90% of overall development cost and the fact that it is, in effect, taking a combination of debt and equity risk.”

        drops mic……

        1. Cian

          thanks for this…

          … although Activate seems to be doing well (I googled their website). Many developers are willing to do business with them. Which suggests to me that they are either (a) giving a competitive product; or (b) there is no alternative product.

          1. johnny

            grand so,there will be loads off houses shortly….
            it was merely an illustration of a role the govt already plays in the market,in other words public banking :)

  6. Deli

    If PTSB were allowed to deal with the NPLs (people not paying or engaging with the bank on the repayment of their mortgage) they wouldn’t have to sell these loans to funds that will clean the loans up. Joan Burton on the radio today said families shouldn’t be evicted from their family homes if they hadn’t been paying their mortgage. If that came into force what would happen if everyone stopped paying. I know people that are on interest only deals with lenders that could be paying the full amount. People out there aren’t honest with the banks on the incomes that are coming into the households

  7. Andy

    The only difference between private banking and this utopian vista of public banking is that advocates for public banking seem to be coming from the perspective that collecting on collateral of defaulting borrower’s would not be tolerated. So effectively, lets provide loans, and if they go bad, sure that’s just life. Let them keep the money.

    I have yet to hear any talk from public banking proponents on how they would operates collections.

    And SME borrower do go bad. On a regular basis.
    19% of irish SME debtors are in default.
    23% of construction SMEs debtors are in default.
    23% of hotel/restaurant SMEs debtors are in default.
    20% of retail/wholesale SMEs debtors are in default.

    How would the public bank deal with these companies?

  8. Truth in the News

    The time has come to issue a Banking Licence to the Credit Union Organisation, how much
    money is tied up in Banks deposited by Credit Unions….?


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