This is the column from two weeks ago but it sooo unoriginal I didn’t post it for shame. For the record though it should go up…
The Anglo-Celt reported on a meeting of the Kilnaleck Debating Society last week. One member asked for an explanation of the sub-prime crisis. He was told it was when banks lent money to people who had never repaid a loan in their lives. The meeting of this informal group which alternately masquerades as the Kilnaleck Philosophical Society took place in Brady’s Bar on the Main Street of the Cavan town. The newspaper account added that the barman offered his view. “It’s like me loaning â‚¬1000 to the local alcoholic who last week couldn’t pay for a pint and a packet of fags”.
If only the world’s bankers had the same sense as the humble barman in Kilnaleck. I should declare that the sage behind the bar and the reporter for the Anglo-Celt are one and the same: my Uncle, Peter Brady, a former Cavan Man of the Year no less. But you don’t need to be a person of such high standing to get the point. Terms we never heard of a year ago, like “sub-prime” and “credit crunch” have created a global financial storm.
The mess is not the result of a natural disaster, a mysterious economic bubble that burst or the fall-out from terrorism. It’s solely due to bankers behaving pretty stupidly. Some lent money to high risk borrowers and others rolled all the bad loans together, insured the risk and sold it up the money chain to other bankers. The bad debts were gradually transformed into A-rated financial instruments which were absorbed into pension funds. Have you checked the value of your pension fund recently? I sincerely hope you are not retiring this year.
The bonuses and dividends earned by all this activity paid for a lot of yachts and condos in the past ten years. Now we’re paying as the banks levy charges on their customers and increase mortgage interest rates.
Just last week, AIB increased the surcharge it imposes on people who overdraw their current accounts without permission. I’m not an AIB customer but you could say I have a flexible attitude towards my overdraft, so I can sympathise with those similarly afflicted. Someone with an unauthorised overdraft will end up paying 27.9pc in interest on the money they overdraw without approval. It’s not quite a pound of flesh, but Shylock wouldn’t be out of place on the board of AIB.
Still, if the bank is reduced to penalising its customers so onerously, you’d think they must be in trouble. Last year the AIB had revenues of â‚¬4.87 billion up 12% from â‚¬4.33 billion the previous year, despite the ‘adverse changes in worldwide banking’ referred to in its annual report. From these revenues they earned a pre-tax profit of â‚¬2.5 billion for 2007. That was down 4% on 2006. Oh dear, tough times.
The Bank of Ireland is having a torrid time too. In the year ending March 2008 it is believed they only earned â‚¬1.77 billion down from â‚¬1.95 billion in the previous year. If you’re a BoI customer you’d better watch out. With such disastrous results, they’ll be forced to charge you a vital organ if you miss a car loan repayment.
So what’s new? Banks like maximising profits. The problem is the effect their practices have on the entire economy in good times and bad. During the property boom, house prices escalated out of all control. Buyers blamed everyone from auctioneers to the government but neither auctioneers nor politicians set house prices. The price of a house is entirely dependent on the amount of capital available to the purchaser. If the bank is willing to provide more capital to anyone who wants it, then house prices will keep rising. And so they did.
The government was happy enough since they earned significant income from VAT and Stamp Duty. Occasionally they’d come under pressure to act to control prices but they claimed they were helpless as they had lost control over interest rates to the European Central Bank.
While the government was busy blaming “Europe”, banks and building societies carried on and without any apparent regulation introduced the 100% mortgage and the 40 year loan. No wonder house prices increased.
But in the past few weeks something odd has been happening. Although ECB rates have held firm at 4% since last June, Irish lenders have been quietly increasing your mortgage rates. What happened to Europe’s influence? Turns out lenders can increase rates anytime they want. This paper reported last week how some banks are even altering the terms of popular “tracker” mortgages. These products guarantee that your interest rate won’t increase unless the ECB rate does.
With the credit crunch in full swing, lenders have decided to dump the ECB linked product. Permanent TSB : the biggest lender in the country and IIB Homeloans have started the ball rolling by changing the terms of tracker loans.
More important than the ECB is the rate at which banks lend money to each other: the Euribor. Since banks consider each other a risk these days that rate has increased. That’s why when the ECB is holding steady and there are even predictions of a cut later in the year your mortgage is increasing. “Europe” can do what it wants and the lenders will carry on maximising their revenue from their borrowers.
When I asked one expert why the government and banks didn’t act together to increase rates during the property boom he said that would have been collusion which is illegal. When lenders act in unison to reduce rates its called competition. When they copied each other and increased them in recent weeks, that was an industry response to the global lending environment. In other words it’s fair and legal if the end result suits them. It’s only illegal if the result suits the national interest.
It’s hardly shocking that banks behave like this. But that’s why we have regulation. It’s the government’s job to make them behave in order to protect individuals and the economy as a whole. They could control the amount of money they lend customers through enforced income stress tests. They could also ask them not to leave laptops with detailed personal information about their customers lying around.
Domestically and internationally, there has been a collective failure of regulation with severe consequences. From sparking a global recession or allowing dictators to keep their billions in Swiss banks, banks do great wrong while governments stand back : until the crisis occurs and taxpayer funds are need to save the Northern Rocks. As Michael Glos, Germany’s Economy Minister put it last month
“It really is quite strange when those who tend to describe too much state intervention as the basic evil of the social market economy start calling for the state to act,” he said. “Privatising profits and nationalising losses — that’s not on.”
Unfortunately for Glos and for taxpayers and banking customers around the world, it is very much on.