Sunday, February 14, 2010

Bank Despair

Attempting to follow the litany of problems faced by the banking system here in Ireland would lead one almost to despair!

Though we knew more than a year ago that they faced horrendous difficulties, the continually evolving situation reveals them as much worse than originally anticipated.

In September 2008 following the Lehman crisis the Government took the unprecedented step of guaranteeing bank deposits to the sum of €400 bl.

At first we were assured that this move was due solely as a result of a temporary liquidity crisis in the banking system (triggered by the international financial upheaval at the time).

However it quickly emerged that one of the banks Anglo Irish - with no branch network - had accumulated huge losses on loans mainly to the commercial property and would need to be nationalised (costing the taxpayer countless billions).

Then it became apparent that the other banks were all very much under capitalised (thereby requiring the State to pour in additional billions of taxpayers money).

Next when it became clearer regarding the extent of the bad loans extended to the property sector by all of the major banks, the Government proposed a highly expensive rescue plan NAMA (National Asset Management Agency) whereby it would buy up the larger loans on the banks' books at a discount. However this discount of about 1/3 was still much higher than current market value with once again the taxpayer funding the difference.

However we were assured at the time that this step was indeed necessary to get the banking system lending quickly again.

It now appears that the banks will also be suffering large losses on many loans not included in NAMA (e.g. on mortgages that were being thrown like confetti at unsuspecting house purchasers during the height of the boom).

Also it is already apparent that the losses on NAMA loans will in fact be much greater than originally anticipated.

This therefore means that the Government will now have to put in large additional sums in fresh capitalisation into the banks.
Meanwhile it is being slowly conceded - in what was apparent to many of us all along - that in fact there is no realistic chance of the banks being in a position to restore liquidity for some time.

So with respect to the banks we seem to be getting the worst of all possible worlds.

Then last week it was announced that Bank Of Scotland (Ireland) was closing down its Halifax Bank operation entirely here with loss of 750 jobs (in an opening move that seems to herald an eventual total close down here).

Now it was this Bank in particular that offered a breath of fresh air when it entered the Irish market in that it - perhaps for the first time - stimulated some real competition in the consumer banking market.

However since the crisis it appears that all the overseas banks are rethinking their commitment and likely therefore to significantly scale down operations with every likelihood of further job losses.

Also the domestic banks (such as AIB and BOI) who are desperate to cut losses are likely to reduce job numbers to a significant extent. So the banking sector will contribute hugely to the already very high unemployment figures in the coming months.

Not alone is this very bad news for the workers employed but likewise for bank consumers.
As the market inevitably contracts (with fewer institutions remaining) the degree of competition will fall. Therefore again with a view to repairing large losses, the surviving banks are likely to operate effectively as a cartel whereby they will extract high profit margins from consumers. So not alone do we face the prospect that many firms and consumers will be unable to obtain credit but bank charges could steeply rise steeply with those successful in obtaining credit paying excessively for the privilege.

And this understandably is likely to lead to further disillusionment and anger among the wider public who have already contributed massively to to cost of cleaning up the banking mess.

There is a deeper problem here which goes to the very heart of the capitalist system in that it fails to properly recognise a collective aspect to all profits.

During the good times bank profits are narrowly associated with shareholders. However during recessionary times, such as we have now, losses are associated more widely with the general public. Though not directly responsible therefore for the bad decisions taken, in effect it is required to substantially bear the losses (resulting from such decisions)

Market Economics as we know it has been built on an unduly limited individual notion of identity. However rightly, there is also an irreducible collective dimension involved in all economic decisions.
So ultimately this whole crisis is pointing to a need to redefine our economic ideas at the most fundamental level.

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