July 11, 2007
Hard to credit we should be grateful to banks for having us in their debtPosted in Banks · 20 comments ·
1977 was the year the Sex Pistols burst onto the scene, introducing Punk to an astounded public and reinforcing the generation gap by giving two fingers to the establishment.
1977 also looks like being the most unfortunate year to be born in this country because, according to latest figures, if you were born in 1977 you are likely to be an Irish commuter/worker facing the 100pc, 35-year mortgage dilemma.
Figures from the Department of the Environment reveal that one-third of all first-time buyers are now taking out 100pc mortgages over 35 years. This scandal condemns an entire generation to debt. These 30-year-olds are the backbone of our society, they are the engine of the economy and yet, this State has lumbered them with a bill which only enriches our banks and our landowners. So we are witnessing an economy where young workers are financing old landlords through the agency of the Irish banking system.
Were Michael Davitt to come back to Ireland, 140 years after the Land League, he would be astonished to find that we have replaced a British landlord oligarchy with our own home-grown Irish version. The gombeen man in the middle propping up the system today is the Irish bank manager.
The Irish banks that are providing 100pc mortgages are making enormous profits. This is no crime. That’s after all what they are authorised to do by their shareholders. But there is a problem in the financial system which the State has an obligation to analyse and rectify. Otherwise what’s next? 40-year or, why not, 60-year mortgages?
The crux of the issue is that the banks are now out of control – in many cases due to forces beyond the control of any one bank in particular. Someone has to come in and discipline them.
There are three separate forces at work here. The first is the law of insecure middle management. Let’s not forget that behind all the slogans like “working together” or “your partner”, banks are simply moneylenders and the more money they lend the more money they make. So yellow-pack bankers, whose status both within the bank and outside has been dramatically eroded by ATM machines, are at pains to exceed lending targets set by senior bosses.
THE middle manager does not see the borrower as a person in this transaction, but sees his suburban house as collateral. The borrower is simply the conduit to the asset. If the banker can get his hands on a bankable piece of collateral such as the house, he can make an easy sale and hit or exceed his target. After all, if he does not hit the target, there are plenty more suits coming behind who will.
The second force at work is the law of shareholder value. Bank bosses’ salaries are linked to the share price of their outfits. So it is in their interest to get the share price up above the average. The problem, however, is that the people who ultimately own the banks – large pension funds – expect too large a return every year. How can a business like a bank, which is involved in a typically low-growth, mature industry like money-lending, make returns on equity of 20pc-plus as expected by the pension funds and banking stock indices?
The only way they can do this is by working their workers to the bone, capping costs and pay while lending recklessly. Therefore, and ironically, our own pension funds are driving our banks to lend to us with abandon. So the prospects of your pension fund when you retire are indirectly linked to getting you into debt when you are working.
The third and most important factor at work in the lending frenzy is the impact of land on the balance sheet of the bank. If the price of land is rising in tandem with the amount of money gushing into property, the banks will be able to lend more against it. The balance sheet starts to play tricks with them. Counter-intuitively, the more money they lend, the safer it looks in terms of the ratios they use to assess secured lending.
So it becomes a self-reinforcing dynamic where the more money they lend the more they feel they should lend. So credit becomes the crack-cocaine of the financial industry. The initial hit leads to euphoria but it wears off quickly, leaving the junkie needing more. And like the addict, all the economy’s senses have been blurred by credit, so it doesn’t know when to stop.
WE HAVE all become hopelessly addicted to the soothing balm of credit, and the banking system is desperately dependent for its living on the price of land, houses and property. The banks can be regarded as the dealers – the middlemen – who cut up the deals, take a fee and keep the addict hooked. But because of the impact of lending on them, their balance sheets, their bonuses and share price, they are as addicted as their clients.
The State now needs to act because we are impoverishing our young workers in this property scam which is creating a dangerous demographic divide in the society between the young and the middle-aged.
The State is not helpless. Remember that banks operate here under license. This license, like all permits, is conditional on good behaviour; it is issued by the Central Bank – an agent of the State. What about using the penalty points system to discipline the banks in the same way as we are all policed on the roads? Bad financial behaviour – such as issuing irresponsible, 100pc mortgages over 35 years – should carry two penalty points.
Ten penalty points and the bank’s license would be withdrawn for a period like a delinquent driver. This would focus Irish bank managers. Like the rating agencies who rate the credit-worthiness of banks, the penalty points system would give shareholders clarity and would minimise the risk of unwelcome profit warnings taking the market by surprise. House prices, which are only being maintained by too much credit being extended, would fall quickly to a level where buyers are not encumbered with huge debts.
So shareholders, first-time buyers and the State would be in a better position. Everyone needs discipline. Sometimes, even in this era of high-faluting finance, the old rules are still the best ones.