During the mayhem that was the release of the Central Bank stress test results yesterday – the video feed from the Central Bank that didn’t work, RTE’s truncated coverage of the news conference and the poorly-planned choreography which saw Governor Honohan’s presentation clashing with Minister Noonan’s statement in the Dail – I was rushing to catch up with what Minister Noonan was announcing in terms of the future of the Irish banking sector. When I first heard the expression “pillar banks”, I thought he mean “PLAR banks” after the acronym used in the stress tests – Prudential Liquidity Assessment Review – but no, what he was setting out was a landscape in which there would be two “Irish” banks formed around AIB and Bank of Ireland. This entry examines why we need two, and why we simply can’t support one, an obelisk bank.
When you think of pillars, you think of columns supporting a structure like a building or in the case of Islam, a religion. I tend to think of the Stability and Growth Pact which we signed up to as part of our membership of the euro – that Pact is aimed at keeping a lid on inflation and not destabilising the finances of any one country and demands that countries adhere to two pillars of financial probity : keeping deficits below 3% of GDP and keeping debt below 60% of GDP. What I always found curious was that our Finnish friend, Olli Rehn, seemed to strongly defend the first pillar as he demanded Ireland cut its deficit to 3% by 2014 but seemed completely oblivious to the second pillar in foisting a debt to GDP of well over 100% on Ireland. But yesterday the use of the word “pillar” was to denote the two banks that would support a future Irish banking sector. But why two?
Firstly, we presently have more than two banks. Ignoring EBS, Permanent TSB (part of the Irish Life and Permanent group), Anglo and Irish Nationwide Building Society, we also have at least four “foreign banks” serving the domestic economy : Rabobank (through ACC Bank and Rabobank Online), KBC, Danske (through National Irish Bank) and Royal Bank of Scotland (through Ulster Bank). In addition there are other banks with a marginal presence, eg Nationwide UK is a High Street deposit taker only. And lastly we have the Post Office and credit union networks. So why do we need two “Irish” pillars, AIB and Bank of Ireland?
Competition? This is simply ridiculous. For example, it took the entry of the Bank of Scotland/Halifax into our market in the late 1990s to really shake up the mortgage market and today tracker mortgages, which were a particular feature offering of the new market entrants, account for most of our mortgages (over 400,000 out of the 780,000) – it was not AIB or Bank of Ireland that created such innovative products. More generally, the duopoly of AIB and Bank of Ireland did not deliver a competitive retail banking system for decades. In addition we now have a Financial Regulator that has over 500 staff – is that body not capable of ensuring that a single “Irish” bank provides competitive services. And what about the “foreign” banks, won’t they act to stop uncompetitive behaviour. And lastly remember that there are other potential entrants to our market – yes, the Cardinal consortium’s reported offer of €600m for EBS was rejected but there will be other interest in a domestic banking system once our economy recovers.
The particular reason I would prefer to see just one “Irish” bank is that if we let the other go, we can possibly see billions of euros in savings to our bailout bill by burden sharing with bondholders. And to remind us of the bondholder position in February 2011 as collated by the Central Bank of Ireland:
We might also see the €13.3bn capital requirement at AIB shared, for example through a debt for equity swap.
The announcements were made lickety-split yesterday and it has taken some time to appreciate what is being proposed. Isn’t it now appropriate to challenge the notion that we need two “Irish” banks?
NAMA Wine Lake 
Imagine a system where private entities can compete to create money……………
Anything you can do I can do better then you , no you can’t , yes I can , no you can’t.
Competition for this ultimate power is absurd.
In a decades time or more when this depression is over – private institutions will have the ultimate privallage to create money retained and will slowly abuse this postion until this generation is dead.
When this happens the relationship will move from abuse to rape until another debt collapse is manifest – then the entire circle of debt will be complete and we start again and again.
The creation of credit should not be a function of a private institution or the regulation of these entities by central banks who are their handmaidens.
Credit should be produced by the exchequer/ treasuries only – there is no need for central banks other then to protect banks.
Full deposit banks should rise or fall based on the performance of their loans.
Its never going to happen however as the propoganda by the priests of finance is all encompassing.
At least as long as the congregation remains illiterate and depends on these spineless priests to tell us what exactly the Bible says.
Nothing is going to change unless we have a counter reformation – and given the deluded tabernacle worshiping nature of the people here it seems unlikely
When you think of pillars, you think of columns supporting a structure like a building or in the case of Islam, a religion.
In this instance I think of Shelley:
I met a traveller from an antique land
Who said: `Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear —
“My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!”
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.’
All this nonsense about private banks, insurance companies and competition seems to me to be a relic of the cold war. The same rules don’t apply in the modern age as is becoming increasingly apparent by the collapse of financial institutions all over the world.
Let there be an obelisk bank, and let the state run it at a profit. Let the state run our insurance companies also. I cannot see how the state can do any worse a job than the mess the private sector has made of the industry. The whole notion of a private financial system is, for me at lest, an utterly discredited notion.
I totally agree and have advocated this previously as indeed has Mike Soden in his previous role. There would be absolutely nothing wrong with merging BoI and AIB both are insolvent without taxpayers and both use the same banking model. If anything this is about preserving jobs in both banks while again the tax payer subsidizes them. Also, why the 500,000 cap on banking salaries been ignored by Anglo?
The “pillar” terminology is just obscuring the fact that both should be merged. BoI must raise over 4bn by June to avoid the same fate as AIB, thats the reality, yet its shares bounce this morning which goes to show there are plenty of gamblers who think they can get in and out and still make a fast buck before June.
@Obsessive maths freak
The state need not concern itself with financial governance once it can create money without private competition.
The fiance industry can risk its own deposits if it wants to loan – this will very soon be self regulating unless the banks get control of the state directly which alas appears to have happened over successive generations.
They can continue to speak financial Latin to us if they so wish but I suspect under the above regeime its purpose would soon become obsolete.
Anyhow our discussions are entirely acedemic as the populace still wish to believe that the bread and wine somehow turns into the body and blood withen the sacred walls of both commercial and central banks.
May I ponder the final bill for a moment here?
1) Regarding subordinated debt and the 10bn contribution they have made to date? I expected this to be taken off the previous 46bn bill at some stage?
This isn’t going to happen now it seems (looks like the 10bn in sub debt was actually factored in when making the 46bn tally?)
2) The new 24bn is obviously on top of the 10bn we have forced from sub bondholders. Now, apparently another 5bn are going to be burned and IL&P will be forced to sell its Life Assurance arm for 1.6bn and said this would reduce their state capital requirement by 1.1bn.
Does this mean the 24bn will become 17.9bn? (even then, assuming BoI manage to raise absolutely nothing).
I regarded the subbies as a bonus in December but I can’t help but shake the feeling that their eventual incorporation into an overall strategy was factored in from the outset.