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Archive for October 19th, 2012

There are two very obvious national business opportunities available right now which I am actively considering. The first which is partly tongue-in-cheek, partly not, is for a security company. For €5,000 per year, it will provide you with a sharp, professional response to your security needs. Under threat of physical harm? Just press your alarm button and one of our highly-trained security staff will be with you in minutes. They’ll know you by name and you will be treated with the courtesy and respect befitting a customer who pays €5,000 a year for their security. Nothing unusual so far, but this business is going to make me a fortune, because a large part of my costs will be manpower-related, and I am going to recruit the cream of An Garda Siochana for this business, underappreciated guards who might be fed up of dealing with piss and vomit on a Saturday night and who would prefer to deal with people of quality such as those who can afford the €5,000-a-year fee. How can I afford to recruit such fine employees? Simples, I will just ask the justice minister Alan Shatter to pay their salaries. “Ludicrous!”, I hear you shout in protest, Minister Shatter won’t simply pay me to employ the best Gardai to provide a private security service to rich folks. Well, if you think my business plan is fantasy, why not study how the private education sector works in Ireland, where annually about €100m is handed over to private schools to pay for…..teachers!

The second business opportunity is less tongue-in-cheek and arises from the present financial mess of the nation’s banks. All banks, and that includes the healthiest like Bank of Ireland and possibly some local units of international banks, are dealing with the colossal financial challenge of loss-making tracker mortgages, distressed loans, loans in arrears, loans where there is restructuring or implementing forbearance measures. Although banks can theoretically access cheap funding from the ECB secured on mortgages, the mortgages need to be of prime quality to access the highest loan-to-values from the ECB at the lowest interest rates.

Now, although the headlines might have given you the impression that there is a uniformly nightmarish scenario playing out right across the State with mortgage borrowers in arrears and negative equity, in truth, the numbers in arrears or a restructuring arrangement is less than 25% of owner-occupied mortgage accounts. And as for numbers in negative equity, estimates vary, but the latest research whilst is albeit from 2010 indicates the problems aren’t as great as widely perceived (see below). So although parts of the Irish banks’ mortgage books are a complete mess, other parts and seemingly the majority, are okay.

In Ireland for owner-occupier mortgage accounts, 400,000 of mortgages are tracker, 270,000 are variable rate and 100,000 are fixed rate. And if you are a variable rate mortgage borrower, you will be feeling nervous at present following recent interest rate hikes despite the fact that ECB interest rates are on a down-ward, or stable trajectory. If you are not in negative equity or mortgage arrears and haven’t needed a restructuring, then YOU are paying the price for your neighbours’ misfortune or bad decisions.

And here’s where the second business opportunity kicks in – the creation of a mortgage company which will poach the best mortgages from the zombie and walking-wounded banks, and because this new mortgage company doesn’t have a legacy of bad lending decisions, loss-making tracker mortgages or a Government paranoid about the need for further recapitalisation and because the new entrant will be able to access the cheapest ECB funding secured on its prime mortgages, this new mortgage company will naturally enough be able to offer cheaper variable mortgage rates. It’s called “competition” and there is a crying need for a new market entrant with a clean balance sheet to provide the “good” standard variable rate mortgage customers with a cheaper alternative.

And now is a perfect time for such an entrant to make their entrance. With the imminent creation of the central credit register, the new entrant will be able to judge a customer’s credit-worthiness better than ever before. With Bank of Ireland required to send out letters to customers advising them of the new entrant’s proposition – yes seriously, that was a condition under which the EU approved the state-aid bailout of Bank of Ireland, and others – the new entrant will even see their marketing taken care of.

And what of the “bad” standard variable rate mortgage customers left to languish at the zombie and walking-wounded banks? Well, it seems that they don’t enjoy any protection at present. Although it seems incredible, the European Commission approved the injections and guarantees of AIB/EBS, Bank of Ireland, Anglo, Irish Nationwide and Permanent TSB, WITHOUT requiring these banks to offer an alternative to customers who may wish to switch their mortgages to other banks, remembering that if you are in negative equity or arrears, no bank is going to want to accept the transfer of your business. So these customers are screwed, courtesy of the European Commission, aided and abetted by our own government and Financial Regulator. If AIB decides to raise its standard variable rate to 10% tomorrow, then too bad for you – that’s how the private sector works. Yes, the Government and Financial Regulator may huff-and-puff  and run to the nearest microphone to transmit their disdain, but the banks can just give anyone who challenges them the finger, and point to their mortgage contracts and to their profit and loss accounts and balance sheets and say that with their increased cost of funding and increased losses on the “bad” mortgages, they are justified in raising rates. The banks might even point to variable mortgage rates in the rest of Europe and correctly point out that our rates are still cheaper on average.

I reckon the new entrant should be able to pick up at least 100,000 mortgages of say an average of €100,000 each or €10bn in total and if the new entrant charges 3% on standard variable rate mortgages and its cost of funding is 1%, then it has €200m gross profit per year. Remembering it is picking up only the primest of mortgages which should require the minimum of administration, its costs should be relatively modest. Heck, the bank mightn’t even need a banking license if it is not taking deposits. Some of you might be thinking about the case of the private health insurer, BUPA which, a few years ago, sought to limit its health insurance to the best risks, and which finally exited the State when it was threatened with a levy. BUPA gave up without a fight, and faced with parochial political manoeuvres decided to run away from the competition fight. Just see if this Government has the temerity to threaten a new banking entrant with such terrors, when banking is hardly a social service and where there is EuroZone wide supranational control of banking from the ECB. Isn’t it funny that that private schools not only get subsidised with €100m of Department of Education funding, but they’re not facing a levy either!

But surely banks don’t have unfettered freedom to raise rates? Well take a look at the following parliamentary questions asked by the Sinn Fein finance spokesperson Pearse Doherty of the Minister for Finance Michael Noonan this week, questions which deal with Bank of Ireland’s compliance with competition terms under which the European Commission approved the granting of state-aid via the €4.7bn bailout. Not only is the Minister satisfied that Bank of Ireland has complied with all of its obligations provided for in the EC approval, but the Minister specifically says that Bank of Ireland does not need provide a mechanism for distressed mortgage customers to switch provider to a cheaper alternative. However the bank would need cooperate with a smaller player who sought to tempt Bank of Ireland mortgage customers to switch provider. Still though, some might say that BofI, AIB/EBS and PTSB are just shooting fish in a barrel with their variable rate increases…

The full parliamentary questions and responses are here.

Deputy Pearse Doherty: To ask the Minister for Finance pursuant to the approval by the Competition Commissioner at the European Commission, of the State-aid provided to Bank of Ireland in 2009 and 2010, and specifically pursuant to paragraph 140 of the Decision N546/2009, if he will confirm the current market shares of Bank of Ireland in each of the four markets referred to in paragraph 140..
Minister for Finance, Michael Noonan:As the Deputy will be aware, the Bank of Ireland (BOI) was approved for State Aid under European Union Rules and the resulting decision was published as Decision number N546/2009 in the Official Journal of the European Union. The Decision was subject to BOI adhering to commitments as set out in the Annexes to the Decision.
The commitment referred to in paragraph 140 concerns BOI providing a mail marketing service to a Relevant Competitor where the relevant competitor’s share of the market is less than 15% in at least one of the four markets for Relevant Products and BOI’s market share is above 30%.

 The four Relevant Products and the most recent data available for BOI market shares are:-

PRODUCT                                                                MARKET SHARE*
(i)Personal current accounts in Ireland                                35%
(ii)Business current accounts in Ireland                                 36%
(iii)Personal & (iv)Business credit cards in Ireland                34%

*At February 2012

Deputy Pearse Doherty: To ask the Minister for Finance pursuant to the approval by the Competition Commissioner at the European Commission, of the State-aid provided to Bank of Ireland in 2009 and 2010, and specifically pursuant to paragraph 155 of the Decision N546/2009, the way the commitment given in the following terms the IBF switching codes for personal
and business customers will be placed on a statutory footing immediately, and it will be accompanied by an information campaign has been met..

Deputy Pearse Doherty: To ask the Minister for Finance pursuant to the approval by the Competition Commissioner at the European Commission, of the State-aid provided to Bank of Ireland in 2009 and 2010, and specifically pursuant to paragraph 155 of the Decision N546/2009, the way the commitment given in the following terms, the National Consumer Agency will run a shop and switch public awareness campaign in relation to banking products and services has been met.
Minister for Finance, Michael Noonan: I intend to answer PQ Questions No’s 175 and 176 together.
I have been advised by the Central Bank that, in July 2010, the Irish authorities in the context of the final decision of the European Commission on the restructuring of Bank of Ireland, committed to undertake several actions in order to improve competition on the Irish banking market. As part of this programme, Ireland committed to the implementation of a package of measures aimed at supporting competition in the Irish banking market. The Irish authorities agreed to meet, inter alia, the following commitments:
       
 “a.   The IBF [voluntary] switching codes for personal and business customers will  be placed on a statutory footing immediately, and will be accompanied by an information campaign (to be carried out by the NCA and the IBF), and
   b.         A review of the provisions contained in the switching code, with a view to making  any necessary enhancements, will be carried out by the Central Bank and  concluded by end Q2 2012″

In December 2011, under  the EU Commission decision (SA.33443) approving the Bank of Ireland revised restructuring plan, the Irish authorities committed to undertake a revised package of alternative measures in order to restore the competition in the Irish banking market by facilitating entry and expansion of competitors and enhancing the consumer protection in the financial sector. In particular, Ireland committed to carry out specific measures in order to enhance:

 ” (a)   Customer mobility and protection (provision of information; transparency to facilitate consumer decision making; financial inclusion);

  (b)   Entry of competitors (electronic banking, SEPA migration, quality and availability of credit history information and reporting by banks);

  (c)   Corporate governance.”

The specific commitment agreed in relation to switching is:
       
        ” The Central Bank of Ireland will:

        (i) carry out a review of the provisions contained in the Code of Conduct on the Switching of Current Accounts,

        (ii) ensure that any necessary changes to the Code of Conduct on the Switching of Current Accounts following its review will be published by end Q2 2012.”

I am informed by the Central Bank that the obligation under the first part of the initial commitment was met with the publication, of the Code of Conduct on the Switching of Current Accounts with Credit Institutions (the Switching Code) on 1 October 2010.  

In 2011, the Central Bank began its review of the Switching Code with a theme-based inspection and mystery shopping exercise (the 2011 Review).  The inspection was aimed at assessing how well the switching process works in practice for consumers.  The mystery shopping exercise was undertaken to determine the awareness and understanding of the Switching Code amongst frontline bank branch staff.  The 2011 Review confirmed that once a consumer began the switching process, it generally ran smoothly.

In June 2012  the Central Bank published a Discussion Paper outlining the outcome of the review undertaken by the Bank on the operation of the Switching Code together with possible enhancements to the Switching Code as a result of that review. The Discussion Paper posed a number of questions to interested parties on issues connected with switching and how the Switching Code could be further enhanced or expanded to support the switching process. Interested parties were invited to respond the questions posed in this Discussion Paper by 30 September 2012.  A total of 4 submissions were received in response to the Discussion Paper, all of which will be published on the Central Bank’s website in the coming weeks. An analysis of responses is currently underway.
The Discussion paper can be found at:
http://www.centralbank.ie/regulation/poldocs/dispapers/documents/120622 discussion paper on switching.pdf

The National Consumer Agency  have informed me that their new interactive banking comparisons were launched in October 2011 and the launch was supported by radio and online public awareness campaigns. A copy of the press release is available on the NCA website – http://corporate.nca.ie/eng/Media_Zone/Press%20Releases/banking-cost-comparison.html.

From April to June 2012, the National Consumer Agency ran a campaign to promote switching banking products. This campaign used press, radio and online public awareness activity.  The NCA recently made a submission to the Central Bank’s discussion paper on Code of Conduct on the Switching of Current Accounts with Credit Institutions which outlines their views on issues concerning switching of banking products.

Deputy Pearse Doherty: To ask the Minister for Finance pursuant to the approval by the Competition Commissioner at the European Commission, of the State-aid provided to Bank of Ireland, Allied Irish Banks and Permanent TSB, the way standard variable rate mortgage borrowers in negative equity can switch to cheaper alternative lenders..
Minister for Finance, Michael Noonan: Bank of Ireland has been granted four state aid approvals between 2009 and 2011. These have been published by the European Commission in redacted form on its website under the decision numbers, N149/2009, N546/2009, SA.33216 and SA.33443.
There is no reference in the State-aid documents to methods for standard variable rate mortgage borrowers in negative equity switching to cheaper alternative lenders.

However, in the State Aid approvals for Bank of Ireland published as N546/2009 and SA.33443 (2011/N) commitments were put in place for both the State and Bank of Ireland to implement market opening measures, which aim at decreasing the cost of entry for new competitors, or the cost of expansion for small competitors, in Ireland.

Bank of Ireland (BOI) will operate two market opening measures

(1)        A Service Package and
(2)        A Customer mobility package

In relation to mortgages, from 2013 -2015, BOI has committed to providing a mail marketing service to a Relevant Competitor where the relevant competitor’s share of the market is less than 15% and BOI’s market share is above 30%.  In this case, BOI will randomly select at the request of the Relevant Competitor, a percentage of its mortgage customers and send them a copy of the Relevant Competitors marketing material. These mailings will be divided over six periods of six months and different selections will be made each time. However, it would then be at the discretion of the Relevant Competitor whether to engage with a particular mortgage customer, with a view to providing a loan.

Irish Life & Permanent Group Holdings plc (now Permanent TSB Group Holdings plc) was granted State Aid approval on 20 July 2011 for the recapitalisation that took place.  In the State Aid decision SA.33311 (2011/N) which has been published by the European Commission in redacted form on its website there is no reference to the matters referenced.

Allied Irish Banks plc has been granted three State Aid approvals between 2009 and 2011. These have been published by the European Commission in redacted form on its website under the decision numbers N241/2009, N553/2010 and SA. 33296 (2011/N) and there is no reference to the matters referenced.

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As someone who has watched in frustration as both our Minister for Finance Michael Noonan and Department of Finance have consistently maintained that our debt:GDP % is “sustainable” on the basis that it will eventually come down, it came as a welcome, though surprising, relief last night to hear Brian Hayes, junior minister for finance at Brendan Howlin’s Department of Public Expenditure and Reform, say that the debt was “unsustainable”.  Minister Hayes was speaking on RTE’s Prime Time current affairs programme and his statement was a bald “our debt is not sustainable” This contrasts with, for example, the view of the Department of Finance which in May 2012 produced a document “The Irish Economy in Perspective” from which the graph above is extracted, along with the official view that our debt was “sustainable”

To me, this was a “game changer” of “seismic” proportions, because up to now, the official line has been debt which will reach €190-200bn next year or about 120% debt:GDP is “sustainable” and indeed up to now, it was Minister Hayes himself who was the greatest cheerleader of the “sustainable” debt claim. “Remember the 1980s” he used say when our debt:GDP peaked at 118% in 1987 and it was subsequently whittled away over the following two decades so that by 2007, it was close to 25%.

Former school teacher, Minister Hayes hasn’t shown any independent streak in government which would suggest he was going on a solo-run yesterday, but unfortunately neither he nor his colleague on the Fine Gael backbenches, Paschal Donohoe who appeared on the Vincent Browne show later last night, was quizzed further over this apparent change of heart.

Because if our debt is not sustainable and that is the official line, then what happens if we do not get a debt deal in the EU which reduces the debt? On Twitter last night, Professor Karl Whelan of UCD referred to a former presidential advisor to US presidents in the 60s and 70s, Herb Stein who said “if something cannot go on forever, it will stop” or “if something is not sustainable, sooner or later it will stop”. So unless there is a debt deal, it seems the official line is that Ireland will default.

For once, the descriptions “seismic” and “game-changing” seem apt.

Meanwhile in Europe, there doesn’t seem to be a snowballs chance in Hell that there will be a deal to address Ireland’s bank debt by 30th October as committed to by economics commissioner Olli Rehn AND Enda Kenny.

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