The unwelcome spectre of the collapse of the banks that was narrowly averted eight years ago by the Irish taxpayers continues to rear its ugly head in many guises, emphasising that there is still a lot that needs to be sorted out in relation to these institutions that people had assumed were fixed or at least well on the way to being so. Last week’s announcement of the results of the latest stress tests carried out by the European Banking Authority (EBA) showed our two main pillar banks, Bank of Ireland and Allied Irish Bank (AIB), faring poorly – the latter in particular.
For these stress tests, the banks began with an average ‘fully-loaded’ capital ratio of 12.6% and ended with one of 9.2% in the tests’ most adverse scenario. However, the adverse scenario figure in AIB’s case was a capital ratio of just 4.3% and bank shares dropped in value when the markets re-opened last week for the first time after the announcement.
This result is a setback to the Irish government’s plans to sell off 25% of AIB in 2017 – just how badly it will affect these plans remains to be seen. The Irish Central Bank was keen to play down the poor stress test results and assured the public that the banks were sufficiently well capitalised, but adnitted that they could be vulnerable to an outside shock, such as an unwelcome fall-out from the Brexit decision.
While the main Irish banks are doing well in the sense that they are generating profits to sustain their ongoing operations, many of them are doing so on the back of higher interest rates on loans, some of which are up to 4% higher than comparable products in other eurozone countries. The banks have been forced to bite the bullet on tracker mortgages and most have set money aside to compensate borrowers who were wrongly moved to other types of mortgages.
However, they are badly hamstrung by legacy mortgage debt that has gone unresolved for far too long, as they still carry too high a level of non-performing loans. For the past eight years, the banks have acted like rabbits dazzled by the headlights of a car, frozen to the spot and not knowing what to do.
To the layman looking in at this situation, it would seem that the banks are in denial about the problem and are hoping that these loans will recover to make the problem go away. Such thinking is naïve in the extreme and the problems the banks have are quite complex to resolve, but sooner or later, they are going to have to simply grasp the nettle and write off non-performing loans, perhaps on a phased basis to mitigate the inevitable collateral damage doing so would cause.
The legacy of non-performing loans is a huge millstone around the necks of our banks that they cannot afford to carry forever. But, if they want to become robust operators again, they need to address the problem for their own sakes and, even more importantly, for the customers affected – and then ultimately for their shareholders who have also suffered.
One can understand why the banks want to avoid giving the impression that they are not as strong as we think they are, but after all these years since the bail-out, the Irish taxpayers who saved them from going under have a right to expect closure by this stage. They must wonder if the Irish Central Bank and the government are doing enough to encourage the banks to address and resolve the outstanding legacy debt issues which have to be faced up to.
People need to have trust and confidence in their banking institutions. All of this was lost at the end of September 2008 when the then government had to give the blanket guarantee for Irish banks.
The restoration of confidence in the banks has been a slow process and is still a work in progress, with setbacks from time to time such as last week’s stress test results. But, how confident can we be about subsequent assurances that there has been further improvement since the tests were carried out?