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Clarity needed on how recovering banks will repay debt

By John Simpson

Published 14/04/2015

Challenges ahead: Simon Hamilton
Challenges ahead: Simon Hamilton

The recent House of Commons Committee examined the possible contribution of the banks in Northern Ireland to the recovery in the local economy. The committee noted that the local banks have an important role to play. However, whether the Northern Ireland Affairs Committee challenged the banks stringently enough merits further debate. What seems missing from the committee report is clarity on what should be expected from the commercial banks to support economic development.

The banks have been necessarily supported through the recent financial crisis, regardless of the extent to which they may have contributed to that crisis. The banks were sustained because the consequence of serious bank failures would have been painful on customers, whether as depositors or as over-borrowed customers.

To argue that taxpayers bailed out the banks and their well-paid employee bonuses is an understandable misplaced criticism. The criticism of Government, if bank deposits had, wholly or partially, been wiped out, would have been much more trenchant.

To sustain the banks through the consequences of excessive lending was not to excuse the excessive lending. However, when the crisis broke, loans became non-performing and householders involuntarily were sucked into negative equity.

The potential price of cumulative failures would have been much worse than the different rescue packages.

The rescue packages have been, for better or worse, successful. The commercial banks are now back to profitable trading. Shortly, the banks will return to near the position in the early part of the last decade when, in Northern Ireland, the commercial banks were amongst the most profitable local businesses.

The problems now are twofold: first, to ensure that the banks contribute more effectively to the rebalancing of the economy, and second to apply banking policies that somehow partially compensate the businesses and households who were hit by the crisis.

The House of Commons Committee is motivated by these challenges although it too readily emphasises the difficulties in securing effective policy changes.

The setting for the monitoring of the role of the banks must take account of the relationship of the banks, local businesses, and public policy. Northern Ireland, using the institutions and legislative scope of devolved government, now develops major parts of economic policy on a regional basis. In the monitoring and delivery of economic policy, Northern Ireland Ministers, as evidenced through the Programme for Government, are critical actors. Ministers and business organisations need good evidence, statistical and qualitative, of the scale of banking actions to increase different types of lending, to attract deposits, and the responses to official financial interventions by Treasury schemes.

At present, as different Ministers have acknowledged, there is an inadequate knowledge base to monitor and assess the extent to which the banks are giving adequate financial flexibility to the various economic players.

There are seven commercial banks, all within international networks, operating with branches in Northern Ireland.

Efforts to persuade these banks to improve the transparency of banking sector activity have made only marginal progress. The Westminster committee concluded that significant progress has been made in persuading the banks to publish regional lending data.

The regional lending data that has been published is far from persuasive or comprehensive. It is partial and does not give a sensible perspective over (say) a 10-15 year period.

The committee notes that the Northern Ireland Executive 'was not able to force banks to supply regional lending data, as the Executive did not have the devolved power to do so.'

If this assessment is correct, then there is merit in a question of how to obtain this power. Presumably someone has checked that the former Statistics of Trade Act (pre-1972) can no longer be invoked.

Simon Hamilton, as Minister of Finance, has a challenge to meet. He will need to use his political leverage and influence through the Bank of England. The local banks now have their 'debt' to repay.

Belfast Telegraph

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