Have banks been let off too lightly in aftermath of the property crash?
The high street banks are reporting improved trading figures and disappearing impairment charges. The overall Northern Ireland position is not easily quantified. However, the two larger local banks, Danske and Ulster Banks, are once again reporting profits.
Although it is a distant memory, less than 10 years ago the commercial banks in Northern Ireland were amongst the most profitable local businesses. However, a quick return to banking profits comparable to the early part of the last decade is not in prospect.
If the worst is over for the high street banks, does this mean that business is back to normal? Of course, the improvement is welcome.
Unhappily the new business environment must cope with the inherited consequences of recent history. Some businesses, property owners and home owners have continuing debts held against greatly diminished property values.
Negative equity remains a significant factor and in some cases may even have been taken to more formal levels with the appointment of administrators or liquidators. For some borrowers, repayment failures have led to the loss of assets, taken to off-set default on debt repayments.
As the banks need to worry less about impairment charges and can adjust to a changed lending environment there is a temptation to down-play or overlook the changes in the continuing problems of inherited borrowing and accumulated financial debt in the wider community.
Northern Ireland’s most successful entrepreneurial developers have taken (to understate the situation) some hard knocks.
Those best able to defend themselves, as property values have fallen whilst bank borrowing has edged upwards, have needed to manage their borrowing tightly and, on occasion, release cash by selling some of their assets. There are some, very few, who have emerged nearly unscathed.
Nevertheless, there have been casualties. Bank forbearance (in the interest of the bank and the borrower) has allowed trading to continue for some businesses with negative shareholder value. A small number of high profile business failures has tended to deflect attention from the wounded survival of others.
With hindsight, many property developers and house buyers borrowed too heavily against the security of property that with hindsight was overvalued. For many years, until about 2007, this level of borrowing served the borrower well as rising property prices reduced the real cost of borrowing. It also served the bank, as lender, well. Banks which stretched their lending beyond prudential levels did so to supplement their profitability.
On the island of Ireland, with hindsight, prudential lending rules were too lax and were honoured in the breach.
Owners of many of the business casualties of the last six years feel aggrieved. Did they deserve to be caught in the largest property crash and business downturn of the last 70+ years? There is an understandable (if fruitless) search for someone to blame.
Was it really the fault of people who asked for and were allowed to borrow too much with the inadequate security of improving estimated property values?
Equally, was the fault more specifically with bankers and lenders whose search for expected profits was excessive?
Now that the high street banks are showing signs of recovery, what is the impact of the inherited consequences of so much impaired borrowing?
Understandably there is, for some, a sense of unfairness. There have been the casualties of businesses closed or sold. Bankruptcy or liquidation is a painful experience. Debt forgiveness is nearly unknown. Northern Ireland does not have the framework for insolvency protection recently introduced in Dublin.
The property market, domestic and commercial, is now functioning with an overhang of negative equity. The housing market is restrained by the impact of negative equity on housing ambitions. The commercial property market is likely to recover more quickly as vacant property levels fall.
The banking crisis has eased but not ended. With assistance the banks have survived. In the aftermath, have the banks been let off too lightly?