View from Dublin: tricky to reverse tide of bank branch closures
Finance Minister Paschal Donohoe is going in search of a "middle way" when it comes to how banks interact with their small business customers. Mr Donohoe wants to get a briefing from the banks on how the closure of branches may be affecting the levels of credit sought by SMEs. His comments follow some strong words from the head of the Credit Review Office and Northern Ireland man John Trethowan, who said bank officials are making loan decisions sitting behind desks rather than face-to-face.
Mr Trethowan, a former Northern Bank director and ex-chairman of Progressive Building Society, warned the closure of bank branches could be the cause of lower demand for SME lending.
The truth is that banks have been moving steadily towards "desk-based" lending decisions for years. The closure of branches has probably accentuated the downside of that more centralised approach to lending decisions.
It seems the old-style bank manager is not so much extinct, as an endangered species.
After the crash, banks were under the cosh for not lending. Now the bigger problem seems to be a lack of appetite for credit, especially when it comes to SMEs. Recent studies have shown small business owners are not approaching the bank for loans.
It may be that it is too expensive with the rip-off rates SMEs are being charged, or firms with legacy debt issues from the boom know they will be turned down.
Banks have been trumpeting their growth in business lending for some time, but they neatly put farm agri-business into that category now to beef up the figures. Farmers have been bigger borrowers in recent years, but they have the collateral as they invest in land, equipment and working capital to grow the likes of dairy farm operations.
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Mr Trethowan may have hit the nail on the head when he suggested that a lack of branches make small businesses less likely to pop in for a chat and a loan.
The revolution in banking has also meant the local branch manager, who may know the businessperson very well, doesn't have the lending clout they once had. Academic studies into how banks make lending decisions have shown the shrinking role of the face-to-face relationship between bank manager and customer.
Finance is more a commodity and banks are more like utility companies. One academic writing a PhD on the subject at the University of Salford talks about the concept of the "depersonalisation, the move from case-to-case judgments to rule-bound impersonal decisions, and the disembedding of banking, the detachment of service provision from social networks…"
"The agency of branch managers as gatekeepers, which lies at the intersection of skill, authority and autonomy, is central in making services embedded and personalised."
This is all well and good, but banks are no longer run on that kind of model anymore. The technological revolution that is driving internet banking, which many customers want, has also affected how and when bank managers meet their customers and what kind of discretion they have in loan decisions. We might not want to go back to the "good old days" of the local branch manager chatting in the golf club and providing preferential treatment for customers he knows personally.
Equally, moving to a system where relationships between faceless anonymous lending officers and small business owners is the norm won't always yield the best results for either the banker or the SME owner.
That is why Mr Donohoe says he wants to see how fewer branches might be affecting the appetite for borrowing. "We have to get the balance right between having branches present within communities to allow direct engagement between them and potential customers, and the work that banks have under way to try and make themselves more efficient", he said.
As Minister for Finance, Donohoe is the biggest shareholder in Irish banking (72% of AIB, 15% of Bank of Ireland and 75% of PTSB) and he knows how important it is for those banks to do things efficiently. Otherwise we won't get our money back as taxpayers.
Since the height of the boom around 200 bank branches have closed across the main Irish banks. In Northern Ireland, 42% have closed since 2010.
Donohoe wants them to find a balance. Good luck with that.