Forum told we ‘need the banks to make money’

There is nothing "inherently wrong" with wanting to make money as an individual or a company, the Central Bank's outgoing head of credit institutions Fiona Muldoon has said.

Speaking at the Trinity economic forum yesterday, Ms Muldoon said Ireland needs the banks to make money and that financial incentives encourage bankers to do well. “As long as the sovereign and banking link is not completely broken, we need the banks to make money,” she said.

She said contingent convertible, or “coco” bonds as they are more commonly known, which are a long-term incentive for bankers to do well, and can be completely wiped out if the bank goes through a rough patch, even a temporary one, are a good thing.

“Anything that pushed the incentives out and makes them long-term is a good thing.”

Homemade crisis
TCD professor Blanaid Clarke said Ireland's banking crisis was homemade as lending procedures in place were bypassed and the financial incentives for bankers to take risks were too high.

“Corporate governance rules in Ireland were the same as the UK, but we bypassed them. Remuneration was linked to risk in a way that was extraordinarily unhealthy.”

As a result, bankers adopted a view of short-term gain to get more pay.

National University of Ireland professor of finance Gregory Connor told the conference that Ireland has very strong prospects across many industries, but that banking is not one of them.

“The banking sector is not going to repair the Irish economy . . . it was a mistake when everyone viewed the Irish banking sector as a way to growth.”

He said Ireland shouldn’t think of banks as a driver of the economy, but as a drag on it. New York had 50 times as many “greedy bankers” as Ireland at the height of the boom, but they couldn’t do as well as Irish bankers due to regulation there, he added. “We have light touch regulation here. Up until 2010, Irish banking regulation was a world leader in feather-like regulation,” he said.

Equity
University of Bonn professor of economics and co-author of The Bankers' New Clothes , Martin Hellwig, said banks should be forced to fund with much more equity than they are.

He said many banks have equity equal to 2-3 per cent of assets, and have used risk weighting to reduce the required equity. He pointed out that the figure of 3 per cent of total assets, which is a requirement by Basel III, was what Lehman had in its last set of published accounts.

Mr Hellwig said banks should have equity of 20-30 per cent of total assets, saying most arguments by bankers against such regulation have the same substance as the emperor’s new clothes in Hans Christian Andersen’s tale.