Dáil debates

Thursday, 18 April 2019

Saincheisteanna Tráthúla - Topical Issue Debate

Community Banking

4:55 pm

Photo of Willie PenroseWillie Penrose (Longford-Westmeath, Labour)
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I thank the Ceann Comhairle for selecting this important issue for debate this evening. I want to record that the Deputy Eamon Ryan, leader of the Green Party, supports my contribution, on behalf of the Labour Party, on this issue.

One of the myths used to explain why Ireland failed to develop economically between independence and the 1960s is that there was a lack of capital for investment. There was, in fact, an abundance of savings in the Irish banks available for investment but rather than invest this money in Irish enterprises, the Irish banks were mainly invested in the UK money markets. This was facilitated by the fact that there was a one-to-one link between the Irish pound and the pound sterling. As a result of the failure of Irish banks to invest in enterprise creation, the State was obliged to set up a number of State-backed lending institutions, including the Industrial Credit Corporation, the Agricultural Credit Corporation and the Industrial Development Authority, now Enterprise Ireland, which could be regarded as one of the largest venture capital funds in Europe.

The State provision of finance for development was necessary because of the extreme risk aversion of the main banks, which were reluctant to invest in manufacturing industry. The main banks were always eager to invest in so-called "property development", which in many cases was, in fact, property speculation. The over-exposure of the Irish banks to the property sector led to their collapse in 2008 and their rescue by the taxpayer at the cost of €64 billion. It is important to recall that while the Irish banks tried to blame their insolvency on the global financial crisis, they would have had to be rescued even if the global crisis had not occurred when Ireland's property bubble inevitably burst.

Since their rescue by the taxpayer, the banks have been frantically rebuilding their capital by charging interest rates to borrowers which are grossly in excess of the rates they pay depositors, or the all-time low rates at which they can borrow on global markets. Having lent recklessly during the building boom which they fuelled, they now will not lend except for the safest of projects and the most demanding of collateral.

I understand the Department of Finance has hired Indecon to carry out the evaluation of community banking promised in July last when the Minister published the local public banking report. I have read the terms of reference for this evaluation and I am concerned that the Department of Finance has written them in a way to tie the hands of Indecon.

Indecon is a very respected group. I believe Indecon will do its work diligently but the Department has it chasing rainbows and looking for unicorns. At least, that is what I think when I read about measuring "market gaps" with regard to SME lending. How can one measure lending that is not happening? The hard-pressed businesses know well the pillar banks are not interested in serving them. How about the Minister reading his own Department's SME credit survey that records that microenterprises have a 20% loan rejection rate?

Even if an SME is lucky enough to get a loan, the banks will apply crippling interest rates to that loan. The cost of loans to SMEs are way above those of their EU counterparts, by up to 200 basis points in the case of smaller loans of €50,000 or less. There is no justification for this level of price gouging of the indigenous companies.

Any gaps in the SME loan market are currently being filled by shadow banking, which is what all this alternative finance being offered to SMEs is. This is not a proper banking service that the small businesses up and down the country are crying out for. It is also a source of funding that will likely dry up in the teeth of another recession. History has proven this to be the case.

The report published by the Department of Finance in July last was an incoherent one, opposing investment in a public banking system on the grounds it might "crowd out" the existing pillar banks. Once again, the Department of Finance mandarins appear to confuse the pillar banks' interests with the national interest. Mr. Draghi has clearly pointed to the quasi-monopoly situation in Ireland as being a cause of our high interest rates.

Still, the Department continues to defend the pillar banks. Most recently, before the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach, it was supporting the right of the banks to sell off loans to vulture funds. They claimed to be speaking truth to power, while all the while they are the ones who have the power to hide the truth - the truth being that the banks are continuing to have a free hand to ride rough-shod over their customers, who have no alternative but to submit.

How come, on the one hand, the Department of Finance can produce a report justifying the pillar banks charging high mortgage interest rates, even blaming the very households that suffered the worst in the last recession, but on the other hand, AIB can suddenly lower mortgage interest rates significantly the day it was appearing before the committee?

The Government, and the Department of Finance mandarins, need to stop their obsession with analysis of whether there are any market gaps and focus instead on the common-good aspects of a public banking system to serve our local economies. What cannot be measured in cold hard facts is the comfort it would bring people up and down the country to know that they had an alternative institution that is mandated to operate in the interests of their local economy, that would not throw in the towel at the first sign of difficulty but would have a real stake in helping businesses to work through and resolve their problems because the bank's success would be based on its local business success.

Does the Minister believe he is doing the people of Ireland a favour by maintaining the status quofor the pillar banks? Mark my words, no one will be thanking the Minister when the next recession comes around and we are still stuck with the same old pillar banks charging us over the odds at every turn.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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I thank Deputy Penrose for raising this issue and giving us a chance to make a statement on it. I apologise that the Minister for Finance, Deputy Donohoe, could not make it this evening. I am happy to take this matter on his behalf and pass on the views of the Department in answer to the Deputy's question. I will pass on the Deputy's concerns to the Minister as well.

As Deputy Penrose mentioned, the Department of Finance and the Department of Rural and Community Development were tasked with fulfilling a programme for Government commitment to thoroughly investigate the German Sparkassen model for the development of local public banks that operate in well defined regions.

Both Departments prepared a report of the findings of their investigation which involved an analysis of the Sparkassen model and the local public banking in Ireland report was published in the summer of 2018. There was considerable analysis undertaken and careful consideration of a proposal for how the German Sparkassen model of local public banking might have been implemented in Ireland. Ultimately, the report found that there is not a compelling case for the State to establish a new local public banking system in Ireland in the proposed form. The cost to the Exchequer of the proposed new model was estimated at a minimum of €170 million.

However, the Department wants to be very clear that there is no impediment to any interested parties pursuing the establishment of a system of local public banks without the involvement of Exchequer funding or State ownership. From my own personal interest in this topic, I originally thought the campaign and movement needed permission to be able to establish the public banking system. I met a local man who we all know, Mr. Noel Kinahan, who is doing great work in pursuing this area. My understanding was that the campaign was for a licence to be able to do this and not necessarily to have State investment. The report has said it is not necessary for the State to invest in this model but it can still happen by itself.

Notwithstanding the conclusion of the local public banking report, a commitment was included in the report to carry out an independent evaluation of local community banking to establish whether its objectives, including financial inclusion and rural and regional development, could be furthered by other means in Ireland. Following a procurement process, the contract was awarded to Indecon earlier this year and work on the independent evaluation is well under way. The report is expected to be completed later this year and will be a useful document.

The Government is committed to supporting access to finance by indigenous small and medium enterprises, SMEs, as well as regional and rural economic growth. A range of supports and schemes have been put in place over the past few years, including a €300 million Brexit loan scheme launched in March 2018. The scheme provides working capital loans of up to three years to Irish SMEs to enable them to adapt and innovate in response to the challenges posed by Brexit. More recently, a future growth loan scheme has been developed to provide long-term investment finance of eight to ten years to help Irish businesses invest strategically in a post-Brexit environment. The scheme was launched on 27 March and, since yesterday, SMEs are able to apply for loan eligibility through the Strategic Banking Corporation of Ireland, SBCI.

As well as the Brexit loan scheme and the future growth loan scheme, there are other Government measures in place to support the financing needs of SMEs. They include the credit guarantee scheme, the micro-enterprise loan fund, local enterprise offices and the credit review office. The matter refers to the difficulties in lending to SMEs and in that regard it is worth noting the finding from the most recent Department of Finance SME credit demand survey which highlighted that when pending applications are excluded, 86% of credit applications to banks were approved or partially approved. The main stated reason for credit declines was a failure to meet the bank’s lending criteria, particularly in terms of account performance and history, followed by the applicant’s ability to repay.

It is also worth noting the consistently low demand for credit from Irish small businesses indicated by SME credit demand survey. The demand for bank lending by Irish SMEs has fallen from 40% in the initial survey in 2011 to the current level of 20% in the most recent survey, covering the period April 2018 to September 2018. Many Irish businesses are doing well and appear to be using their own funds instead of external financing to meet their needs. The uncertainty surrounding Brexit may also be contributing towards the subdued demand for banking lending.

Additionally, it is worth noting that only 1% of SMEs that did not seek credit stated it was due to it being too expensive to borrow. The main stated reason for not having sought credit in the past six months is a simple lack of credit requirements, a reason cited by 89% of businesses not seeking credit.

That is a report that was done independently of ourselves but, naturally, we all get different feedback and I am happy to hear the concerns and issues of Deputy Penrose and I will pass them on to the Minister for Finance.

5:05 pm

Photo of Willie PenroseWillie Penrose (Longford-Westmeath, Labour)
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According to the Public Banking Institute, "[a] public bank is a chartered depository bank in which public funds are deposited. A public bank is owned by a government unit - a state, county, city, or tribe - and mandated to serve a public mission that reflects the values and needs of the public that it represents." Public banks come in a variety of models. A public bank might be capitalised through an initial investment by the city or state, as well as through tax and fee revenue. A public bank, like a private bank, can take tax revenues and other government income as deposits, create money in the form of bank credit, and lend at very low interest rates and that is a critical thing which the Minister of State overlooked. Where private banks are committed by their business model to take advantage of low interest rates by charging higher rates to borrowers, which the Minister of State also forgot to mention, a public bank has no shareholders to pay and so can pass the low rates onto borrowers such as public agencies, local businesses, residents, and students.

Public banks can also partner to underwrite or guarantee the loans of local banks to fund projects that might otherwise not be funded. Such partnering with local banks shows that public banks can be partners, as well as competitors, with local private financial institutions. Public savings banks, such as postal banks, typically offer individual savings accounts, savings bonds, remittances and other services. Around three out of four postal systems worldwide offer such banking services. Public banks are a major financial force in Germany, the EU’s most successful economy.

The need for public banks or a third banking force has long been recognised in Ireland and the Labour Party has been its proponent. The Fianna Fáil and the Labour Party programme for a partnership government 1993-1997 stated that the coalition would "develop a vigorous third banking force from within the State sector by merging the ICC Bank and ACC Bank and by seeking a merger of the new entity with the Trustee Savings Banks". The so-called rainbow coalition was also committed to creating a third banking force, but the proposal was never implemented.

Ireland is now one of the very few countries which does not have public banks that would lend on favourable terms to SMEs. The Irish economy is perilously dependent on a small number of multinational companies for our economic growth. While Enterprise Ireland does a fine job in supporting domestic industry, access to affordable finance is still a major obstacle to the development of SMEs. A public bank would be in a position to provide affordable finance for SMEs and could also offer cheap banking services through the post office network for the many people in rural Ireland who have difficulty accessing such services.

We have a great opportunity in Ireland to strengthen regional development with an alternative in the form of a public bank that would not only reshape our financial services to the real economy but also provide increased financial inclusion to all wherever they live. Does this Government have the political will to think not just of the next election but to act like statesmen and think of the next generation of industry, entrepreneurs and small businesses?

The bureaucratic reply that the Minister of State, Deputy English, gave on behalf of the Minister of State, Deputy D'Arcy, tells its own tale and is revealing of the mindset in the Department of Finance. It is adamantly against any prospect of introducing competition for the pillar banks. That is the central and key issue which is blocking the progress of a worthy proposal of a public bank.

Photo of Damien EnglishDamien English (Meath West, Fine Gael)
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I thank Deputy Penrose and I know his heart is close to this issue of public banking. I want to be clear. As I mentioned in my opening remarks on behalf of the Department of Finance, the Government recognises that there are a number of positive principles underlying the concept of local community banking in general and that includes the public banking concept the Deputy has put forward. There is an issue over who invests in that and who permits it.

The response I gave was not bureaucratic, it was factual. The Government made a commitment to look into this under the programme for Government because we recognised there was a strong campaign over a long period of years by the proposers of the public banking system, some of whom the Deputy and I both know, who have done a very good job of making that case. For that reason, the Government looked into this and there was a report done and an evaluation of that, after which the Government made a decision. That is not a bureaucratic response, it is a factual one. The Deputy might not have liked the outcome of the report but we have to pass that on.

Work by Indecon on the evaluation of community banking and local provision of banking and financial services is well under way. A public consultation exercise closed on Monday and the submissions received will be reviewed by Indecon over the coming period. It will continue to engage with stakeholders and other interested parties on this issue by way of a stakeholder forum and let us track that system and see what comes out of it.

Anyone who made a submission as part of the public consultation will be invited to attend the stakeholder forum. I imagine those who are proposing a public banking concept based on the German model have made a submission and will get a chance to talk it through in that forum.

There was a strong commitment to continue to work with An Post and the credit unions on the development and provision of financial and banking services provided by them to retail customers and SMEs, especially in regional and rural areas. I recently attended an event in my local credit union. I support the credit union model and that is another form of community or public banking. I am a strong proponent of that. Navan Credit Union, through Credit Union Plus, has put together a new range of services directed towards business and SMEs that will see a greater movement of the credit union sector into the provision of loans to small and medium sized businesses and that is an important step because we do encourage accommodation.

It is also important that SMEs are aware of the range of financial and non-financial supports available from the Government and its agencies. Enabling Irish SMEs to create employment and continue economic growth remains an important Government priority, as well as supporting rural and regional economic growth and development.

In a previous Government, I spent time in the then Department of Jobs, Enterprise and Innovation and it is important that we work with businesses, especially start-ups and companies that want to grow, to help them with support for their applications for finance. Very often the future plans and growth strategy of the businesses do not facilitate them seeking the finances they need. We need to work with them on that. There are soft supports available, through our agencies, to enable that conversation and the development of business plans that help SMEs to draw down finance, regardless of who provides it.