I am the founder and chair of the International Small Business Alliance, ISBA, and the joint chair of the Public Banking Forum of Ireland, PBFI. I have worked at the coalface of Irish business for approximately 40 years, with particular emphasis on SMEs in the area of competition law and enforcement. In recent years, I have carried out studies on various markets from beer, beef and bread to cement and concrete. Together with my colleagues in the PBFI, we have produced a proposal, entitled "Creating Ireland's Alternative Banking Force".
Our island economy has contributed in no small way to the creation of dominant, or jointly dominant, firms across most sectors of our economy, not least banking, where we effectively have 2.5 pillar banks controlling 95% of the market. Without adequate regulation, dominance almost always creates market power, and market power quickly morphs into abuse of market power. This in turn leads to market distortion, elimination of competition and long-term damage to the socio-economy. Our forefathers knew this. That is why they crafted Article 45 of our Constitution. Although it is merely a directive principle of the Constitution, it is nevertheless the duty of the Oireachtas to enshrine these principles in law through legislation.
It is worth giving Article 45.2 a quick look in light of our current banking sector. It states:
ii That the ownership and control of the material resources of the community may be so distributed amongst private individuals and the various classes as best to subserve the common good.
iii That, especially, the operation of free competition shall not be allowed so to develop as to result in the concentration of the ownership or control of essential commodities in a few individuals to the common detriment.
iv That in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole.
Clearly, we have much work to do. We must examine our pillar banking system and determine what are the alternatives. Article 45 is a cornerstone of how we are supposed to run our country, yet it continues to be ignored by the body politic.
The behaviour of the banking sector led to the wholesale destruction of our country's socio-economic well-being. We allowed our privately owned banks to become "too big to fail" and we granted them a monopoly over the creation of credit. Why did we do this? Worse still, we shackled our credit unions and post offices so that they could not compete fairly, if at all, with the private pillar banks. In so doing, we have driven a coach and horses through competition law. In bailing out our banks, we knowingly and blatantly breached Irish and EU state aid law. The quid pro quo was to be the introduction of real and meaningful competition into the banking market, but this has not happened. We have lost Anglo Irish Bank, the Irish Nationwide Building Society, INBS, Bank of Scotland Ireland, ACC Bank and the EBS.
Over the past eight years, it has become apparent that successive Governments are trapped in a dichotomy between the growth and welfare of the pillar banks and that of the general welfare of citizens and the indigenous economy. With little meaningful progress on rebanking the economy being made in that time, the question of Ireland's compliance with EU competition law surely arises. It is difficult to reconcile the current banking policy and behaviour with the almost daily warnings over the future of credit unions and post offices. Hundreds of post offices are set to close and credit unions are being pressurised into merging. Put simply, promoting Ireland's existing private pillar bank model, which accounts for 95% of the banking sector, is simply incompatible with driving the indigenous economy.
With more than 300 credit unions and 1,100 post offices, the platform is already in place to create a locally and regionally based alternative to the pillar bank model. There is pent-up demand throughout the indigenous economy for a sustainable funding model. As matters stand, the credit unions and post offices are severely restricted in terms of the products and services they can offer and to whom they can offer them. To date, successive Governments have applied discriminatory terms and conditions to credit unions and post offices compared with the pillar banks, which, on the face of it, appears to run counter to Irish and EU competition law.
What funding is finding its way down to the indigenous economy arrives through various circuitous routes, with profit extracted all along the money supply chain. As such, that funding ends up prohibitively expensive to indigenous enterprise. The Irish Strategic Investment Fund, ISIF, and the Strategic Banking Corporation of Ireland, SBCI, are cumbersome creations and, for the most part, act as intermediaries with no local focus. The Irish solution to funding SMEs puts Irish SMEs at a significant disadvantage to their German counterparts, which obtain funds at first cost from their public and community banks.
The Public Banking Forum of Ireland proposes an all-encompassing and full banking service model which will, on the one hand, compete with the commercial pillar banks and, on the other, provide a long-term and sustainable platform for the survival and growth of credit unions, post offices and the indigenous economy. PBFI proposes that credit unions and post offices collaborate in the establishment of a network of ten community or public banks supported by one central service provider. Credit unions and post offices will have the option of providing front of house services on behalf of the community public banks, thus re-establishing a locally-based, full-service banking model to serve communities and the indigenous economy. This new dynamic, created through a spirit of co-operation between the three entities, will massively boost the entire indigenous economy while providing a risk-averse platform for savers. It should be borne in mind that credit unions currently have little choice but to deposit members' surplus savings in risk-taking commercial pillar banks.
The new regionally based community and public banks will present credit unions and post offices with a new and alternative investment opportunity. Credit unions currently have circa €6 billion to €8 billion of under-utilised members' deposits. Currently, the return available on these funds is unsustainably low, on top of which Bank of Ireland is now charging credit unions for holding large deposits. Like the pillar banks, the new community and public banks will leverage these funds using the fractional reserve system but in a constrained manner using a conservative ratio of six to one, in line with the approach of the hugely successful German Sparkassen banking model. This could provide a massive boost to the indigenous economy throughout the regions. The regional community and public banks will recycle profits into making more locally focused loans available while also investing in local community projects, again in line with the German Sparkassen model. Lending will be focused on the productive economy, for example on SMEs, local micro-enterprises, construction, regional infrastructure, tourism, value added chain in both agriculture and marine and voluntary and co-operative enterprises. There will be no lending for speculative purposes.
