I thank the Chairman and members for inviting us to make a presentation today. Given the brevity of this presentation and the fact that Irish Rural Link has adequately dealt with the micro issues in its rebuttal letter, we intend to devote our time to highlighting the macro issues involved and the joint consultation group’s abject failure to adequately inform Government of the machinations of the banking industry, in terms of regulatory failure; credit creation and the monopoly thereof by the pillar banks; the difference between creating credit for the real or productive economy and creating credit for financial transactions; and why Basel I, II and III regulations do not and cannot work effectively; why another financial crash is considered by many as inevitable; why artificially high interest rates being charged by our current pillar bank oligopoly are wholly incompatible with driving our indigenous economy; the imperative to introduce competition in the Irish banking sector; the illegal suppression of our credit unions and the fallacy of turning our post office network into an “agency bank” for the benefit of pillar banks and not post masters or communities. It is worth remembering that a partnership banking arrangement with An Post has already failed back in 2010.
The consultation group’s Government report incredibly has failed to take into account the article in the Constitution that deals with competition. Article 45.2.iv specifically states: "That in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole." We ask why Government, the Central Bank of Ireland and the Department of Finance repeatedly put the interests of pillar banks before those of the people, the indigenous economy and the general socioeconomic well-being of our country.
In that context, Professor Steve Keen of Kingston University in London has said that "the financial sector should be the servant of the rest of the economy, not the master but at the moment, it's the master of not just the economy but of the politicians as well .... [so] to break the nexus, we need a complete political shift". In the 1960s, the term "regulatory capture" was coined by an economist, Professor George Stigler, to describe the domination of regulatory agencies by big business through lobbying and selective information sharing. He claimed that regulatory capture is endemic and that regulatory agencies tend to be understaffed, unaccountable and peopled by bureaucrats, many of whom are drawn from the industries that are being regulated and see themselves as partners with industry rather than its overseers. Two economists, Dr. Daniel Kaufmann and Dr. Pedro Vicente, published a paper on legal corruption in 2011. It describes such corruption as taking many forms, including "cronyism, patronage and state 'capture' - when powerful groups manipulate policy formation to serve their own interests rather than the public interest".
Irish pillar banks currently have a monopoly on the creation of credit. The effect of this is to put them in control of the economy. They decide how much money will be created, to whom it is loaned and for what purpose. There is no effective control over bank lending. Pillar banks continually lend for speculative purposes. This leads to asset bubbles such as the property bubble, which brought about the financial crash ten years ago. Investment in the productive economy is kept to a minimum. The Basel regulations, which include tier 1 capital requirements, incorrectly assume that banks act as financial intermediaries by accepting deposits and lending the same deposits out again. The reality is that banks are creating money largely for speculative purposes with virtually no cap on credit creation. While this leads to high short-term profitability, it inevitably creates asset bubbles and ultimately leads to banks that are too big to fail. This partly explains why banks are not lending in any meaningful way to SMEs, microenterprises and farmers. Where they are lending, there is no ceiling on the interest rates being charged. This means Irish consumers pay the highest interest rates in Europe.
The circumstances I have described, in which pillar banks can charge what they like, is continuing unchecked and unchallenged, mainly because the Government and the captured Department of Finance refuse to countenance competition in the banking market. High interest rates apply only to those who succeed in obtaining credit from pillar banks. The reality is that banks are simply not lending to the productive economy. There is ample evidence of this in various ISME reports. There is a host of anecdotal evidence from farmers and people involved in small and medium sized enterprises. The figures that have been reported are exacerbated by the fact that many customers are being informally refused before they go to make formal applications. Such refusals are not taken into account in the official figures. We see this time and again.
The Minister for Rural and Community Development, Deputy Ring, has acknowledged the roadblock facing the indigenous economy arising from the behaviour of the pillar banks. As he said in April of this year:
There is a problem and I am hearing every single day as a rural Deputy, not as a Minister, how banks are dealing with consumers. We do need a bit of competition in the market. Banks have certainly lost the sense of what they used to do and are certainly not there for the people anymore. They are there for themselves, not for the ordinary general public who need banking services.
Before we submitted our detailed proposals to the joint consultation group, we engaged with the Department of Finance and the then Minister for Finance, Deputy Noonan, to make proposals in respect of public and community banking. They responded to us by saying that public and community banking would bring no additionality to the banking sector and to the needs of Irish consumers and small businesses. In many ways, the views put forward by the consultation group in its report were to be expected. It could be interpreted that the outcome of the consultation was a foregone conclusion and that the consultation was no more than a mechanism to fulfil commitments made by the Government in the programme for Government. More commitment is needed.
The consultation group has made multiple references to the Strategic Banking Corporation of Ireland, SBCI. We dealt with the SBCI in detail in Appendix 2 of our presentation to the Joint Committee on Communications, Climate Change and the Environment. The SBCI is merely an on-lender, with the bulk of its loans - over €700 million to date - going to the pillar banks. This strategy serves to further consolidate the oligopoly enjoyed by the pillar banks. It allows them to gouge huge profit margins from further on-lending. I remind the committee that 80% of funds on-loaned are guaranteed by the SBCI. The funds provided to the SBCI should, at the very least, have been made available to credit unions and post offices.
They could more prudently have been used to assist in setting up public and community banks. As it stands, the SBCI model borders on the provision of illegal state aid to the pillar banks, at a time when post offices and credit unions continue to be suppressed.
The real problem is not funding - it is a culture of reverence to the pillar banks that does not serve the public interest. This fundamental aspect of the matter must be changed if Ireland is to build a self-sustaining indigenous economy. Western countries are realising the folly of allowing banks that are too big to fail to dominate their economies. Four of the larger credit unions in Canada now have banking subsidiaries. There is a clamour to reintroduce postal banking in Canada's 6,000 post offices. Mr. Bernie Sanders, who is a former presidential candidate in the United States, recently introduced the Too Big To Fail - Too Big To Exist Act, which provides among other measures for the break-up of US banks that have a total exposure of more than 3% of that country's gross domestic product. It is time for Ireland to take the lead in financial and banking reform. We can start this by quickly convening the promised stakeholder forum, setting a tight timeline and bringing in the requisite experts in the field of finance and financial reform to assist stakeholders in arriving at long-term workable solutions in the public interest. I thank the committee for its time.