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 quo for 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.