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Why Danske Bank Pulled Out and What it Says About the Irish Banks
It's more bad news on the jobs front from the Irish banking sector, but something doesn't quite tie up. The full scale retreat from the Irish banking market of ACC and Danske Bank - and rumours suggest Ulster Bank may be next - comes at a time when the worst has passed and banking margins and profits are on the up. It's not just bad news on the jobs front; it's also bad news for consumers and small businesses which are looking at a retreat to 1980s-style duopoly banking.
Rabo Bank, the owner of ACC, is well capitalised and might be excused for wanting to rid itself of a problem child and confine to history a poor move in the first place. Danske bank, it seems, may be reacting to not only increasing regulatory pressure in its home market, Denmark, for stronger capital ratios but also increased political pressure.
In early October last, the Danish government won political support to require strategically important banks, including Danske Bank, the country's biggest financial institution, to have a minimum capital solvency ratio of 15 per cent of risk-weighted assets, up from 12% previously, over a five-year period. It appears that in Denmark politicians are, for once, making the hard decisions.
In Ireland, the black hole of mortgage debt write-offs has not yet been dealt with. But banking margins are improving. In the mortgage market, for example, it'll cost the consumer near 5% for a mortgage. Yet, at the same time, deposit rates are drifting down towards the ECB overnight rate of 0.5%. Yes, the banks are making strong returns again, and at the consumer's expense. The Government, in its recent budget, has added insult to injury by taking 41% of whatever meagre deposit rates are on offer.
Despite the fact that gross banking assets as a per cent of GDP in Ireland remain dangerously high at 250 per cent, Bank of Ireland, as an example, gets away with a capital solvency ratio of circa 8% - nearly half the level now being forced on Danske Bank.
Is it possible the Irish Government has its head in the sand or are they adopting Fianna Fail style politics? If the capital adequacy bar for banks in Europe is being raised then surely, to attract liquidity funding at least, the Irish banks should be put on an equal footing. But then that would mean rights issues for the Irish banks, and we know who has to pony up the majority of any new funding round.
Squaring the circle, the Government should insist on more capital for the Irish banks and dilute existing shareholders. This would not only increase the banks' capacity to lend but it would also facilitate the necessary debt write-offs, which, in turn, would underpin a recovery in consumer spending, and avoid laying the entire burden of the banking adjustment at the consumer's door.
Minister Noonan and the Fine Gael party either don't understand the issues or should be ashamed of themselves for not grasping the nettle as many in Europe are starting to do.