Irish banks, caught in the perfect funding storm

Irish banks are caught in a perfect storm of funding costs versus lending costs which spells bad value for consumers. This is clearly seen on the deposit and lending fronts, our banks can’t offer headline rates on deposits, nor can they charge sufficiently on lending. This is creating a multi-billion Euro dilemma which will ultimately be paid for by an already unfairly burdened taxpayer.

On the deposit side foreign banks can afford to pay far more than Irish institutions meaning they can hoover up deposits rapidly and with relative ease, on the lending side, Irish banks are unable to obtain the margin they need in order to compete and remain profitable.

When it comes to leading rates for indigenous lenders you will see that Anglo, despite being nationalised and having the inherent backing of the state on all deposits, is paying the highest rates for an Irish institution on  6 month (it is the best of the Irish institutions) and 1yr deposits (it is the best across the board on 1yr deposits) – this is well above the odds they should have to pay to attract deposits given the state backing, but it is also evidence of how badly regarded the failed bank has become [the nearest rate for a non-nationalised bank on 6mth Ptsb 1.5% and on 1yr Ptsb 3.1%].

The ongoing Banking Guarantee and the ensuing ‘equitable liability guarantee’ is costing the nation via the prices we pay for debt and the embedded cost to our banking system. Banks will pass on charges accordingly, but even with the protection the guarantee brings, the foreign institutions can still outstrip our banks on deposits, while our banks are charging less on mortgages!

This is putting the very banking system into a perfect storm whereby our indigenous players cannot make margin on loans which are increasingly defaulting, and at the same time they are unable to attract deposit business at leading rates because other institutions are out bidding them.

Foreign deposit only banks have several key advantages, they don’t operate branches in the country, this means they don’t have to spend huge money on the payments system the way branches do, they can then lend the deposited funds in any jurisdiction they want, and often they do so by charging rates that relate to the cost of funds, while Irish banks are left with negative margin products and a raft of non-performance. The foreign banks can thus attract capital by raising it here with low overheads and then lending it elsewhere (for instance in the UK or mainland Europe) at higher prices than they would achieve in the Irish market.

This issue is at the very heart of the survival of our banking system, lenders will need to find a way to gain margin by raising prices, drop down deposit rates, and shed staff in order to save money.

The first choice has limited scope as there are so many tracker mortgages out there, the weight of change will fall disproportionately on variable rate mortgage holders, this process has already started. The second choice will be nigh impossible, they can’t drop deposit rates or it compounds the issue they already have of not being able to attract capital (thus the state is going to play a vital role in saving our banks). The third choice of firing staff is unpalatable, but it will come in time as the sector adjusts, the question is – what do they do in the meantime?

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