If someone founded a new lending bank, would you support it

[onq]

I went to Frontline last night and had a ringside seat to Brian Lucey and the Government rep having a frank exchange of views.

The Third Option to be discussed by the panel was an outside bank taking shares in the Irish Banks.

Predictable nonsense about how this might not be good for Ireland followed.

I was a bit miffed when no-one suggested wht people have been talking about for months here, and what several of my clients have suggested:

Start a new lending bank for business.

Lucey suggested I start one myself when I spoke to him later.

So I'm posting here to air the idea once again:

Here is a link about starting a bank €5M will do the trick according to this website:

[broken link removed]

They question is, in a conservative nation would people support this new bank,

Remember, no baggage, no debts, just funding to be lent out straightaway, letting credit flow back into the Irish Economy.

According to Lucey even €5Bn in capitalisation wouldn't be enough, we'd need €60Bn, but I cannot see why so perhaps someone could advise here.

From where i'm standing Lucey's position seems like telling a starving man that the fish is off the menu, when all he needa to stay alive is a crust of bread and a drink of water.

What say you?

ONQ,

 

[Brendan Burgess]

The short answer is no.

The long answer is...no.

There is something which I just don't understand and people have not been able to explain it to me. We have come through around 10 years of unprecedented economic growth. Businesses have made huge amounts of profits and generated huge amounts cash.

Some businesses have held on to these profits to fund them through the bad times.

Other businesses have
1) either not been profitable during a boom
2) have been profitable but have squandered the cash

I have asked a few practising accountants this and they have told me it's mainly the latter.

Most business people have reduced their personal expenditure in response to the lower profits. Some have not. They are still taking high salaries to fund their lifestyle and are criticizing the banks for refusing to fund good businesses.

I would love to know the full story of the agricultural contractor on FrontLine last night. He gave the impression that he was up to date with all his repayments. He missed and the bank seized his tractor. This is very unusual behaviour by the bank. Normally they work with people for a considerable time and only repossess after months of failed agreements.

So the people who want to borrow now have not been great financial managers during the boom. Do you really expect them to be profitable during the bust?

The well run businesses are not finding it difficult to raise money if they need it. ISME claims that 50% of business loan applications are being refused. That means that 50% are being accepted. I would imagine that these are the well run businesses.

If the government wants to set up a "Good Bank" to donate tax payers' money to badly run businesses, that is a political decision for them to make.

There is an argument for the government to donate more money to businesses to get the country going again. But I don't think that indivduals should.

 

[tiger]

I would tend to agree. While there does appear to be alot of general stories about how banks have tightened credit, any specific examples I see in the media are usually cases of business that don't look very healthy.

 

[number7]

We cant have it both ways.

We as a nation are chastising the banking system for reckless lending while at the same time we are hounding them for not lending to sme sector.

I cant think of too many business sectors I would lend my cash to (if I had any) in this climate.

Banking is business, lending for profit to generally low risk areas, Ireland is not low risk at the moment, as the risk declines the lending options will increase.

 

[Sunny]

Why on earth would anyone put deposits into or lend to a bank with €5m of share capital?

 

[onq]

The short answer is no.

The long answer is...no.

There is something which I just don't understand and people have not been able to explain it to me. We have come through around 10 years of unprecedented economic growth. Businesses have made huge amounts of profits and generated huge amounts cash.

Some businesses have held on to these profits to fund them through the bad times.

Other businesses have
1) either not been profitable during a boom
2) have been profitable but have squandered the cash

<snip>

Granted you have done the research Brendan, even if only anecdotally and perhaps with a less that relevant population number, but I accept what you say.

However you forget two other kinds of businesses.

3) developers who rolled their profits over into purchasing land banks at what now seem to be extortionate prices or into developments affected by the crisis - there was a programme late last year that detailed at least two first time developers who were caught like this and say their equity acquired over many years in other businesses vanish. The money originally came from well-run businesses.

4) people who traded profitably and well, not extravagantly and who put their money [unwisely in retrospect] into Bank shares, Blue Chip Investments, or property to avail of double digit growth to maximise their returns, only to see their investment obliterated. There is no suggestion their money came from anything other than well-run businesses.

Neither of these accord with the stereotype of the profligate spender, although I accept some were. There was a strongly expressed opinion last night on Frontline - that was not contested by the government representative - that banks were not lending.

The government representative admitted as much and when Kenny closely questioned him as when they would start lending he answered
" ... sometime this year."

That, quite frankly, isn't good enough - not by a long shot.

That doesn't square with ISME's 50% comment or the comments from the accountant's you spoke to and it was made on the national carrier, so I assume if a well-prepared government representative was aware of even anecdotal evidence supporting your comments above, he would have made the case your research reflected - he didn't.

So if, by the admission of the government representative, and based on questions thrown up by a team of expert researchers, the banks have no money to lend - what's to be done?

Continue to fix the broken banks, to reach some arbitrary capital ratio designed to cater for normal levels of runs on deposits in normal times?

We're not in normal times, Brendan, and the attempts to re-capitalise as opposed to lend funding businesses and raising the level of transactions is what's holding back our recovery.

Nor do I think its fair to go from a torrent of credit to a drip for private purposes, so long as people are able to pay back their loans.

I accept we've seen a few instances of overstretched credit ratings here and on other websites, but I have heard several anecdotes of people with normal/good current cash flow not being able to get car loans, last year for example.

In one case it was a business person with an excellent credit rating who couldn't get a car loan. He could get a loan to extend his property, but not to replace his car. Utter nonsense in the context.

Then there are the people I've spoken with this year in networking meetings and functions. Two people confirmed they'd love to go forward with extensions to their property but can't arrange finances.

So I'm saying that while you may have some anecdotal evidence to support bank lending - and I have to admit our our bank is very supportive of our office - the show last night really affected me, presenting as it did the widely held opinion, not refuted, that banks aren't lending - yet!

My understanding of the gist of the comments from the government representative was that it would take time to bring them back to a level of capitalisation - involving the injection of many more billions of Euros from either the taxpayer or private investors, that lending would only be beginning this year, and would not be up and running for another couple of years.

So if we have three years to wait for credit we won't see a recovery this side of 2013 and possibly 2015 - and that's unacceptable.

We need credit to start flowing now, and not be putting fig leaves on banks who were part and parcel of the profligacy that went on.

In the words of one banker I know "we went from lending money, to selling money - that's where we went wrong."

I'm nut suggesting a return to profligate spending with no checks and balances - OTC I think that banks customer relations managers should take a far more pro-active and invasive role in relation to the monies they lend, resist lump sum handovers, encourage staged drawdowns and payments and at all times minimize the banks and their customers exposure to the negative effects of being in a loan or credit-supported situation.

But the fact is people do need credit, not least because they haven't been paid for services they have rendered or goods they have supplied.

Builders are underbidding to get tenders, knowingly intending not to pay certain suppliers to break even.

Clients are refusing to honour fee agreements and themselves have gone bust owning millions.

Look at the situation Traynor O'Toole architects ended up in last month. This may well be repeated across the architectural profession, where both award winning practices and tight commercial concerns are suffering.

So when I say that finance isn't available its not off the top of my head and when I suggest a new commercial lending bank its not because I believe the banks will recover or are recovering to what is needed.

We probably need 60Bn in deposits to fund a minimum of 30Bn in lending according to one source - I'm not dropping names.

But if we have zero or next to zero billions, then even one new lending institution with no strings attached will prosper and help the economy to grow. The big banks will eventually over take it [and possibly overtake it], but the trickle of credit it supplies will help us move forward in the short term and offer hope to potential borrowers to keep going through this.

And of course once its built up a network of say 50 or so outlets, it becomes a national footprint and that might attract some foreign investors to a small bank going places.

Regardless of what transpires, all it not as well as your accountants make out Brendan, and someone needs to be seen to be doing something effective, and soon.

FWIW

ONQ.

 

[onq]

Why on earth would anyone put deposits into or lend to a bank with €5m of share capital?

Its not about "would anyone put deposits into or lend to a bank with €5m of share capital".

Quite the contrary.

We need a bank that can lend and this is the minimum amount you need to set up a bank, according to a link I visited last night.

Feel free to contradict this figure, but its lending from I'm talking about, not depositing in or lending to it.

Apart from the initial capitalisation, of course.



ONQ

 

[onq]

We cant have it both ways.

We as a nation are chastising the banking system for reckless lending while at the same time we are hounding them for not lending to sme sector.

I cant think of too many business sectors I would lend my cash to (if I had any) in this climate.

Banking is business, lending for profit to generally low risk areas, Ireland is not low risk at the moment, as the risk declines the lending options will increase.

Lending to SMEs does not equate to reckless lending and I would ask that you withdraw that comment.

The lack of lending is increasing the risk, as the number of transactions falls and the economy contracts.

Banks know there is a degree of risk to every loan and once the get their actuaries out of whatever shock or headshop induced paralysis they're in we can start taking a balanced, not a panicked view.

ONQ.

 

[canicemcavoy]

Then there are the people I've spoken with this year in networking meetings and functions. Two people confirmed they'd love to go forward with extensions to their property but can't arrange finances.

Are these extensions related to business or to private property? If the former, that is of concern. If the latter, I hardly think that building kitchens is one of the more pressing issues facing the nation's banks at this time.

 

[Brendan Burgess]

In one case it was a business person with an excellent credit rating who couldn't get a car loan. He could get a loan to extend his property, but not to replace his car. Utter nonsense in the context.

Look at the situation Traynor O'Toole architects ended up in last month. This may well be repeated across the architectural profession, where both award winning practices and tight commercial concerns are suffering.

Hi Onq

You asked if we would invest or deposit in a small bank? The answer is clearly no.

There is a separate issue as to whether the government should donate money to businesses to get credit and employment going. Well definitely not for car loans or extending properties.

I don't think that they should lend to architects either - even if they are prize winning.

You don't mention them, but they should be closing down hotels, not lending to them.

There is huge oversupply in many industries - the legal profession, architecture, hotels etc. They have to be allowed to contract to a size appropriate to the economy. If the taxpayer props up the weaker ones, the whole sector is weakened. If they let them go, then the remaining ones will be more viable long-term.

The problem with NAMA is that it won't get the credit flowing of itself. But without NAMA , there will be no credit or banking system. It's a very difficult problem to solve.

On the guy building the extension. If the banks lend to him that will create jobs for the builders and suppliers. So maybe it should be encouraged.

One of your friends could get a loan for an extension. Two couldn't. That is the way credit works. It depends on his income and his level of borrowings. The banks have taken huge losses on car loans so they are probably trying to cut their exposure to this at the moment.

 

[DerKaiser]

Its not about "would anyone put deposits into or lend to a bank with €5m of share capital".

Quite the contrary.

We need a bank that can lend and this is the minimum amount you need to set up a bank, according to a link I visited last night.

Feel free to contradict this figure, but its lending I'm talking about, not depositing or lending to it.



ONQ

What happens once you lend out the first €5m? A large part of the current problem is that the banks, like you have just done, felt they could operate a lending business without having sufficient deposits backing it.

I am, however, starting to have sympathy for the view that we could end up blowing more money than we need to get the economy going again through re-capitalising AIB and BoI.

I accept the stability of the banking system and our ability to attract continued external funding are a very delicate matter but I'm getting the impression that the banks incentives from here will be to make themselves bombproof by building up their capital ratios. This is at odds with the requirement to get economic activity going again.

Perversely, I think payments to the banks arising from NAMA and any recapitalisation payments need to be made on the basis that the banks should hold a weaker solvency position than they would otherwise choose.

 

[onq]

Are these extensions related to business or to private property? If the former, that is of concern. If the latter, I hardly think that building kitchens is one of the more pressing issues facing the nation's banks at this time.

You can refer to Brendan's reply above also, but the issue isn't what the extension is for.

Anyone with the finances to service a home improvement loan should be in a position of accessing credit to allow them to carry out these works.

The point being that the work so done will help sustain in a small way the competent building industry we have developed and this in turn will help the economy through the multiplier effect.

If you cannot see the importance of having a lot of small loans that people can afford to pay back going around at this time you may be missing the point.

The spin-offs support the economy, the banks get supported - even the other banks - through microcharges on transactions and everything starts to grow again.

Being dismissive of any enterprise is not appropriate at this time.

This is prudent lending we're talking about, regardless of whether its is "business" or "private" and its exactly what the economy needs at this time to help get it back on its feet.

ONQ.

 

[onq]

Hi Onq

You asked if we would invest or deposit in a small bank? The answer is clearly no.

There is a separate issue as to whether the government should donate money to businesses to get credit and employment going. Well definitely not for car loans or extending properties.

I don't think that they should lend to architects either - even if they are prize winning.

You don't mention them, but they should be closing down hotels, not lending to them.

There is huge oversupply in many industries - the legal profession, architecture, hotels etc. They have to be allowed to contract to a size appropriate to the economy. If the taxpayer props up the weaker ones, the whole sector is weakened. If they let them go, then the remaining ones will be more viable long-term.

The problem with NAMA is that it won't get the credit flowing of itself. But without NAMA , there will be no credit or banking system. It's a very difficult problem to solve.

On the guy building the extension. If the banks lend to him that will create jobs for the builders and suppliers. So maybe it should be encouraged.

One of your friends could get a loan for an extension. Two couldn't. That is the way credit works. It depends on his income and his level of borrowings. The banks have taken huge losses on car loans so they are probably trying to cut their exposure to this at the moment.

Actually, Brendan, that wasn't what I asked and I wasn't trying to be clevreor trap people with words or assumptions.

I was very specific - I asked:

"If someone founded a new lending bank, would you support it"

I specifically didn't intend it to be a deposit-taking bank per se becase I was concerned that taking deposits might harm the trading porfitability of the larger banks that are in such trouble.

I designed this primarily [in my head at least, although obviously I didn't communicate this well enough ] to be a bank to supply liquidity to the Irish economy.

Your argument about apropriate sizing of market sectors seems oddly inappropriate given the scale of the economic problem and the investment professionals make to become trained.

Merely telling people to disappear, emigrate or go back to college isn't good enough, although a direction and a strategy as to how to export the oversupplied skills and competences would be useful.

---------------------------------------------------------

In relation to Traynor O'Toole I said this.

"Clients are refusing to honour fee agreements and themselves have gone bust owning millions.

Look at the situation Traynor O'Toole architects ended up in last month. This may well be repeated across the architectural profession, where both award winning practices and tight commercial concerns are suffering."

This wasn't intended as a plea to lend money to architects per se.
This was intended as part of the rebuttal to your comments noted below:

"Some businesses have held on to these profits to fund them through the bad times.

Other businesses have
1) either not been profitable during a boom
2) have been profitable but have squandered the cash

I have asked a few practising accountants this and they have told me it's mainly the latter. "

This seemed to me to unfairly suggest that most people were imprudently spending.

In the case of these architects they didn't receive the profits - expenses and costs were incurred in good faith for which they could reasonably expect to have receive fees following later billing points - this didn't happen and they paid the price for working for several large clients who are now in difficulty.

--------------------------------------------------------

It is a very unwise government that allows obliteration of a professional class, whether it is solicitors or architects. The numbers were increased at a screaming rate during the boom and now there is not enough work to support them - temporarily.

It is quite clear that professional firms which are viable should be supported to a degree to maintain our skillsets and competence in this country which have reached world-class standard in the last five years or so.

It is also quite clear that we need help to assist those still willing to practice - and many are sodiscouraged that they have given up - a total indictment of our society IMO.

I find the suggestion that the professions should now "contract" to match a diysfunctional economy unhelpful.

Let this economy heal its wounds, but lets market ourselves on a global scale - not every country is experiencing this crisis.

As far as I can see it is necessary to push ourselve beyond nimbyism to reach inspired solutions to leverage our open economy and global reach to ensure that our economy thrives again.

---------------------------------------------------------

Today I spoke to a builder based on the west coast about getting costs in for a house. In passing he told me of his company name and mentioned another, then corrected his statement to say it doesn't trade here, but in the middle east.

A rural Irish building company with a sister company supplying building services in the middle east.

In a country completed untouched by all of this crisis situation.

That is an intelligent, sustainable option.

Crises do not hit all countries equally.

That is a sustainable international marketing strategy that could provide sustainable employment for the tens of thousands of unemployed Irish building workers who are on the dole.

We have world-class designers and world-class builder and we need to export their skills.

Doing things like this [and I accept I am commenting on my sector of industry] is one way to leverage our position as an open economy and repatriate profits where these companies choose to be based here for tax reasons to support Ireland.

This is the hook for future business lending - it cannot just be about lending ot indigenous companies - some proportion of the total monies lent must be lent to exporting companies who agree to repatriate profits and that is a decision only government policy can enforce.

And for that we need a business lending bank which I call on you to support.

ONQ.

 

[number7]

Lending to SMEs does not equate to reckless lending and I would ask that you withdraw that comment.

The lack of lending is increasing the risk, as the number of transactions falls and the economy contracts.

Banks know there is a degree of risk to every loan and once the get their actuaries out of whatever shock or headshop induced paralysis they're in we can start taking a balanced, not a panicked view.

ONQ.

Dont see anywhere I suggested that lending to sme's is reckless (That could only be decided on a case by case basis) so there is nothing to withdraw.

I did say the banks were being chastised for reckless lending. Am I incorrect?

I did say that Lending was not low risk in Ireland at the moment, do you disagree?

The only way I can see funds being released into the SME sector is if it is government backed by way of a stimulus as they are the only ones who have the countries greater good (I know debatable, but they should have) as their aim.

I am a small business owner, I would be delighted if what you are proposing was realistic but I am sorry I cant see it. Hope I am wrong.

 

[onq]

Number 7,

Perhaps you could parse this for me:

"We as a nation are chastising the banking system for reckless lending while at the same time we are hounding them for not lending to sme sector."

This appears to suggest that lending to SMEs is on a par with reckless lending.
If that is what you intended, I would ask that you withdraw that comment.
If that is not what you intended, please clarify.

TIA

As for the rest of your comments above, I too am a small business - a very small business as it happens

I want to take the government out of the lending equation in terms of administering it and make this the responsibility of a dedicated business lending bank staffed by persons competent to oversee the lending and the loans as describe above.

The initial deposit can be a deposit the government or the monies a minimum of 20 private individuals put in to start the bank.

ONQ.

 

[sunrock]

There are banks,credit unions,venture capital companies,rich individual investors.
I am sure one or more of the above would invest in a promising enterprise with a realistic earnings potential.
However as our economy is contracting and a few more billion is going to be taken out of peoples wallet by Mr Lenihan next year,there is going to be less purchasing power in the irish economy and so why would anybody lend money to set up a new pub,hotel,hairdressers or any small buisness sector where there is overcapacity. Let the existing buisnesses fight it out for market share and let the uncompetitive ones go out of buisness.Even architects offices must compete with each other and it is survival of the fittest.

 

[onq]

sunrock,

What happens if all the businesses go under?

Unless people in authority stop quoting misplaced Darwinism and provide a working credit facility and an appropriate level of credit that's what will happen.
The knock on effect of big players will take out little players reeling from unpaid debts, as well as a lack of credit.
There will be no orderly winding down of companies, there will be mass extinctions.

Evolutionists will say this is normal, but read the fossil record again - whenever the dieback was extreme it became that much harder to achieve diversity and growth again.
In business terms, you can deal with poor trading conditions, an unusual level of bad debt, or a low availability of credit but not all three conditions at once.
Banks normally clean up in a period like this, by screwing us when we're down, citing the increased risk as a factor in setting interest rates.
This time they are caught feathering their nest with ridiculously loan interest charges, ten percentage points over the base lending rate.
Thsi was another thing mentioned on Frontline last evening and has nothing to do with increase in mortgage interest rates.


Merely allowing dieback on such a massive scale will in and of itself damage - not strengthen - the economy.
Weeding out presumes decimation - a 10% reduction - which leaves a large population of survivors and a reasonably rapid return to growth.
I have no figures for elsewhere but in the architectural profession this has equated to well over 50% unemployment - in a profession, for goodness sake!

The mass lay-offs in the legal and architectural professions aren't resulting in the usual natural progression of a lot of smaller leaner companies fighting for survival and driving down costs - why is that, do you think?
Because amongst other factors, the normal start up capital loans aren't available AND the credit for people to undertake small building works which are theri bread and butter - such as extensions - ALSO isn't available!
The Darwinian "survival of the fittest" that applies to species over hundreds of millions of years is inappropriate to the business sector when all the conditions are critical.
You won't see survival of the fittest - you'll see extinction of the population.

Something has to give unless someone offers a ray of hope - that's really what my idea of a business lending bank is- just a ray of hope.

ONQ.

 

[jack2009]

In what manner are you asking us to support this new bank if you are not looking for deposits?

The link you post says that one of the rules to open the bank is to have IR£5million in paid up share capital but it does mention that further funds should be available.

It also mentions that certain liquidity ratios have to adhered to, I would assume this means that the full €5million would not be available for loans. Perhaps someone would know the exact ratio.

Obviously, if you could find 20 people to invest in your bank what rate of return would they expect to see and how would you plan to make this possibly high risk idea appeal to these investors.

How high would your interest rates have to be on loans cover expenses and return on investment for investors and also possible bad debts.

What rules will you apply in vetting people applying for loans?

I could go on but I dont see a new bank as being a solution.

Banks are lending, the only problem for many is that now the banks are really looking for security, rounding figures down and being prudent (what they should always have been doing). Granted this does not really help start up companies but in the past banks did not lend to risky start up companies either, these people had to seek funding elsewhere.

So I guess your bank would be getting applications from people who were rejected by the main banks and therefore more of a risk.

I think you would be better investigating setting up a venture capital company.

 

[number7]

Number 7,

Perhaps you could parse this for me:

"We as a nation are chastising the banking system for reckless lending while at the same time we are hounding them for not lending to sme sector."

This appears to suggest that lending to SMEs is on a par with reckless lending.
If that is what you intended, I would ask that you withdraw that comment.
If that is not what you intended, please clarify.

TIA

As for the rest of your comments above, I too am a small business - a very small business as it happens

I want to take the government out of the lending equation in terms of administering it and make this the responsibility of a dedicated business lending bank staffed by persons competent to oversee the lending and the loans as describe above.

The initial deposit can be a deposit the government or the monies a minimum of 20 private individuals put in to start the bank.

ONQ.

I am suggesting (badly) that lending to sme's is suffering because the overall risk of lending into this country, regardless of sector, is now high (mainly caused by reckless lending, not necessarily to the SME sector) and until this stabalises I cant see a new or existing institution starting to lend to any significant extent unless it is government funded.

I accept that it was badly written and open to misinterpretation.

I was interested in the idea, last year, of a gov sme bond, set up along the lines of the ssia's where Joe Average could save in a fixed rate fixed period bond and the money would be loaned to the sme sector through the Credit Union system. A 1 billion fund for sme's administered via the cu set up. Could this not have the same effect as what you are suggesting but not have the same issues of ratio attached.

 

[PaddyBloggit]

Simple answer .... if I needed a loan and the rates were good I'd take out the loan so in essence I'd be supporting a new lending bank.

My answer - yes I would.