Last month it emerged that Ulster Bank – the last major bank in Ireland to offer free current accounts – would introduce charges, while just last weekend there were reports that AIB would cut its deposit interest rates. Here banking expert Ronan Coburn explains why it’s downhill from here.

HAVING RECENTLY attended a Tax Tips Seminar, I was reminded of this fact: Those of us whose wealth relies on our individual income will continue to take a hiding every pay-day, with tax rates at 52 per cent and set to rise further.

Whereas those who can reinvent themselves as limited companies, or those of us who have acquired (or earned) capital assets have much more tolerable tax rates (of 25 per cent or lower) to live with. It is the average docile citizen (or consumer) who, is unable to be domiciled abroad and resident in Ireland, and therefore will continue to be financially taken advantage of by his or her bank and by the Irish State.

An entirely predictable development is the recent news that Ulster Bank is now joining AIB and BOI in applying quarterly account management fees to all current accounts. These costs will be an inevitable part of the future for all consumers of banking-related services.

Irish retail banks have large holes in their balance sheets as a result of (a) their loan losses on bad lending, and (b) their inability to source low-cost funds from the wholesale inter-bank market in Frankfurt. To a large degree these ongoing future market conditions are rooted in the Irish banks’ throwing their Good Lending Practices Book out the window and adding fuel to an already over-heated property market, in particular from 2004-2008.

Consequently, prevailing bank lending market conditions are such that Irish retail banks are now only willing to lend to very strong low-risk lending propositions, and even then at very substantially marked-up interest rates. In fact it is preferable, from the banks’ internal funding perspective, to re-invest low-cost ECB rescue funding into higher-rate inter-bank investment accounts in order to achieve zero-risk, zero-resources net income streams to patch-up their damaged balance sheets.

‘The Irish banks can never return to the 1990s’

From an internal bank due diligence perspective, the Irish banks (post-economic boom) will never be in a position to return to the days of the nineties and the early noughties, which were broadly characterised by banks ignoring borrowers’ balanced risk-sharing, in favour of proceeding with (and actively encouraging) 90 per cent to 120 per cent private and commercial mortgage financing. In these endeavours, the banks vigorously competed with one another for very complex, high-risk and under-secured very substantial credit proposals. Senior lending executives were heavily incentivised in bringing such credit proposals into their respective credit committees. Recent revelations in bank investigations have revealed that AIB Bank (now 98.9 per cent owned by the Irish state) developed highly focused and targeted strategies to beat Anglo Irish Bank in bringing home such proposals.

Additionally, and even more outrageously, there is now evidence that bank heads very vigorously and successfully lobbied our last government (and incompetent compliant regulators) to enact the Asset Covered Securities (Amendment) Act in 2007, to effectively allow the banks to legally utilise existing high-risk commercial mortgages as ‘security’ to raise further low-cost inter-bank financing in order to lend to even more commercial mortgage borrowers, in a type of domino-effect fever. In my view it was in 2007, when the Asset Covered Securities (Amendment) Act was enacted that the fuse was lit on the time-bomb that was the Irish property bubble.

The above scenario, which was unique to Ireland, is a major underlying causal factor for the inter-generational ongoing calamity visited on our national finances.

It is also the reason why consumers and SMEs in Ireland will continue to experience high-cost banking services, excessive lending rates, increasing tax rates and higher imported goods prices for very many years to come.

But in tandem with the newly-passed EU Treaty government-spending controls, the Central Bank’s vigorous and robust fitness and probity compliance measures for senior Bank Executives in Ireland, and the Irish retail banks’ capital adequacy controls on reckless financial overtrading, there is a good chance that normality may be restored circa 2031. This estimated timescale is one eighteen-year business cycle.

Ronan Coburn is a Dublin-based independent banking consultant, forensic accountant and expert witness. He is also a member of the Institute of Bankers in Ireland. Further information at thebottomline.ie.