Irish banking was already in trouble even before Ulster Bank’s and KBC’s departures and the announcement of the closure of many Bank of Ireland branches. Banks are simultaneously faced with a likely spike in loan defaults in 2021 and persistent difficulties, stemming from the 2008 crash, in rebuilding their loan books. The tracker mortgage scandal has not helped. Bank fees are increasing, and the government’s suggested measures for equity sharing for homebuyers may have undesirable side-effects.
On top of this, Ireland’s economy has structural problems dating from before the pandemic which heavily expose it to severe systemic risks in the global financial system.
Creative thinking that takes both effectiveness and resilience into account is needed, within Ireland and worldwide.
Effectiveness in Irish banking is being undermined by the near-monopolisation of the sector, the high-capital-reserve lending requirements, the restrictions on repossessions, and the deposit insurance system. (Just to be clear – some of these are understandable and indeed necessary right now, but we’ll need to think beyond them for the future; they’re problematic because they render the system unaffordable for many.)
Resilience – the ability to bounce back after shocks – is being undermined, first and foremost, by the financial sector’s worrying unpreparedness for the energy transition. Other factors include high indebtedness in Ireland, the fact that the dominant Irish banks have a mandate to maximise profits to shareholders, and, again, deposit insurance (because it creates a moral hazard for banks by automatically bailing them out if they make mistakes).
The economy ultimately runs on energy, and urgently-needed decarbonisation, accompanied by resource shortages, will soon result in massive shifts in both the quality and quantity of energy available. It’s highly likely that this will affect global and Irish productivity growth, which in turn will affect both credit demand and the ability to service existing debts.
So, what can be done?
Ireland could benefit from the introduction of regional public or mutual banks, which have an impressive track record in supporting economies elsewhere. Such banks would improve the financial sector’s effectiveness by providing healthy competition for the big commercial banks, and historically they have proven more resilient to downturns and shocks, such as the 2008 crash, than commercial banks.
They can also help to build ecological resilience by strengthening local economies, helping them to save precious energy and reducing their carbon footprints, for example by lessening their dependency on the transport sector to supply them with goods.
Our recent Feasta event ‘Banking on the Community: investing for resilience’ (co-hosted with the Cork Environmental Forum), explored the potential for regional public and mutual banking in Ireland in some detail. It included speakers from the Public Banking Forum of Ireland and the Northern Mutual campaign that will form part of the UK-based Community Savings Bank Association.
However, even regional public and mutual banks could be endangered if confidence in the economic future collapses in an era of high indebtedness and erratic and declining energy supply. We need an additional ‘grounding wire’ for the financial sector, so as to prevent panics and provide us with a way out of the capital-reserves-requirement and deposit-insurance traps.
The root of the problem is that most money in the economy at present has its origins in profit-oriented commercial bank lending. That is, it comes into the economy in the form of loans and therefore its very existence depends on credit demand. But in times of recession, many people and businesses are understandably reluctant to take on new loans if they can avoid it.
During the COVID pandemic, central banks and governments jumped into the breach, with governments taking on the role of borrower of last resort. This has definitely helped enormously in the short term, but in the longer term it may exacerbate financial instability and inequality unless other measures are taken.
How about a recession-hardy and shock-resistant money system?
We need to find a way to decouple the overall money supply from productivity expansion, while avoiding a return to ossified and regressive practices such as the gold standard.
Money creation doesn’t have to be linked to gold or GDP growth. It can simply be spent into existence. Cash is an example of that. The UK-based organisation Positive Money, and the 2018 ‘Vollgeld’ campaign in Switzerland, have argued in the recent past for an overnight transition from commercial-bank money to 100% debt-free publicly-issued money which could be kept in circulation through thick and thin, upturns and downturns.
But this can’t be implemented unilaterally by a Eurozone member state, and in any case, such an abrupt change could panic financial markets (and, indeed, ‘ordinary’ people with savings).
A more incremental approach would be preferable – but with a firm timeline, because the energy transition can’t be postponed.
One initiative from the Netherlands that has gained a 100% consensus vote across political divides in the Dutch House of Representatives is ‘personal safe accounts’. This emphasises the right of deposit-holders to choose to store their money in a risk-free location, as opposed to the current situation whereby they are at the mercy of commercial banks’ investment choices. (Even though the official line on this in Ireland is that deposits up to €100,000 are covered by an insurance fund which the banks pay into, in practice a systemic collapse would inevitably mean drawing on taxpayer funding sooner or later.)
Implementing personal safe accounts would be a two-step process, so as to reduce financial market turbulence. The first step requires legislation on a national level, while the second would involve Eurozone member states acting together.
In Ireland, even the first step alone – creating personal safe accounts held at a non-profit depository, with a limit on the amount of money that could be held in them free of charge – would help to generate enough flexibility in the system to enable Irish and European authorities to gradually phase out capital requirements for lending and deposit insurance. It would lower entry barriers to competitors and subject the big commercial banks to greater market discipline.
The second step would entail passing legislation in the Eurozone countries that defines balances in personal safe accounts as money (instead of claims to money), and ends the one-to-one parity between commercially-issued credit and currency. By ensuring that there is a stable and functional money supply which is free of any dependency on economic growth, it would take us some considerable way towards having a resilient, ’growth-neutral’, recession-hardy Euro.
Paradoxical though it may seem, personal safe accounts could actually free up the capacity of both public and commercial banks to build and maintain their loan books; it would also free them to make fuller use of other ways of supplying credit, such as equity sharing. This would be be simultaneously grounding and stimulating for the economy and for society as a whole.
Personal safe accounts, public banking and mutual banking will all have important roles to play, but they’re not magic bullets. They need to be accompanied by a range of other measures.
To ensure that finance truly supports the energy transition, external measures such as Cap and Share that place firm limits on the use of depleting or damaging resources will be needed. In addition, given the state of indebtedness in Ireland, some kind of direct debt recalibration is plainly also going to be necessary, and given the state of the property market, reforms in taxation including a Site Value Tax will be vital too.
More direct aid to the vulnerable is needed as well. Universal basic income and services (a social wage), while appearing costly up-front, would help to ward off catastrophic – and much more expensive – destabilisation down the line.
And finally, if the commercial banks would rethink their mandates for profit maximisation to shareholders, they would not only help to speed all of the other things along, but might just end up in healthier shape themselves as well.
All of these initiatives would reinforce each other.
We’re living in scary times, but also exciting ones. We should not ignore the fact that there’s a chance now to think very differently about many things. Despite the extreme difficulties and threats we’re facing, the potential for positive change at the moment is actually huge – including a move towards a much fairer, stabler and more efficient financial sector in Ireland. The main thing lacking is awareness that alternatives exist.
So if you’d like to continue this discussion, please feel free to comment below and don’t hesitate to share this article, and please also keep an eye out for our second event on finance, also co-hosted with the CEF, which will be held in the latter half of 2021.
Many thanks to Edgar Wortmann of Onsgeld and to Graham Barnes and Anne Ryan of Feasta for their help with this article. Any mistakes are my own.
Edit May 2: corrected the line ‘even regional and public banks could be endangered’ to ‘even regional public and mutual banks could be endangered’.
Teaser photo credit: Photo by Sindre Bøyum on Unsplash
