Rory O'Farrell: Much as the economy of the Soviet Union was criticized for having a bloated economic planning bureaucracy (Gosplan), the Irish financial sector should be criticized for its bloated size. In 2008 the sector absorbed over 10% of our economy. This is a huge price to pay for the ‘efficient allocation of capital’. On Wednesday, 13th January, the European Trade Union Institute (ETUI) organised a conference 'After the crisis - towards a sustainable growth model'. Though it had a European focus, many of the topics discussed are relevant to Ireland in creating an ‘exit-strategy’ for the financial sector from the recession. While Brian Lenihan has been acting as the financial sector’s fireman there has been a focus on short term (bank guarantee) and medium term measures (NAMA). Concrete long term proposals for changes to regulation have been largely absent from the public debate. What we want from the financial sector should be examined.
At the conference Hélène Schuberth (Austrian National Bank) said what is missing from the European discussion on financial market regulation is the question: what function should the financial system perform? Hélène Schuberth noted that the reform initiative has been minor, and does not emphasize that the financial sector should service the economy. She noted how the financial sector gains rents at the cost of the rest of the economy. While the financial system is supposedly a shock absorber this has been shown not to be true. Sony Kapoor (Re-Define) noted that this is not the first banking crisis. The financial system should be a means to a purpose. He stated that the financial sector is not competitive, and that in the US 30-40% of all corporate profits went to the financial sector, and this is taking rents from the real economy. He asked, if the human resource department of a firm was responsible for consuming 40% of the resources, would this be seen as a well functioning department? Competition within the financial sector is required. However the financial regulators favor large complex banks over smaller simpler banks. Sony Kapoor agreed that the massive state subsidies have contributed to the bloated size of the financial sector
Possible changes to banking regulation included a shift to Asset Based Reserve Requirements, as suggested by Tom Palley. Here, the reserve requirements of banks would be based on the amount of loans they have given rather than the amount of deposits they hold. Yanis Kitromiledes suggested a move back to public service banking or narrow banking. Karel Lanoo (CEPS) stated that so far the debate on a move to narrow banking has been merely academic, and that mutual banking and co-operative banks should be reconsidered. Competition policy should be used so that banks do not become too big to fail, and banking should be viewed as a utility, similar to gas and electricity.
In Ireland the financial sector gains a massive state subsidy in terms of free insurance as Irish banks are too big to fail. This takes the form of deposit guarantees, NAMA, and the implicit free insurance given by the government on banks risky activities. While the economy does benefit from employment in the International Financial Services Centre, these jobs are effectively subsided by the governments of these branches parent firms. Countries like Germany have no interest in subsidising such jobs in Ireland and it is only a matter of time before EU regulations will make such jobs untenable. While subsidies to other sectors such as agriculture have social benefits for rural Ireland, the financial sector subsidy results in large inequalities, and diverts talented workers from careers in areas such as engineering or computer science.
At the moment the Irish government is proposing contradictory policies of ‘stopping reckless lending’ and ‘getting lending going again’. No long-term plan has been put forward for the financial sector. The government should no longer promote the financial sector as an end in itself. In the Irish case it is interesting that there are no moves to increase competition in the financial sector. If anything the number of banks is being reduced. Competition can be increased by promoting mutually owned ‘boring banks’ that have been successful in the past. Also, with the notable exception of Irish Nationwide, the mutual financial sector (namely EBS and the credit unions) have not suffered as much as the rest of the financial sector. The massive state subsidy received by the Irish financial sector could be put to better use in the real, productive, economy. The financial sector should be made to pay its own way.
Luckily our first official language has given us the word gaimbín, meaning monetary interest, from which comes the word gombeen, an apt description for the leadership of the Irish financial sector.
Rory O'Farrell is an economist and researcher at the European Trade Union Institute in Brussels
Dr Rory O'Farrell @r_o_farrell
Rory O'Farrell is an economist lecturing in TU Dublin. He previously worked for the OECD and for NERI.
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