The future for banks

Second Reading
“People did not expect charity from banks but they believed they were safe institutions in which to place their money. Recent revelations have undermined this belief.”

Fr Kevin HegartyFr Kevin Hegarty

THE journalist, Peter Jay, had an elevated view of his station in life. When he was an economics commentator with the London Times, a sub-editor asked him to clarify an oblique sentence in his column. Jay arrogantly retorted that the column was written to be understood by only three people in Britain and the sub-editor was not one of them.
I can say, without any false modesty, that I am sure I would not have understood the sentence either. I often get lost in the maze of statistics and terms used in the financial pages of newspapers.
I know that economists may find this heretical but I often wonder how exact their science is. Are their projections any more valid than those of the fortune-teller who plies her trade in Belmullet on the festive fair day in August?
Let me explain. In the 1980’s, when we were in the midst of recession, Magill magazine asked a number of economists to predict our future. Their conclusion was that Ireland was an economic basket case and likely to remain so.
Some years ago, at the height of our economic boom, the magazine employed them again. This time, they asserted that the good times were here to stay. Is it any wonder that JK Galbraith, himself an economist, once ruefully reflected: “The only function of economic forecasting is to make astrology look respectable.”
About two years ago, however, I read a report in The Irish Times, that made sense to me. It was a harbinger of the the recession that now engulfs us. The article summarised a Bank of Ireland report which stated that, in 2006, Ireland built half as many houses as Britain.
Britain has twelve times our population. As the construction boom was one of the main underpinnings of our temporary financial prosperity, I sensed we were in for a torrid time.
One major consequence of the recession has been a collapse in trust of our banking system, akin to that which has happened to the Irish Catholic Church in recent years. As a child I thought banks were like secular chapels. They were distinctive buildings in our towns, their facades often displaying architectural flourishes similar to small European palaces. They were furnished with solid mahogany. Their walls were often adorned by photographs of their founders, stern men, their moustaches bristling with Victorian rectitude. Once inside, people spoke in hushed, almost reverential, tones.
People did not expect charity from banks but they believed they were safe institutions in which to place their money. Recent revelations have undermined this belief.
As Irish bankers reflect on their future, in the wake of the MAMA legislation, what is the way forward?
Recently, I read an article in the Financial Times magazine that suggests the future for banks may be to return to the ways of the past. The Stafford Railway  Building Society is a one-branch bank employing 17 people. It was founded in 1877 by the local mayor, vicar and directors of the railway which had just opened.
The bank is a prudent operation. Mortgages are approved personally by the manager and his deputy. Customers are evaluated by experienced negotiators, not pushed through standard credit-scoring procedures. Stafford will not lend more than 75% of a property’s value, or higher than 3.5 times income. To avoid a conflict of interest with its core business, the bank does not sell life assurance or travel insurance.
It now has outstanding mortgage loans of 130 million sterling to 1,750 borrowers and deposits from more than 14,000 savers totalling 160 million. It lends out less than it takes in. In the last ten years it has had only to repossess two homes.
Not surprisingly, it has been dubbed, “the safest bank in Britain”. It has won ‘What Mortgages’ award for the best building society in Britain for the last five years.
What a contrast with Northern Rock which had loans worth 100 billion and deposits of only 24 billion when the British Government  had to bail it out with public money two  years ago. Here staff were given sales targets that effectively forced them to offer loans and other products to customers who could ill afford them. Due diligence was disregarded in a drive for growth.
At its last annual general meeting, Mike Heenan, the manager, summed up the Stafford Railway Bank philosophy: “A simple business model, whereby funds are generally lent on the basis of funds received, where profit is generated to maintain financial stability and not for personal gain, and where you only lend people money that they can afford to repay - not just based on their current circumstances but allowing some margin for the unforeseen - is the model that works.”
Some food for thought there.