No choice but to hit lenders with an iron fist
LET’S start with a confession. When I heard Central Bank Governor Philip Lane talk about “moral suasion” last week, I thought he had lost the “hat”, or prefix if you prefer, off the second word.
I would have insisted on “persuasion” had I not noted that the man is also a professor. There followed an inevitable scoot around dictionaries, starting with the Oxford English Dictionary which yielded: “Suasion (noun): Persuasion as opposed to force or compulsion.”
The bible of dictionaries added that the word comes to us via middle English and late French. It’s believed to originate in the Latin verb “suadere” which means “to urge”.
Prof Lane threw in the intriguing phrase when he was giving the reprehensible details of the tracker mortgage scandal to the Oireachtas finance committee. Two years after the start of an industry-wide examination into the banks overcharging tracker mortgage customers, the governor was still relying heavily on “moral suasion” to ultimately make those banks do right by some 20,000 to 30,000 borrowers hit by this scandal of scandals.
But the Central Bank also revealed that only three out of 11 lenders caught up in the controversy have started a process of redress and compensation to those overcharged customers. We now know that these are AIB, Permanent TSB and Ulster Bank.
At the far end of this travesty, we are told that two unnamed lenders may have failed to either identify or recognise customers who were out of low-cost mortgages, where rates are linked to the European Central Bank benchmark.
At all events, Prof Lane did not by any means invent the term “moral suasion”. Like a lot of industry vogue terms, it has been around for years in the area of public sector economics and what passes for financial regulation.
History teaches us that, every now and again, these in-trade terms escape into the broader public domain. And in a sense that is what the Central Bank governor was knowingly or unknowingly doing last week. In fact, the term has been used for centuries and we learn that it is most favoured by the Australian financial regulation authorities. The Americans call it ‘jawboning’, meaning the Federal Reserve (the US version of the Central Bank) has the bank principals in and gives them a right talking to.
The Japanese apparently call it ‘window guidance’, we suppose evoking the notion of a parent knocking on the kitchen window as a warning to the boisterous kids acting up in the garden.
And most pieces explaining “moral suasion” also ruefully note that it does not always work. Any parent who has delivered one of those warning knocks on a kitchen window will not require further explanation.
Since Prof Lane’s sallyforth to the finance committee, we have had a week of competitive indignation. Let us at this point take much of that as read.
The banks, whom we had to bail out to the tune of tens of millions with money borrowed, and as yet unpaid, by the taxpayer, have excelled themselves with their crass behaviour.
Many of us can cope with the notion that our banks often overcharge and short-change us. But this one is about more than money. It is about borrowers losing family homes, investments earmarked as pensions, and other such precious possessions. It is also a tale of broken mental and physical health – of strokes, nervous breakdowns and family trauma.
Everyone has the right to be angry – from the Taoiseach down. But we must also have regard to reality in the brutal world that is banking.
LET’S move swiftly to Finance Minister Paschal Donohoe’s meetings with the banks today and later this week. A sideways glance at the history of this one will teach us that “moral suasion” just will not do it.
Mr Donohoe has wisely kept his powder dry ahead of these meetings. But he has not rowed back on the Government sharing the general public’s dismay and anger at the banks’ carry-on here.
He has also confirmed some of our other impressions. These are that the Central Bank is not seeking more legal powers at present, and that it is not likely we could legislate retrospectively to deal with the issue. The minister said he would be outlining the Government’s options for dealing with the issue. He also added an intriguing comment about banking as it persists to the present day.
The Central Bank and the public testimony of so many of our citizens so badly hurt by the way in which the tracker mortgage issue has been dealt with was now obvious to all.
“For me, it shines a light into the culture of our banking system for a period. But what is now of concern to me is that it also shines a light into the status of our culture in Irish banking now,” the minister has said.
Mr Donohoe has called for a “fundamental change in banking culture”. He is right on that – but we also know that culture changes in business need some outside stimulus to drive them.
So, the eyes of the entire country are now on Mr Donohoe and what, if anything, he will do next. The Taoiseach has several times spoken of increased taxation on the banks as a means of bringing them into line.
For more than a week now, Leo Varadkar has talked very tough on this issue, creating an expectation of action, not just urgings or vague threats to the banks on this issue. In doing this, the Taoiseach has placed his Finance Minister in “the gap of danger”.
In simple terms, Mr Donohoe has to forget the velvet gloves and lay bare an iron fist on this one. His boss has created this expectation and there is no other option.
For a week, Leo Varadkar has talked tough – creating an expectation of action