How to fur­ther bi­fur­cate the economy

The Irish Times - - Business News -

Far be it from Can­til­lon to pity a bank, but poor old AIB be­came – cour­tesy of The Ir­ish Times – the poster boy for hy­per-re­stric­tive mort­gage lend­ing in the Covid-19 era.

A leaked doc­u­ment pub­lished last Mon­day showed the bank had in­tro­duced wide-rang­ing re­stric­tions on lend­ing, in­clud­ing a de facto ban on mort­gage lend­ing to those in re­ceipt of gov­ern­ment wage sub­si­dies.

Dur­ing the en­su­ing storm, a few other banks de­cided to slip out ad­mis­sions of what ev­ery­one al­ready knew but which no one had both­ered men­tion­ing up­front to cus­tomers: mort­gage lend­ing is in deep freeze for as long as a ques­tion mark hangs over the long-term sus­tain­abil­ity of wages.

The banks largely gussied up their lend­ing go-slow by ar­gu­ing that of course they were lend­ing; you just needed a let­ter from your em­ployer say­ing your wage, cur­rently be­ing sub­sidised by the State up to 85 per cent, was tick­ety-boo in the long run. Or that your sud­denly-mu­nif­i­cent part­ner earned enough to cover the mort­gage by them­selves.

Such ex­pla­na­tions do not sur­vive con­tact with the real world. The banks and the State need to start think­ing se­ri­ously about what credit and con­sumer lend­ing might look like dur­ing this pe­riod.

It is at least pos­si­ble that some form of sub­sidy will re­main for some time. If so, how will banks fac­tor that into lend­ing de­ci­sions? Will a sub­stan­tial co­hort be con­sid­ered in­el­i­gi­ble for mort­gages? What will the struc­tural ef­fects be of turn­ing off credit to these peo­ple?

The bi­fur­ca­tion of the economy be­tween those who have, and those who don’t, may be­come more de­fined still. The pol­i­tics of that mat­ters; just ask a wannabe home­owner what de­ter­mined their vot­ing pref­er­ence in Fe­bru­ary.

And what about top-up lend­ing? Unse­cured debt? Peo­ple rely on a whole va­ri­ety of credit in­stru­ments to make on­go­ing in­vest­ments in their house­hold and main­tain their stan­dard of liv­ing. These, in turn, sup­port house­hold wealth and the wider economy.

By Wed­nes­day, AIB cracked un­der the pres­sure and an­nounced a U-turn: it would ac­cept ap­pli­ca­tions from those on sub­si­dies. But this may only be skin-deep, for AIB and for oth­ers. You may now be al­lowed ap­ply but how many peo­ple will be ad­vanced let­ters of of­fer, or be al­lowed to draw down funds, while sub­si­dies re­main in place?

The time to have hard con­ver­sa­tions about these emerg­ing prob­lems is now.

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