How the Activities of Banks Impact on the Lives of Ordinary People

24 July 2019

The world of banking and high finance is something that few of us understand or have a deep interest in. Banks have a key role in the economy and ’the economy’ is the dominant social institution, having taken over from the Church in centuries past as the primary institution determining how we live our lives. Just think about how the collapse of our banking system in 2008 set back our national development, diminished the effectiveness of our services and caused undue misery to many families, particularly those most vulnerable families in society who tend to be more dependent on state provided services. On that occasion government bailed out the banks at enormous cost, accumulating a national debt of some €200 billion which will continue to impose difficulties for future generations. All-in-all we were fortunate to survive that particular economic crash, largely because our multinational companies continued to trade buoyantly, providing continuous employment and much needed tax revenue for the Exchequer. But it cost us dearly and it does provide a stark rationale for taking some interest in banks and banking.

Leaving aside the effects of the economic crash, banks continue to impose themselves on many families, largely through their impact on the cost of accommodation. Banks provide mortgages and invest heavily in property development. So they are a key driver of the cost of accommodation, determining the mortgage that may be provided to those wishing to purchase a house and the interest rate that will be charged on the loan. Banks also invest heavily in property development because it provides a very good return on the investment for both the banks and the developer.

When we think of banks we normally focus on the formal banking system – AIB, Bank of Ireland, Permanent TSB etc. But there is another informal banking sector, known as the shadow banking system – hedge funds and other speculative investment corporations - who are constantly on the lookout for opportunities that will yield a high, and usually quick return. These are sometimes called ‘vulture funds’ because of their opportunistic nature and their visibility at times of crisis and despair, Ireland’s property shortage being a typical scenario.

People may not be aware that property related loans currently constitute 68% of all bank loans in Ireland, an enormous proportion by any yardstick, and a clear indicator of the speculative activity that drives up rents and property prices. So, what is the cost to society and the state? When states decide that housing is a commodity that should be subject to market forces the assumption is that demand and supply will eventually balance out, resulting in fair profit for the investor and a reasonably priced house for the purchaser or renter. However, in a situation where there are severe shortages in the supply of housing, coupled with a continuous demand as individuals and young couples seek to live independently, then we have a skewed market resulting in grossly overpriced house prices and high rents. Economists call this market failure. Market failure indicates that the so-called invisible hand balancing supply and demand cannot be applied to the activity in question, in this case housing.

Aside from the cost imposed on the purchaser or tenant, a huge cost accrues to the state in providing rental supports and emergency accommodation for those unable to meet the market rent or make their mortgage repayments. There is also a social cost in terms of homelessness, family stress and in particular the disruption to children’s development.

Given the hardship imposed on families and the costs forced on the state why doesn’t the state regulate the activities of banks? And why doesn’t the state become more active in the provision of housing, given the market failure of the existing model of provision? Well the regulation of banks is largely determined by the European Central Bank (ECB) and the ECB has little regard for social concerns, being mostly concerned with preventing a repetition of the 2008 banking crisis. Is there anything preventing the state taking a direct role in housing provision? A quick recall of public housing provision from the 1930s to the 1970s shows what can be done when there is a will. Those public housing programmes provided affordable accommodation which in turn improved health and other social outcomes for many.

So, it would appear that matters are controlled by Europe (the regulation of the banking sector) and by the Irish state (the model of housing provision). But we live in a democracy and we can influence events, even those that appear to be determined by vested interests and the accumulation of wealth. It might be appropriate to ask your newly elected European Parliament Member (MEP) if they support the European Central Bank‘s failure to integrate social responsibility into its banking regulations. For instance, the Charter of Fundamental Rights, which is European law, is invisible in the ECB’s banking regulations. Similarly, newly elected local councillors should be quizzed on their party’s attitude to social and affordable housing. Do they support a market model that channels profits to the big property companies presently investing in rental accommodation? Or do they believe in publically provided affordable housing, both purchase and rental?

The purpose of this short article is to inform people on matters that determine the quality of their lives. Things can be turned around. So, let’s actively engage with our MEPs and local councillors.

(This article draws heavily on the work of Padraic Kenna of the Centre for Housing Law, Rights and Policy NUIG)