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State Development Bank welcome

Posted on May 25, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The announcement in Dublin, last week, by Government of the establishment of a Strategic Banking Corporation of Ireland (SBCI) is a very welcome development. The timescale for its establishment, its mode of operation and delivery and the scale and impact of that delivery will be vital to an assessment of the impact of SBCI. The Programme for Government agreed in 2011 by the incoming Government committed to the following:

‘We will create a Strategic Investment Bank that will become a provider of finance to large capital projects, a conduit for venture capital and a lender to SMEs.’

The announcement of the SBCI appears to signal that this commitment may be implemented in the not too distant future. The mention of ‘Bank’ may come as a surprise as it was widely thought that the original intention to establish a ‘Strategic Investment Bank’ had been watered down to the establishment of a Ireland Strategic Investment Fund housed in the National Treasury Management Agency. Legislation to establish this Fund has been published.

The new bank will be funded from capital provided by the Ireland Strategic Investment Fund (ISIF), the European Investment Bank (EIB) and the German state development bank KfW (the Kreditanstalt für Wiederaufbau (KfW) to give its full title). The involvement by the latter is of interest given the inclusion of the following sentence in the recent Government statement:

The involvement of KfW follows directly from discussion between the Taoiseach and Chancellor Merkel following Ireland’s successful exit from the EU/IMF Programme on finding ways to reinforce Ireland’s economic recovery.

The establishment of a new Irish investment bank – especially one that is a state investment bank – is viewed with caution and even hostility by some commentators. These critics do not see any significant role for such a new institution since, it is claimed:

  • Ireland’s capital stock is more than adequate in terms of roads, airports and railways
  • Any lending body under the control of the state is liable to be used for ‘pork barrel’ politics especially in the run up to a general election where local and national constituency interests might prevail over economic rationale
  • The key to economic recovery is entirely located in private investment and export led-growth and not domestically primed investment in projects of questionable worth; and
  • Ireland has enough banks and some of these are a drain on public finances and liabilities as matters stand.

An additional, but ill-informed, objection is sometimes raised that the Government is raiding the ‘people’s pension fund’ to invest money in white elephants (in fact the pension fund was raided many times over in 2009-2010 to recapitalise banks with the ultimate effect of penalising taxpayers so that bondholders could be paid back).

In an earlier blog I drew attention to the critical situation facing many Irish small and medium-sized enterprises who have been facing significant debt problems as well as access to short and long-term financing. Interest rates payable by SME borrowers are higher than elsewhere and access to funds is restricted. In our first NERI Quarterly Economic Observer in Spring 2012 we advocated the establishment of a state investment bank with a significant capital budget and phased investment programme over a five-year period in some key areas of social and economic infrastructure. The theme was taken up in subsequent working papers including a paper by my colleague Paul MacFlynn in regards to investment in Northern Ireland. The prospects for borrowing for commercially viable projects have improved since 2012 due to the fall in borrowing costs on international markets.

The announcement signals a movement towards:

  • More investment
  • Investment in areas of growth and potential
  • The setting up of a bank and not just a Fund housed in the NTMA
  • Cooperation between the European Investment Bank and the new Irish investment bank.

However, it must be asked:

  • How long will it take to fully implement and deliver?
  • What will be delivered over the next two years (the scale of investment required is much larger than half a billion which is only a start)?
  • Will the Bank operate at arm’s length from small and medium-sized businesses (as seems likely since the money is to be channelled through the pillar banks who will be risk-averse).

We need a State Investment Bank that deals with and lends to businesses directly. However, a good start has been signalled. And it does not stop there. A state investment bank could invest in a range of enterprises including private, state and voluntary (not for profit). Some of this funding needs to be directed into social housing as a matter of priority.

Consideration of the role of a new state development bank takes place within a much wider debate not only about what type of banking system is needed for the future but what sort of society we seek to create from the recent economic conflagration.  Next week the NERI hosts the second annual Dónal Nevin lecture. The lecture will address ‘The Future of Banking in the EU and in Ireland’ and will be given by Professor Stephany Griffith-Jones.  She specialises in international finance, with emphasis on reforming the global financial system to support stable, inclusive economic growth— without costly financial crises. Stephany has made a substantial contribution to the study of financial regulation, governance and international capital flows.

Posted in: Investment

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