Sins of the Father (20 page)

Ibec also found that of the capital formation which did occur in Ireland, between one third and one half went towards construction, ‘The major part of [the capital formation] does not flow to uses that have a direct and immediate impact upon the production of goods for the Irish market or for export.’ It also found that ‘shockingly low’ levels of capital formation went towards agriculture, and that ‘an unusually high degree’ of capital formation in Ireland was ‘marshalled under the auspices of government agencies’.

The role of private banks in the creation and distribution of credit in Ireland was quite limited, ‘[This] cannot be explained in terms of a comparative dearth of personal savings,’ wrote Ibec, ‘since Ireland’s 1949 personal savings represent about twice as large a proportion of gross capital formation as in the United Kingdom’. Instead, it concluded that ‘The disparity is clearly chargeable to the fact that an active capital market for domestic issues has never been developed in Ireland’ and that ‘this failure is immediately influenced by the example of government and private commercial banking agencies which consistently have channelled a very large proportion of their assets into British securities rather than securities of the home market’. Irish commercial banks were seen as directly responsible, along with government, with stymieing Irish economic growth. A reform of monetary and banking policy was needed, and as so often in Ireland when an economic power bloc was challenged, the concerns were duly noted and filed away.

There were nine joint-stock banks in Ireland in the 1950s, compared to only five in the UK. The added numbers did not lead to any competition regarding credit and charges. ‘To all intents and purposes,’ wrote
The Irish Times
, ‘[the banks] work hand in glove, and their activities are coordinated by the Joint Banks Standing Committee.’
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There was a cartel in operation, ‘and entry into retail banking was inhibited other than by way of a takeover’.
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In 1958, the Bank of Ireland acquired the Hibernian Bank, which led
The Irish Times
to wish that the move would ‘contribute, even in small measure, towards a narrowing of the gap between deposit and overdraft rates, at present so much wider here than across the Channel’.
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There was no change in costs to bank customers, but the merger was the first of a series of such moves which took place over the following decade. In 1965, Bank of Ireland took over the Irish branches of the UK-based National Bank. Ireland was opening up its financial world to foreign investors, and the mergers could be seen as a pre-emptive move to ensure that retail banking stayed under the control of the cartel.

The largest merger, however, was that which formed Allied Irish Banks. On 22 August 1966, the Munster and Leinster Bank, the Provincial Bank of Ireland and the Royal Bank of Ireland announced their decision to amalgamate and form a new bank with total resources of £225 million. The move received much praise, as it was seen to ensure ‘that control of these banks [would] remain within Ireland’.
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It was thought that the size of the new bank – ninth largest in the British clearing bank system – would enable it to compete both internationally and within the Common Market, Ireland’s membership of which was seen as all but inevitable. And in international banking,
The Irish Times
noted, ‘it is size that displays fertility’.
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The newspaper voiced its concerns over the name of the new bank. ‘The directors are open to suggestions from the public,’ it wrote, adding that with the title, Allied Irish Banks, ‘it is unfortunate that such a deplorable name has been chosen’. In December 1966, AIB announced the formation of a merchant bank subsidiary, the Allied Irish Investment Corporation, which was a joint operation with Hambros, the London-based merchant bankers, and the State-owned Irish Life Assurance. It gave AIB a foothold in the area of Irish banking that had been opened up to foreign investment.

The increase in foreign investment in the 1960s brought with it an increase in demand for bank services, especially wholesale banking. Companies needed capital, and banks, especially American banks, were credit rich and constantly on the look-out for new markets. Ireland provided such an opportunity for expansion. At the time of the Irish bank mergers, ‘there was virtually no control over the establishment of branches or subsidiaries of foreign banks that wished to concentrate on non-clearing or wholesale banking’.
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North American banks were the first to arrive, and by the 1970s they accounted for over 5 per cent of the Irish banking market. These were followed by European banks in the aftermath of Ireland’s entry to the Common Market in 1973.

On 28 September 1965, the Irish branch of the First National City Bank of New York (FNCB) was officially opened at a ceremony which was held at its Dawson Street office in Dublin. The FNCB had been in Ireland since June and employed twenty-five people. It was ‘The smallest branch of the largest international bank in the world’ and any credit note issued in Ireland had the full backing of the bank’s $12.5 billion reserves in New York.
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In June 1967 the bank moved to new premises at 71 St Stephen’s Green, the occasion of which was marked by an appearance and speech by the Minister for Finance, Charles J. Haughey. The expansion of the FNCB took place alongside the opening of Ireland to the eurodollar market and to the opportunities such a market afforded with regard to international financial speculation. ‘In developing the range of their services the Irish banks may be able to benefit from the experience of their American counterparts’, Haughey told the audience. ‘Such facilities as the purchase and leasing of expensive industrial equipment, long-term financing of business and residential properties and term loans are provided directly to customers by American banks.’
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The commercial and residential property boom which Ireland was going through was financed, in part at least, by the American banks – a boom which was assisted by government tax incentives, and which led to tens of thousands of square feet of empty premises, with more absorbed by government departments under a policy of rent rather than ownership. The government was using taxpayers’ money to create a demand which didn’t exist, and taxpayers’ money to absorb a surplus which shouldn’t have been built. American banks provided a boost to finance, allowing Irish banks to keep parity with sterling, as they did not have to produce Irish-pound-based credit to fund these loans. The banks, along with the builders, contractors and their political friends, reaped the benefits.

With the Pay As You Earn (PAYE) tax scheme introduced in 1960, the government had gained a captive, and constant, supply of income. The government’s policy of funding speculation with tax breaks and absorbing speculation via office rent was in effect the wholesale transfer of wealth from the working population to builders, banks and speculators, with government as the conduit. It seems incredible that something so blatant could exist so freely, but it is only so strange when seen in isolation. Given the pattern of Ireland’s economic history, from the 1920s currency commission to the 2008 bank guarantee and the creation of NAMA, the 1960s speculation boom fits securely in place.

The role of the banks in facilitating and sustaining property speculation was underlined in a 1977 study of Irish banking by N.J. Gibson. In it, he noted that while ‘both the merchant banks and the North American banks have been active participants in the inter-bank money market that has developed in recent years in Dublin,’ the development of this money market ‘is partly a consequence of their arrival and their particular methods of operation in that they … often seek out lending business and then find the funds to finance it’.
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He found that with the Irish merchant and North American banks, ‘their liabilities within Ireland tend to be less than their assets, and so they tend to be net external borrowers’. Ireland’s industrial banks dealt with hire-purchase loans for consumer goods, ‘industrial loans, the finance of foreign trade and company finance’, and foreign banks such as the Algemene Bank Netherland (Ireland) Ltd and Banque Nationale de Paris (Ireland) Ltd.
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The liberalisation of the Irish banking system also had an affect on the once-conservative building societies. In 1965 they accounted for around 7 per cent of all deposit and current accounts in the State; by 1985 that share had risen to almost 50 per cent.
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Ostensibly concerned with the provision of affordable mortgages to members, by the late 1960s, Irish building societies had turned into full-blown property developers and speculators, overseeing the construction of office blocks and suburban estates. By 1985 the societies had total assets of £2.5 billion, around 20 per cent of the liquid assets in the State. Ten years previously, total assets stood at £250 million. It was a phenomenal growth, virtually all of it based on commercial and residential property.

The banks were bringing credit into Ireland, finding buyers, and selling it to them. With a famously ‘hands-off’ Central Bank and government, the purpose of this credit, and its function within the wider economy, was rarely challenged or even discussed. The Irish economy was being sold credit, and this credit was ending up in land speculation, construction and mortgages. It was not long before Ireland had a major banking crisis on its hands.

E
dward Collins, Minister of State at the Department of Trade. Commerce and Tourism, 6 November 1985.

On 8 March 1985, the Taoiseach, Garret Fitzgerald, was visited at his home in Rathmines by two of his cabinet colleagues and informed of an impending banking crisis which had the potential to bring down the bank and fatally undermine the economy. His Minister for Finance, Alan Dukes, and Minister for Trade, Commerce and Tourism, John Bruton, told him that the Insurance Corporation of Ireland (ICI), which had been bought by AIB the previous year, ‘had racked up massive but as of yet unknown losses by wildly underwriting high-risk businesses in the insurance market’.
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AIB had tried to cover the losses but could no longer afford to do so. However, it made sure to tell the government that if ICI’s liabilities were not met, AIB itself could fold, and the effect on the Irish economy of the collapse of the largest bank in the State would be devastating. Fitzgerald, Dukes and Bruton decided that the State would have to step in and take responsibility for ICI’s liabilities, even though it had absolutely no idea as to the scale of those liabilities except that they were of such a scale as to threaten the existence of AIB. The government gave AIB a blanket guarantee. It covered everything, absolving AIB of its financial commitments to the broken insurance company. ‘Clearly the bank was playing a game of who blinks first?’ said a former AIB banker. ‘and Fitzgerald and his ministers blinked first.’
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The previous year, the chairman of AIB, Niall Crowley, criticised the Tánaiste, Dick Spring, over comments he had made relating to the operations of the Irish banking system. At a party conference in Cork in May 1984, Spring told delegates that ‘for too long the right of the banks to ignore any obligation except to themselves has been taken entirely for granted – and I do not think it is going too far to say that what is happening now amounts to an abuse of the people of this country’.
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He said that the banks should contribute to the alleviation of the country’s major social problems, especially during times of recession. ‘To give you an example,’ he told the conference, ‘The Allied Irish Banks’ profits last year alone would go a long way to solving the housing crisis that faces thousands of our young people.’ Mr Crowley’s reaction was swift. He told
The Irish Times
that the Tánaiste’s speech ‘showed an extraordinary lack of understanding of the principles of banking’. He pointed out that banks had a commercial responsibility to their depositors, ‘If we started lashing our depositors’ money around the country on enterprises totally without commercial viability we would be unable to repay the money when people wanted it back, and we would have to go out of business.’
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Less than a year later, AIB successfully dumped its financial problems onto the shoulders of the Irish people.

The Insurance Corporation of Ireland was founded in 1935, ‘for the purpose of transacting all classes of fire and general insurance’.
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In 1946, it took over the marine underwriting business of the State-owned company Irish Shipping Ltd and in 1971 ‘The government appointed the company sole agents for managing export credit insurance schemes for Irish exporters’.
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One year later, it formed the Property Corporation of Ireland, in association with Irish Shipping Ltd. Its first main venture was the construction of a 62,000 square foot office block on a one and a half acre site at Merrion Hall, Sandymount, Dublin. As with so many other commercial property ventures which were built at this time, the tenants for the offices came from the public sector. In 1974, Córas Tráchtála, the Irish export board, moved into the building along with Irish Shipping Ltd.

Seven years later, AIB secured 25 per cent of the issued share capital of ICI for £10.2 million. In 1983 it made an offer for the remaining 75 per cent, which was accepted, and ICI was fully incorporated into AIB. The entire deal cost the bank £40 million, of which only £10 million was cash, the other £30 million was made up of shares. ‘Allied Irish Bank picked an ideal time to make a bid for Insurance Corporation of Ireland,’ wrote Bill Murdoch in
The Irish Times
in 1983. He referred to ICI’s high liquidity, and its capital and free reserves of £51.1 million, which would ‘boost AIB’s capital base [and] allow it to expand still further’. All in all, he concluded, ‘it is a good deal for AIB’.
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