A terminal problem for Irish building societies: Co-operative News


Something is rotten in the state of Ireland. Specifically, something is very rotten in Irish banks. And, just for once (for good reason), I include the country’s last two building societies within the definition of ‘banks’.


When we talk of Ireland’s remaining building societies we must speak very definitely in the present, not the future, tense. They are unlikely to exist much longer. The EBS Building Society is the larger of the two – initially founded in 1935 as the Educational Building Society.


But like all the other major financial institutions in the Irish Republic, it got badly caught out in the great property bubble of the 1990s and the 2000s that ended so abruptly last year. It made heavy losses on loans that were awarded without effective asset security behind them as property prices fell. It is now assumed that it will either be taken over by Rabobank – a large Dutch mutual bank, which has been pursuing EBS for five years – or else by one of the main Irish banks.


Those large Irish banks are also in serious trouble, however. As a result, the Irish government has had to put €440 bn (about £400bn) of guarantees in place, to prevent both a run on deposits and also, potentially, the collapse of the main clearing banks.


It is the Anglo-Irish Bank that was closest to destruction, until the Irish Government effectively nationalised it by taking on 75% of its shares. But the crisis at the Anglo-Irish runs much more deeply than merely bad commercial lending – on which it has set aside provisions for bad debts of €724m, mostly on loans to property developers.


Anglo Irish (which is not to be confused with AIB, an entirely separate Irish bank) is also enveloped in a scandal after it was discovered that Sean FitzPatrick, its chairman and former chief executive, had borrowed €87m from his own bank over an eight year period. When this emerged, both he and the bank’s current chief executive had to resign. As FitzPatrick left he stressed that nothing he had done had been illegal.


The reason why this massive loan never emerged into the public domain was that the loan was temporarily transferred on an overnight transaction to cover the end of every financial year. Consequently, it was not shown on the bank’s accounts. Quite why this was not picked up by the auditor is as yet unclear.


But this brings us to the even more significant question about why another financial institution should be willing to accommodate this arrangement by entering into an overnight transaction to transfer the loan onto its books, in an apparent connivance to mislead the financial reports of Anglo Irish. For the answer we have to look more closely at the operations of that other party – Ireland’s second largest building society, the Irish Nationwide (which, it must be stressed, is unrelated to the UK’s Nationwide).


Regulatory nvestigations are ongoing that attempt to unravel the relationship between Anglo Irish and Irish Nationwide, which led to this extraordinary transaction. We do know, though, that the two institutions were close. It was long speculated that Anglo Irish would acquire the Irish Nationwide, after the society put itself up for sale in 2006 – following legislation to allow building societies to be bought by banks.


But the loan was not the only controversy that has beset the Irish Nationwide. The chief executive of the society is Michael Fingleton and following the declaration by the Irish government that it was guaranteeing all bank and building society deposits for two years, Fingleton told the BBC he was going to use this guarantee as a marketing opportunity to win deposits from savers in Britain, where deposit guarantees were (and still, officially, are) less generous. Fingleton’s son went a step further and began emailing wealthy people in the City of London, suggesting they move their savings to the Irish Nationwide.


This, not surprisingly, stirred up a storm – and in all probability a complaint to the Dublin authorities from their counterparts in London. The Financial Regulator in Ireland, Patrick Neary, responded quickly, saying: “It is inappropriate to use the guarantee in marketing, advertising or any communications to customers or potential customers.”


Ironically, one of the points raised by Fingleton junior was the credit rating at that point of the Irish Nationwide. He argued that the Irish Nationwide was the “safest place to deposit money in Europe with an AAA guarantee from a country with the lowest national debt to GDP ration of any AAA country”.


Things are not quite the same today. The Irish government is now in a dire fiscal mess, with tax income plummeting, private sector jobs disappearing and costs – particularly those related to the growing unemployment – rising fast. If Ireland had not joined the euro, its currency would probably have plunged as a result of the financial mess.


Meanwhile, Irish Nationwide has its own problems of creditworthiness. Having boasted about being AAA rated, the society’s credit ratings from Fitch are BBB+ long term and F1+ for financial strength, and with Moody’s are Baa1/P2 on deposits and C- on financial strength. These might, superficially, look good – but they are not. In fact, they are worse than the ratings for the Icelandic banks, shortly before they collapsed.


The saga of the soon-to-be fulfilled demise of Irish Nationwide raises fundamental corporate governance questions about the society. Who made the decisions? How were they approved? What was the role of the directors? What information were they given? Why did the auditors not pick up these problems?


In many ways these unanswered questions provide an echo of the failings at Equitable Life. One person familiar with Irish Nationwide told the News that chief executive, Michael Fingleton had treated the society as if it were his own property. In this way, in life as in death, the society appeared to have breached all the principles of mutuality.

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