Irish Banks Are Not Meeting Their SME Lending Commitments

During my appearance on the Vincent Browne show a few weeks ago, government TD Damien English told me that the Irish banks were meeting their lending targets to SMEs. It’s hard to follow all the news that comes out on the Irish economy so I wasn’t sure what Damien was talking about but I did express skepticism about this claim based on figures from this IMF report (page 13) showing the banks deleveraging core assets faster than had been planned in the PCAR\PLAR document.

Anyway, I did some work today to check what’s going on. You may recall that in 2010, AIB and Bank of Ireland both committed themselves to €3 billion in …. well in what? That’s a good place to start. Bank of Ireland’s document was fairly vague. The only mention of the €3 billion figure in the announcement was this

Bank of Ireland is committed to providing a minimum of €3bn in lending to viable SMEs each year for 2010 and 2011.

Now banking is a sufficiently complicated business that this could mean anything. It could stretch from an addition €3 billion of loans on the balance sheet, to issuing €3 billion in new loans while some old loans are repaid, or perhaps something else. AIB’s announcement, however, was clearer. It committed itself to

Make available €3bn in new or additional credit to SMEs, including specific working capital support, in both 2010 and 2011.

Since we can presume that both banks had to agree to the same type of commitments, this statement told us that the banks were agreeing to make new loans to customers (featuring “additional credit”).

One thing that the €3 billion commitment clearly did not refer to was restructuring existing loans, as this counts as neither new credit nor additional credit. Indeed, elsewhere in AIB’s document setting out its commitment, the bank makes it clear that they do not think restructuring loans counts as new lending:

AIB is already providing considerable lending support to SMEs in both new lending and in the re-scheduling and restructuring of their existing borrowings

Note “new lending” and “re-scheduling and restructuring” — if the bank thought restructuring was new lending they would not have added the second half of this sentence.

Ok, that’s what the commitment was. Let’s find out how much new lending there has been. Since June 2011, the Central Bank has been publishing figures for SME credit in Ireland, including data on Gross New Lending defined as follows.

This component details the amount of new credit facilities drawn-down during the quarter by SME counterparties, i.e. where this credit facility was not part of the outstanding amount of credit advanced at the end of the previous quarter. Gross new lending is defined in such a way as to exclude renegotiations or restructuring of existing loans.

The latest figures are available here.

Over 2010, total gross new lending to SMEs from all banks in Ireland, not just AIB and Bank of Ireland, was €3.1 billion. For 2011, the figure was €4.3 billion. Total new lending to SMEs excluding lending to financial intermediaries (which I’m guessing is closer to what the commitments actually referred to) was €3.0 billion in 2010 and €3.1 billion in 2011. Whatever way you look at, without knowing how much the non-pillar banks loaned out over the past few years, it is clear that AIB and Bank of Ireland have not met their commitments to together make €6 billion in new loans to SMEs.

Given these figures from the Central Bank, why would Damien English think that the banks have met their target? The answer is likely to be that John Trethowen of the Credit Review Office has declared that the banks met their targets in 2011. Here‘s his latest report from February 2012

I am pleased to advise that AIB and BoI have both achieved their €3bn on loan sanctions.

And here‘s the Irish Times reporting this happy outcome.

Now how can Trethowen think that the targets for new lending have been met when the statistics show that they haven’t? The answer is that, contrary to the original commitments, Trethowen is counting loans that have been restructured:

The €3bn targets achieved in 2011 has a majority of restructured sanctions

It’s interesting to see the evolution over time in Mr. Trethowen’s discussion of these targets. Here‘s his first report, from June 2010. The only mention of targets is a mention of his role in

ensuring the two banks have plans in place to achieve the €3bn p.a. new lending targets over the next two years.

Here‘s his second Report from November 2010. This report mentions that the €3 billion targets being achieved wouldn’t necessarily see balance sheet expansion of the same amount because of a number of factors such as loan repayments. One factor that is mentioned is

‘Old new Lending’ being the restructuring of overdraft lending already on the balance sheets.

The inverted commas are Mr. Trethowen’s, not mine. It looks as though at this point, he doesn’t view restructuring as genuine “new lending”.

By his third report in February 2011, Mr. Trethowen has begun to state that restructuring loans counts towards meeting the targets:

The Minster’s target for new sanctioned lending of €3bn by each of the banks is in line to be achieved by April 2011. This may appear contradictory to the comments elsewhere in this report on balance sheet contractions. The explanation is that much of this sanctioning activity is in debt restructuring to assist many businesses to survive. I have asked both banks to report the amount of ‘New’ money being sanctioned, and they are presently both amending their systems to provide this information.

The target has apparently now shifted from the fairly clear “new or additional credit” to “new sanctioned lending … including debt restructuring”.

By his fifth report in August 2011, Mr. Trethowen had taken an Orwellian turn and started chastising people for actually expecting the banks to keep their promise in relation to new credit:

Until the demand for credit is fully understood there is little point in some commentators being fixated on the amount of New Credit as opposed to restructuring sanctions. It is obviously impossible to grow New Credit in an economy where such credit is not being demanded.

This may have been a rhetorical over-reach for Mr. Trethowen as in his next report in November 2011, he seems to have re-discovered (perhaps via a clip around the ear from someone in government) that new lending is sort of the point of the whole loan commitment thing:

Whilst I have not subscribed to the disparaging of the restructured financing element of how these targets have been achieved to date, I do however accept that a focus should now be brought onto the ‘New Money’ element to reflect and support the prospects for a continuing economic recovery in 2012.

And in his latest report he notes

There is growing interest in the level of new money: restructured money in these sanction figures. I fully accept that restructuring, while important, will not drive growth and the Government would like to see a sharper focus on the element of ‘new’ money sanctioned and drawn in the quarters ahead, and this is reinforced in our meetings with the Pillar Banks.

So there’s a growing interest in finding out how many new loans the banks are actually making given that they had both promised to make €3 billion a year in new loans? Funny that.

Since the Central Bank now collect and publish statistics on new lending to SMEs, one hopes that Mr. Trethowen won’t find it too difficult to obtain this “sharper focus” on new lending. One would also hope that members of the media might remind the government and Mr. Trethowen that spinning about targets met isn’t really the same thing as meeting the targets that were actually set.