Banks To SME Sector: It Is What It Is

Michelle Obama killed Donald Trump. No, this is not another QAnon far-right conspiracy theory. It’s just a turn of phrase. Here’s another turn of phrase which I usually hate – “it is what it is”. But when the former First Lady used that phrase after a brief critique of Trump’s leadership qualities at this week’s Democratic National Convention, it was perfect.

It was a brutal reality check which not only trolled Trump, but also ridiculed his recent use of the same phrase to explain the horrendous US Covid-19 death toll. The contrast between reality check and abdication of responsibility could not have been made more stark. Closer to home, economic reality is beginning to bite but only at a micro level. Thousands of businesses are in survival mode, some are already dead. At a leadership level, the coalition government and the banks are promising SME support through credit guarantee funding worth more than €2 billion. Well, almost.

The reality is that this ‘guarantee’ applies to 80% of the funding amount. The domestic banks are on the hook for the other 20%. Now step into the parallel universe of banking reality. Imagine a bank credit officer with a very large existing loan book exposure to say….. the tourism/hospitality sector. In what universe will a bank be looking to increase its lending exposure to a new customer in that sector? If you believe the banks have appetite for even a single euro extra of risk – 20%, 30%, 95% guarantee, whatever – I have a large bucket of bleach to sell you as a global Covid-19 vaccine. The brutal reality is that the very sectors and companies in urgent need of support come from the exact same sectors which are already killing our banks.

The banker reality is that our banks are already fighting fires on multiple fronts as new business income dries up, costs rise and existing customers struggle to service loans. Banks are under obvious political and social pressure to play along with the proposed government support schemes. However, back in the real world, the daily headlines are quoting the banks and the challenges they already face. The phrases may be different but the indirect messaging is pretty stark. Check out the following selection of challenges:

• ‘Scars from the crash give Irish banks 2.6 billion reasons for Covid caution” – Irish Times

• ‘FSU refers Bank of Ireland proposed redundancies to Workplace Relations Commission” – RTE

• ‘AIB swings to half year loss on €1.2 billion bad loans’ – Morningstar

The €2.6 billion of loss provisions referenced in the first headline was about twice as big as market analysts expected. These are ‘expected’ losses which regulators now require to be quantified in market communications. Call it a window into the thinking of bank managements about the future. Clearly, the banks are messaging strongly that the chances of increasing risk exposures in already-challenged loan books are slim.

Discussions between banks and struggling SME companies will employ different words and phrases but the end result will be the same – no support. The SME sector urgently needs new thinking and new funding solutions. And, some honesty.

I do not choose the following words lightly. Perpetuating the current myth of government and banking SME support is a dangerous abdication of responsibility. The banks can’t help. It is what it is.

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