We need new forms of banking for a variety of reasons.
One of the problems with the current recession is that banks are not lending.
Now, this particularly affects small and medium-sized enterprises.
Large firms are not affected at the same extent because of access to alternative forms of finance,
and many of them have large cash balances such as Apple and Google and whatever.
Banks are not lending because they've lost a lot of money in the recession
and because they have to hold lots of new capital under regulatory requirements.
So why aren't they lending to small and medium-sized enterprises?
Because these are very risky.
The Universal Bank will always find more profitable opportunities in selling insurance,
or consumer finance, or one way or another, or trading inequities or whatever.
Lending to small and medium-sized enterprises is very capital intensive.
It's very labor intensive. You need a lot to put a lot of information into it.
So banks will prefer not to lend to small and medium-sized enterprises.
So this is why you need new institutions.
You need a new loan guarantee scheme as you have in the UK and the north of Ireland,
but the problem with that is that it can lead to displacement.
In other words, a bank will simply replace existing loans with the loans guaranteed under the loan guarantee scheme.
That's why you require new institutions.
New institutions dedicated to lending to small and medium-sized enterprises,
new institutions that are locally based.
This means they'll become expert in particular sectors, they'll become expert in the locality,
and they're more likely to lend to small and medium-sized enterprises.
So I think that's why you need them.
You need to fill this gap in the financial provision or credit to small and medium-sized enterprises,
which is absolutely vital for them.
Mutuals and alternative forms of banking, I think, are very important,
because they suffer from less conflicts of interest than the traditional stock market quoted firm.
One of the problems with stock market quoted firms, banking firms, is the incentive structure
that bonuses tend to be based on options which encourage risk-taking.
Bonuses can be very high indeed.
Now, if we look at the credit unions, credit unions have lost less money,
some of them have lost money in the recession,
but generally they've outperformed the traditional banking sector.
We have to remember that banks like the Kuat Bank in the UK, or Rabo Bank, another mutual based in the Netherlands,
they've performed relatively well in the current recession.
So, mutuals and not-for-profits tend to outperform traditional,
or have outperformed traditional banking because their incentive structure is less misaligned.
They tend to be more focused on particular sectors,
and because of their lending structure, you don't walk in off the streets and get alone.
They've lost less, and they tend to be more in touch with their consumer base, with their lender base.
We're going to boost the flow of finance to business in Northern Ireland.
I think we need to look at three different areas.
Firstly, there's the business community.
I think businesses need to understand there's a new banking norm now.
They need to demonstrate quite clearly how they're going to pay back their loans
if we're looking at traditional debt.
They need to ensure they've got the right management information available to the banks.
I think in terms of the banks themselves, I think we need to see a focus there
on building better banking relationships.
They need to be clear and out there highlighting the criteria they're now using,
which is all about cash flow and paying back with a lot less focus on assets.
I think finally then, there's government itself.
Government needs to get a much better understanding of what's happening out there
in terms of lending by sector, by size of companies.
We believe they have a key role in terms of coordinating and facilitating.
And there are a number of practical steps to how to build confidence
and address some of the challenges that are facing the business community.
