The Agri-food sector in Ireland contributes a value of €24bn to the national economy, generates 6.3% of gross value added, almost 10% of Ireland’s exports and provides 7.7% of national employment. When employment in inputs, processing and marketing is included, the agri-food sector accounts for almost 10% of employment.
We have two pillar banks and, although these are 14% and 99% owned by the Government, the sector is effectively private. This is at odds with other countries – globally, almost 40% of banks are publicly owned.
Germany, a country well known for its shrewd savers and conservative financial policies, has a banking system structured in three different pillars, totally separated from each other. They typically differ in their legal form and ownership.
Private banks, which account for about 20% of the market, are represented by Deutsche Bank or Commerzbank and are part of the first tier. The second tier is composed of co-operative banks such as Volksbanken, meaning people’s bank.
The third tier consists of public banks that are a legally defined arm of the industry in Germany. The German Savings Banks Finance Group (Sparkassen-Finanzgruppe) has the most outlets, with over 400 savings banks using the Sparkassen brand.
Based on OECD studies, the German public banking system has a share of 40% of total banking assets in Germany. Between 2008 and 2011, German public banks increased lending to small and medium size enterprises (SMEs) by 17%.
What is a public bank?
There are basically four models. The German savings bank model, the co-op model, the Japan Post Bank model and the Bank of North Dakota model.
A public bank is a bank operated in the public interest, by institutions owned by the people, usually through the government. Instead of profit maximization, their aim is the sustainable development of the local economy within their business territory.
Lending is prioritised to local businesses (SMEs and farming) where local deposits go to local loans controlled by local stakeholders working for their region. In all cases the profit and interest on lending is returned to the institution to boost its capital and returned to the community in new loans.
How could we build one?
If we take a look at the German Sparkassen model, we could set up a number of regional banks. The Government would need to provide the foundation capital of about €100m. This would effectively be the license to operate as a bank.
Each bank, operating independently could then take in deposits of about €5m to €10m and lend out about six times this. Loans would range from €20,000 to €200,000.
With foreign owned banks fleeing the market, only two pillar banks remain. While they say they are open for business and backing brave, a new bank can only be good for competition and enterprise. There is plenty of room in the market and both can work alongside each other.
SME growth is where the opportunity lies for the rural economy. A new bank targeted at lending to this sector can fuel this growth.
Case study: The Bank of North Dakota
Public banking was first introduced in America by the Quakers in Pennsylvania. The concept was later embraced by the State of North Dakota, the only state in the US currently to own its own bank.
The Bank of North Dakota (BND) was founded in 1919 to insure a dependable supply of affordable credit for its farmers, ranchers and businesses. Today, the BND makes low interest loans to students, existing small businesses and start-ups. It partners with private banks to provide a secondary market for mortgages and supports local governments by buying municipal bonds.
The model is simple – the State of North Dakota is doing business as the Bank of North Dakota (BND). That means all the state’s assets are used to capitalise the BND. By law, all the state’s revenues are also deposited in the bank. Among other advantages, this gives the BND the ability to participate in loans originated and led by private banks, which then have more flexibility to manage and expand their loan portfolios.
As a public bank, the Bank of North Dakota pays its dividend to its only shareholder – the people of the state. In the past decade, despite its small population and modest volume of economic activity, the Bank of North Dakota has returned over $300m to the state.
Case study: An Irish farmers’ bank – the ACC story
After 88 years, ACC handed over its banking licence last year
The Agricultural Credit Corporation (ACC) was founded in September 1927 and was one of the first creations of the Irish Free State. It was set up to provide an avenue for farmers to get access to credit, and quickly became known as the farmers’ bank.
The bank was successful and led to the creation of the Industrial Credit Company, which provided finance to industry.
Moving away from its core mission of supporting farming business, a new Agricultural Credit Act in 1988 empowered the corporation to deploy up to 25% of its risk assets outside agriculture. This was to change the direction of the bank and lay the foundations of what followed.
When the Government decided to sell the bank just over a decade ago, its business changed dramatically. Under its new owners, Rabobank, ACC embarked on ambitious plans to grow its presence in Ireland and started lending for property development and speculation.
Following the financial crisis, Rabobank provided capital support of €1.3bn to ACC since 2008 with over €2.1bn of the loan book written down since 2008.
Last year, ACC decided to restructure with a focus solely on debt recovery, and stopped delivering banking services. At the time, ACC had 5,000 deposit customers totaling €110 million. Overdrafts on current accounts amounted to almost €75m.