The banks are about to downsize and the fall guy – or gal – will be the ordinary bank worker

Next time you go into a bank, stand back and have a good look around.

What strikes you? Is it the quietness of the place, or the strategically positioned flowerpots? Or is it the ads for mortgages of the thirty-something couple on a beach, smiling to show their perfect teeth?

Or maybe it’s the thick curls of their laughing three year old perched securely on Dad’s shoulders, while the beautiful five year-old girl, head to toe in ‘‘Mini Boden’’, giggles beside Mum?

Look again and maybe you will notice something about the employees. The vast majority are women. Of the 40,000 people who are members of the Irish Bank Officials Association, 70 per cent are women. One in every 28 women employed in Ireland works in a high street bank. This is a phenomenal figure. In fact, one in every 45 people employed in Ireland works in a bank.

In the next twelve months we are going to see an employment bloodbath in the traditional Irish banks as they suffer a major retrenchment. The opening salvoes of this carnage were fired last week by Permanent TSB, when it announced plans to cut 15 per cent of its total staff.

Permanent TSB probably went first because it feels less political pressure to hold off, not having availed of the bank guarantee. However, it is not scaremongering to suggest that a 15 per cent cut across all the banks is likely. On present numbers, this would mean 6,000 people on good salaries with good jobs – and most of them are likely to be women.

In fact,15 per cent is the most benign scenario because the banks have to contract much more to become sustainable again.

In the boom, because so much of the growth came from reckless bank lending, loads of people had to be employed in the banks, which couldn’t ship the cash out of the doors quickly enough. The financial sector grew dramatically.

Just look at the loans to deposits ratio. In a normal banking system, the loans to deposit ratio is 100 per cent. This means that the banks are covering all their loans with an equal amount of deposits and the system is stable. As late as 2004 this was the case in Ireland. Then the bosses of the banks – many of whom are still drawing huge salaries from the same banks – decided to take advantage of the lax regulation, take more risks for more profit and borrow money from wherever they could in order to lend it out in Ireland.

(Don’t forget their bonuses were directly related to the share price of the bank so they had a direct incentive to boost profits and behave recklessly.) Thus began the process of wealth destruction. In mid 2008, lending of the ‘‘domestic Irish credit institutions’’ (as defined by the Central Bank of Ireland) stood at €505 billion. Deposits at these institutions stood at €420 billion.

Currently the loans stand at €390 billion and the deposits stand at €294 billion. So, just using those simple numbers, we can see that the banking sector in Ireland has shrunk by 23 per cent on the lending side and 30 per cent on the deposit side in the last two and half years.

But, of course, there is more. As part of the EU/IMF deal there is considerable pressure on the domestic guaranteed banks to reduce their loan to deposit ratios to close to 100 per cent in the near term. Considering their most recent figures have been in the 160 per cent range, it is obvious that the Irish banks will have to shrink their balance sheets by at least another 35 per cent – and this is making the rather large presumption that there will be no more fall in deposits at those banks in the coming year.

So, banks with rapidly shrinking balance sheets, and whose profits are being decimated will start cutting staff in large numbers very soon. Just judging from the shrinkage that is needed, it would seem that of the 40,000 currently employed it is possible that well over 10,000 will be out of work by year end.

Let’s see what will happen this year. There are only two ways they can do that. The first is to reduce lending dramatically to reduce loans. This is a process called deleveraging and it crushes an economy because it involves a massive reduction of credit in the system. But that is what has to happen to bring the banks back to a sustainable size. The other way you achieve a more manageable and prudent loan to deposit ratio is by increasing deposits. The way you increase deposits is you enter a deposit war where banks increase interest rates to attract in deposits to rebuild their balance sheets.

But once they get into a deposit war, the interest rates of deposits escalate. What does this do? Well it encourages people who are already worried to save. This increases the saving ratio and in so doing takes more money out of the system. But if people are saving and the banks are not lending because they have to curtail lending in order to get their loan to deposit ratios down, what happens?

The money gets stuck in the banking system. The banks, rather than becoming an instrument of credit distribution where your savings become my loans and the economy is lubricated, become the instrument of hoarding. For an economy there is nothing worse than hoarding because it means the economy shrinks from want of credit.

As the banks return to deposit based banking, they don’t need so many employees because there is no business. So they let people go. The way they make a profit in a declining market is to cut costs everywhere and the major cost is the staff.

So as the banks in Ireland return to normality after years of gorging themselves, the average bank worker suffers. This is deeply unfair because the average bank worker didn’t make all the bonuses and the cash in the boom. Unlike their bosses, they weren’t involved in the property syndicates that ultimately destroyed the wealth of the nation but temporarily made some people feel as rich as Croesus.

They didn’t run the treasury departments that blew the banks’ balance sheets by borrowing abroad like drunken sailors. In many cases the ordinary bank worker was a victim of the banks’ short-lived success because they were the ones paying the hugely inflated prices for houses – prices that were inflated by the very banks they worked for!

Like so much else in the past two years, it is the ordinary little guy or in the banks’ case little gal, who suffers.

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