A new, working, banking system would probably be the best Christmas present that the Irish economy could receive for 2011. The main reason, for example, that Ireland's traditionally high rating fell in the IMD World Competitiveness report this year was that its banking and finance system plummeted in international rankings. That the country's overall ratings fell only slightly was testimony to how competitive Ireland has remained on other criteria.
There is also no doubt that progress in resolving the problem is painfully slow. We invited readers to provide practical suggestions on the banking fix for Ireland, and, in this issue, in the first of two parts to appear this month and next, we publish their proposals. A report, summarising the findings, will be given to the Minister for Finance, (and all other politicians and public representatives), for use in fixing Irish banking.
The report will concern issues such as, (a) the marketing of equity/debt in Irish banks to investors, (b) the economic-regulatory framework, (c) the role of international banks, including those already licenced in Ireland in the solution, (d) tax issues, (e) markets, and sectors issues (f) the role of property lending in the mix, (and NAMA), (g) staffing and remuneration questions.
To start the process, we publish some the following individual blueprints, submmited by three distinguished former, and current chief executives of leading Irish international financial institutions, Ernst Matthiensen, former CEO and founder in Ireland of one of the IFSC’s first banks, Dresdner Bank, Harley Murphy, former CEO of BNY Mellon in Ireland, and Frank Monks, Managing Director of Nexgen Capital Ltd, the principal operating subsidiary in Ireland of Natixis, the leading French bank. Next issue: Part II

Ernst-Richard Matthiensen:
-Keep a watchful eye on proprietary trading - this should NOT be considered as a main source of income.
-Set limits for counterparties
-Do not permit "Short Trades" in uncovered positions
-Understand the nature of drivatives and other synthetic products (educate your staff, Board)
-Watch your FX exposure
-Watch your refinancing risks, limit unmatched maturities.
-Liquidity Managment of utmost importance.
-When granting loans (especially syndicated loans), analyze the risk yourself, do not rely exclusively on outside sources (rating agencies,etc.)
-Limit home mortgages to 3 times annual income of borrower,subject to a 85 p.c. loan to value ceiling; exclude one time or extraordinary income. Check relevant tax returns.
-Bonuses should be tied to long term performance with set criteria - never ever pay them upfront or irrespective of the overall earning situation.

Frank Monks: (I confine my remarks to the sytemically important banks, Bank of Ireland and AIB); Both these banks need additional equity investment to cover recognised and potential losses and meet the capital solvency requirements. At the moment, this can only come from the NPRF since dividends have been cut and having been stung, retail investors and fund managers are now risk averse. Each bank will need a Business Re-orientation and Renewal Plan. This plan should include the following steps and features:
* De-risk and de-lever the balance sheet, ending up with a "utility bank" with virtually no propietary trading books
* Return to "cashflow lending" with capital and interest repayments. Collaterised lending (excluding home mortgages) would be limited to a small portion of the lending book and would be short-term.
* Disposal program for non-core assets, and "bad bank" section to runoff non-core loan and investments
* Closure of overseas offices and non-economic branches
* New core business focusing on retail & SME banking and payment & FX services, with corporate and investment banking being dramatically reduced
* More sophisticated risk measurement and management
* Re-price term-lending and general banking services
* Cost efficiencies to include staff redundancies & review of remuneration policies
* Review or the closure of DB pension schemes to avoid future P&L volatility
* Continued development of web-based banking with increased security features for retail customers
* Review deposit marketing with a focus on stable long-term savers and pension funds. Improve PRSA/ARF offering to aggressively compete with non-bank offerings. This would entail offering pension fund administration and trustee services.
* Re-list equity on Stock Exchanges if lost
* Roadshows to attractive new equity investors, targeting international venture capital or sovereign wealth funds using structured finance expertise where possible
* New management with credibility to drive forward this plan
After approval, this plan should be broken down into different stages with realistic timeframes, starting with the clean-up and recapitalisation stage, moving on to the rebuilding stage (staff training and re-organisation, deposit marketing) and ending up with seeking equity investors. A critical part of this process will be the rebuilding of confidence and of the deposit base. Communications to staff, customers and the public will play an important role in this process. Senior management should be much more visible and be held accountable.

The key to the success of the rebuilding of these banks will be their ability to attract and retain stable long-term deposits and to rebuild a funding base to allow them to prudently lend to consumers and to the productive economy in Ireland. The competition with Life Companies for such funds may need to be addressed through legislative changes to switch the advantage to banks. Alternatively, moving the provision of home mortgages to the Life Companies could be considered.

Harley Murphy:
a) Marketing equity/debt to investors

* For competitiveness & market reasons it is crucial that every effort/support is made to keep Bank of Ireland out of Government majority held ownership since AIB will be.
* Consolidation of the other domestic credit institutions must take place rapidly to create a meaningful third force.
* Government must put the legal framework in place to give investors the greatest possible clarity around the risk aspect of their investment. This could allow banks, in due course. get involved in the newer debt raising instruments such as COCOs & bail-ins. This legal framework must include legislation covering the winding-up of banks which should be implemented well before the IMF/EU deadline of mid-2012.
* A much greater level of transparency around banks balance-sheets and results must be included in reporting for investors. Should go well beyond basic accounting standards. This is essential to restore trust among the investor community.
* The banks should be encouraged to actively encourage significant equity participation by reputable international institutions. The IDA should be mandated to support this.

b) Economic - Regulatory Framework:
* It is very important from an international market perspective that the CBI Governor and the Financial Regulator are seen to be acting independently of political control. The continuous referencing/quoting by the Taoiseach and various ministers to the views of Patrick Honohan and Matthew Elderfield to support their own policy positions is damaging their credibility and perceived independence, in my view.
* The regulatory framework must meet the highest international and be seen to do so. This will be a challenge given global developments in this area, but given the reputational damage done in the last two years this is essential.Transparency is again key here.
* The government must resist any populace demands and refrain from imposing any special levies on the financial sector to give it the opportunity to develop some level of profitability to support growth and attract investment.
* Day to day management must not be subject to political interference.

c) Role of international banks
* As stated above identified reputable financial institutions should be 'cajoled' into taking significant equity stakes;
* The international banks in Ireland should be convinced through appropriate political approaches to tell the 'good story' internationally about Ireland and its efforts to address the failures. This would be similar to the role certain multinational companies play in helping to attract inward investment.

d) Tax Issues
* No further taxes or levies should be imposed on banks for reasons mentioned above.
* The 12-5% Corporation tax should be used to attract international institutions take significant stakes in Irish banks.

e) Market & sector issues
* There is a vast number of points/recommendations here but I will keep to some key points:
* The banks must complete revise the Business Model they have developed over the past 10 years to reflect:
o a refocusing on the Business Sector, particularly SMEs and to a lesser extent the retail sector
o decentralise the credit approval process to the branches, except for large loans (eg > Eur 100,000).
o concentrate on rebuilding customer relationships and brand loyalty;
o significantly reduce their cost basis (including staffing at all levels) through creative use of technology & franchising etc.;
o severely limit proprietary trading except where it compliments customer related dealing;
o focus on a smaller number of core competencies;
o change the organisational culture, from top to bottom, to reflect the new business model.
* Detailed strategic plans must be implemented and goals/objectives subject to monthly review.

f) Role of property lending
* NAMA must be pressed to take a cooperative approach to the banks as distinct to the 'bossy' approach they seem to have taken to-date;
* Through a more cooperative approach on both sides there can be a win-win situation in dealing with the property sector;
* Obviously the banks must learn, in a very practical way, from the massive failures
* Reinforce and continually review their risk management process & staffing;

g) Staffing & Remuneration
* As stated above there must be significant staff reductions which is based on a clearly developed talent strategy and not a last-in, first out or other such simple formula;
* Requirement for retraining of staff, at all levels, with particular emphasis on middle-management, to reflect the new required business model;
* A much more rational and less emotive/populace approach to remuneration must be adopted. This does not mean a return to an old 'bonus culture' but it does mean recognising that talent operates in a competitive arena as does any other resource factor. Imposing subjective ceilings is completely counter to restoring a quality domestic banking system.
International & domestic benchmarks for comparable positions should be used as the basis for any norms/restrictions being set.