State-owned development banks – such as the Strategic Banking Corporation of Ireland – can play a big part in refloating the economy here, according to Columbia University economics Professor Stephany Griffith-Jones.
An expert in development banks, Professor Griffith-Jones said “after a crisis the banks never lend to SMEs - we know this happens so we need public institutions (to lend to SMEs)... it’s surprising it hasn’t happened here sooner”.
Delivering the annual Donal Nevin lecture to the Nevin Economic Research Institute, Prof Griffith-Jones said public these kinds of banks work “counter-cyclically”, ramping up lending as the private sector withdraws.
She said public development banks were also good for the private banks because the public banks often took on risk that the private banks are unwilling to finance, such as public infrastructure.
But the development of infrastructure makes it more likely that all sectors of the economy benefit, so the private banks can be more profitable too.
Prof Griffith-Jones said the Strategic Banking Corporation of Ireland “has the attraction of joining up with the people who have the experience of lending to SMEs, the KfW (Kreditanstalt fur Weideraufbau – the German state development bank )and EIB (the European Investment Bank – owned by EU governments), and using money from the old pension fund.
“It would be good thing to involve the technical expertise from the KfW because the Irish banks are not accustomed to this (long term specialist SME lending).”
Prof Griffith-Jones was critical of the weakness in Irish banks when it comes to SME lending expertise, and said that technical skills and an appetite for specialist SME lending will be difficult to transfer to Irish banks.
But she said this is one area that has to be strengthened.
The SBCI model involves raising money at low interest rates and then passing it on to other banks – existing or new entrants – to lend it on the SME sector.
Prof Griffith-Jones said there are mechanisms to monitor this lending, to make sure the stock of SME loans increase at the aggregate level. She said the cost advantages of this type of lending must be transferred to SMEs and the real economy, not used to increase bank profits.
Overall she said a public development bank can improve productivity and employment in the Irish economy, and she urged the rapid and skilful implementation of the strategic bank model.
Prof Griffith Jones has worked in Barclays Bank, The Central Bank of Chile, the UN and the Commonwealth Secretariat.
Her academic and consultancy work specialises on stabilising capital flows and lending to avoid costly economic crises and promoting economic development.
With Columbia University Colleagues Joseph Stiglitz and Jose Antonio Ocampo she edited the book “Time for the Visible Hand: Lessons from the 2008 Crisis”.