The Friday night before last December's budget, John Trethowan got an unexpected call from the Department of Finance. Amid the slashing and burning in Merrion Street, Brian Lenihan wanted Trethowan to set up and run a credit review scheme to hear appeals from small and medium enterprises which had been refused loans by banks covered by the government guarantee. Small businesses were starved of capital and the minister had promised to make the banks lend. Would he do it?
"I did a lot of thinking over the weekend and very quickly came to the conclusion that I didn't have to do it, I wanted to do it," said Trethowan. "I was committed to doing whatever I could to repair the damage in the industry."
Trethowan is a guy who cleans up other people's messes. A career banker in Northern Bank, he was parachuted into Dublin in the late 1990s by the then-owners, National Australia Bank (NAB), to fix the problems in National Irish Bank (NIB) caused by the revelation of bogus non-resident accounts. He was named project director for the internal investigation and then was appointed chief operating officer and director as NAB prepared its Irish banks for sale. Once Danske took over in 2005, he was made acting chief executive and continued to serve as director until he "headed north to retire peacefully" in 2007.
That peace was disturbed pretty quickly as the global financial system went into meltdown in 2008, culminating for us with the government's plan first to guarantee the liabilities of the domestic banks and then to nationalise Anglo Irish Bank and recapitalise Bank of Ireland and AIB last year as the depth of the problems here became clearer.
"I had watched the banking crisis develop with horror," said Trethowan. "I would have been in contact during the crisis, trying to be helpful to the department as someone to bounce the odd idea off."
As a "grey panther" – an experienced banker untouched by scandal or boomtime excess – Trethowan was clearly in demand. With two days to go before Lenihan's budget speech, he agreed to run the credit review office and set to work devising how it would work once the legislation was in place.
"I just reflected on my experience in banking and went back to first principles," he said. "Banking isn't that complicated. There are two things you want to understand: Are you good for the money? And where is it coming from? Those are very simple principles. If you were to establish those for a lending [dispute], it boils down to two components: the facts of the situation and a difference of opinion between the bank and the customer. I devised a model which said we'll establish the facts and we'll establish the two opinions. I had that done the first weekend."
Within days of the budget, Trethowan was doing the rounds of business trade bodies such as ISME, the Small Firms Association and Ibec, to gauge their response and get their input. Having complained for over a year about the lack of credit coming from Irish banks, the lobby groups were pleased to get some sign of good news.
"Some were so enthusiastic I had to hose them down," Trethowan said. "But there are no silver bullets; there are parts of jigsaw. It's important not to run away with the impression that [the credit review office] is going to solve the whole problem."
One "silver bullet" mooted by some of the business bodies was a loan guarantee scheme, something Trethowan thinks could work only in very limited circumstances for targeted areas, such as developing intellectual property, where outcomes are uncertain but downside risk is not particularly high. For ordinary businesses, he thinks his office will do most of what a guarantee scheme would achieve anyway. A team of six experienced lenders from Ulster Bank and NIB will review each appeal strictly on its independent merits, but without the capital constraints a bank would have. They will ask questions about the business environment, cash generation capacity, other borrowings and credit history to develop a clear view of risk.
"The first thing we're asking of borrowers is 'are you credible?', and that's exactly the same question a guarantee scheme will have to ask," he said. "If we're getting 90% of applications we wouldn't do, why would the government guarantee that? You're taking the risk off the bank and putting it on the taxpayer. People need to think through what happens next."
It all comes down to the vexed question of viability, which has been a sticking point between banks and businesses since credit began to freeze up in 2007. Two reports to the government by consultancy Mazars (the third is due next week) found a large disparity between how many loans the banks are turning down and how many businesses report credit refusals. The banks say the refusal rate is 14%, but the borrowers put it at 25%. Trethowan thinks the banks are counting only written applications while borrowers are including informal, verbal inquiries where bank managers make a snap judgment about a customer's prospects in a deteriorating economy and discourage a formal application.
"SMEs are weaker than they were two years ago," he said. "The supply of credit to them is more problematic, the price is higher because of funding costs to the bank, and the risk threshold has probably adjusted. We're not interested in asking banks to take on dangerous lending, but there is a grey area where the credit review office can do something."
Trethowan's opinions will be non-binding, however, so ultimately the final decision will still rest with the banks. Considering their ongoing capital deficits and high levels of loan impairments, executives are more likely to be focusing on de-risking and de-leveraging than taking on new business.
"Good lending is good business," Trethowan said. "The cheapest source of capital is profits. It's a matter of having some courage."
The real challenge, he said, will be later in the year when there is some sign of recovery. Businesses will need more working capital to take advantage, but by then their historic financials from the last few years will suggest they will have trouble repaying new loans. That is where, Trethowan said, "you have to have a leap of faith".
"I've not encountered any difficulty in dealing with the banks," Trethowan said. "The minister has sent me. I've been courteously received. The banks have done what they can to show me how they're going to cooperate. I haven't yet coming away with the impression I'm fighting a losing battle. I'd be optimistic they're going to try their very best. But this is borrower-initiated. If borrowers don't come forward, the banks won't hit their targets."
The skirmishes, it seems, have barely begun.
* Review SME credit refusals by banks covered under the government guarantee scheme; first appeals expected in May
* Establish how Bank of Ireland and AIB will add an extra €3bn to SME lending by the end of 2010, per legislation passed last month
* Monitor specific lending targets at main banks, such as green technology and seed capital
* Report quarterly to finance minister on quantity of lending to SMEs in general
* Gather intelligence on behalf of the Department of Finance on the functioning of the overall credit system
Career: Former chief executive, chief operating officer and director at National Irish Bank; Northern Bank
Directorships: Northern Ireland Transport Holding Company, South East Health and Social Services Trust (NI), Business in the Community Ireland
Education: Ulster Business School, MBA
Family: married to Vivien with one son, David
Hobbies: gardening, golf, model-making