Tag Archives: competitveness

Disruptive Innovation and Irish Universities post-Leporte

History and business are rarely taught or even studied together. That’s a pity. Economic history, as  subject, has disappeared down the memory hole. What is more worrying perhaps is that the methods of historical analysis, careful source text reinterpretations, critical data analysis and a cool analysis, are not often applied to business. Enter Jill Lepore, a Harvard historian, to remind us why this ahistorical business analysis is a weak approach Continue reading

Irish Banks : Arrears, Deposits, Bail-in and Interest Rate Editon

This is an edited and extended version of a column in The Irish Examiner 26 October 2013

There is a great book on marketing titled “the long tail” , which stresses that instead of trying to hit millions of customers at once its perhaps better to do millions of niches. Replete with examples it was and remains a deserved hit. The long tail refers to the distribution of something – a large bulk at one end quickly trailing off to smaller numbers but which go on for a long time. Another word for this is skewness. In very many skewed distributions it is common for the total amount in the long tail to be equal to or greater than the amount in the bulk. Another way of thinking of this is a power law. Many many things have been found to follow power laws – terrorism, population of cities, bibliometrics, income distribution… theres no reason to think Irish bank losses are different.

download (1)The long tail approach is worth considering as we move into the sixth year of this crisis.  Having dealt with the massive mess of the commercial property and developers loans via hiving them off to NAMA (which has yet to “get credit flowing” as its cheerleaders in the then government and some still prominent stockbrokers trumpeted) , the long tail of the mortgage and SME loans continue to erode the banks. We are moving down the tail with the average loss getting smaller but there are an awful lot of them. Today I spoke to a SME owner who runs a small distribution business. He had settled with a bank for a loan taken out in 2006 which resulted in the bank taking a loss of just under €1m. The business is still going, much reduced but “ticking over nicely”. This is as good as it gets – a viable business remains. Many many SME loans are for larger amounts and the banks will take a larger hit as there is nothing left. I think of someone  I know who purchased a house in 2006 for €450k, interest only of course, in a  not very fashionable holiday area, where similar homes are selling at €150k on a good day. These are the long tail and they are wagging the dogs of our banks as the banks chase them round in a circle.

Basel-IIIAt present Irish banks are well capitalized. Some might say that in a classic overreaction to the lack of adequate capital buffers in the past they are over capitalized. Bank capital is a two edged sword. On the one hand the more capital they have the greater a buffer exists to absorb losses. On the other, as capital is measured as a percentage of assets the more capital is required then all things considered the smaller will be the assets. A bank that has a 10% capital ratio will be able to make more loans (assets) than one that is required to hold a 15% ratio. The ECB has recently announced that it will conduct another round of stress tests. These are required, in essence, so that the final set of capital injections will be made prior to the ECB taking over full control of regulation. The political reality is that this step, a necessary requirement for a proper banking union, will require that individual states make or supervise any capital injections. In a banking union this will be the responsibility of the union, and thus the German taxpayer might be on the hook. But not this last time.

gpyugoWe have known for some time that the Irish banks will require additional capital. The state of the mortgage book is bad but the state of the SME loan book is also dire. Earlier this year we found out that  50% of the SME loan book was in distress.  There is a total of €70b in SME lending, of which an astounding €30b is still outstanding to real estate. A multibillion loss is an absolute certainty.   On the mortgages we have similar. The question that should raise its head is : who bears these losses. Traditionally the order of losses was deemed to be shareholders -> junior bondholders -> deposits and senior bonds. The taxpayer might then step in and recapitalize if the bank was deemed to be needed.  So in the Irish case 2008 saw some but not all junior bondholders and almost all equity destroyed, but the system balked at that and so in stepped Paddy with his chequebook. And we know how that ended. We saw in Cyrpus, and indeed have seen in the liquidation of IBRC that depositors can and in future will be “bailed in”. This is fine and dandy if all other sources of capital have been burned through. The problem is that recent statements by Mario Draghi suggest that bondholders might be spared in future, for fear that once burned they might not return. In other words the sovereign would be required to make a decision as to whether they would absorb losses or instead force bailins on depositors. There is zero willingness for the Irish state to add more taxpayer money into the banks. Thus the question becomes: do the banks hae sufficient buffers in place to absorb losses before the question of depositors comes into play?

hqdefaultOn a macro level they are good. AIB has shareholders funds of c 10b, BOI of 8b and PTSB 2.4b.  In the case of PTSB and AIB much of these shareholder funds are in fact state funds, so any erosion of these is an erosion of taxpayer funds. The problem is that as we noted they are required to hold funds at a certain level. This level is higher than the European requirements. Thus as losses get booked the banks will have to either raise additional funds. This, in sufficient amounts, is I submit unlikely. While they have had some success in raising limited amounts these have either been expensive or have required significant security. In addition, the banks face rollovers of existing issued debt. Bank of Ireland will need to roll over or pay off bonds of 9.5b in 2014-2015, AIB 7.5b and PTSB 5b n the same period. This will tax them significantly. If they face a requirement to otherwise increase capital from losses that will make the job that much more difficult. A large part of the outstanding bonds are senior notes, some 7b. A large part of the remaining is covered or asset backed. Only some 5b or so across the banks, mainly in Bank of Ireland, are unsecured or subordinated. Bank of Ireland has the largest “burnable” buffer but is the one least likely to require it. AIB has very little unsecured debt and less than 4b senior debt. We have seen that even the mention of senior debt being burned, where legally possible, has caused significant negative market reaction. Thus where there is no taxpayer backstop and either no bondholders or no willingness to burn them, inevitably deposits must come into play. In that context depositors should seek a higher rate than they are at present getting.

browseChartThe chart shows the deposit rate on new deposits for an agreed maturity, Ireland v Germany. Deposits that were ten years ago seen as close to riskless as it is possible to be are no longer so perceived. The difference between Irish and German deposits is not, I suggest, sufficient to reward for the relative risk differential. Although small, the risk of depositor bailin in Ireland is many many times larger than that in Germany. These risks are the worst sort- small probability large outcome risk. It is time that the banks begun to remunerate depositors  appropriately for the risk, small that it is, that they are being asked to bear.  We need to move away from a banking system that is dependent in large part on loan capital towards one that is dependent on deposits. In fact, in the last week we have seen the situation worsen. The increase in DIRT means that deposits are now paying less than the already paltry levels. Combined with the loss of ACC , closing after 86 years, this further erodes competition, even if ACC was a small player. Expect pressure on interest rates to be downward, relatively speaking, on deposits. Which are now risk capital and in the firing line.

Universities are not Innovation Bootcamps

This is an extended version of an opinion piece published (here, paywalled) in the Sunday Business Post Sunday 8 September 2013, authored by Charles Larkin and myself.


innovationIrish universities remits and units are shrinking in most areas, with one exception it seems. There has been a growth over the last number of years in university-based industrial incubators. These subsidized hot presses are designed to encourage faculty and students to create tomorrow’s Google or Facebook, and with it  money for the universities and  jobs for the politicians. Of course, faced with 400k on the live register we will need a lot of FaceGoogles to make a dent.Facebook has about 5k staff, so 80 of those will do nicely. We merely need 10 googles. Good luck with that. 

At one level these incubootcamplators amount to free or cheap office space and IT; at the other these amount to startup boot camps where (typically) students are run through courses delivered by existing entrepreneurs and academics to generate ideas and to carry them to the market. These showcase units attract a lot of attention, playing as they do into the apparent government desire for us all to become entrepreneurs. Lets leave aside the actual numbers and facts on Irish entrepreneurship : that we have a high level of forced entrepreneurs (the TINAEs those for whom there is no alternative to entrepreneurship)  and that the attraction of entrepreneurship is waning rapidly. Innovation and entrepreneurship are, officially, a Good Thing To Be In Favor Of


brazil-03Incubators and accelerators have become, without any proper debate, the method by which entrepreneurship has moved into being a core function of higher education. We are knee deep in the entrepreneurial big muddy and on we press, the classic escalation of prior commitment (also known as throwing good money after bad) paradigm being played out in real time. Universities now are expected to foster and support innovation and enterprise with time, money and materials, diverting these from existing activities already under pressure from declining funding and increased demands.  Most worryingly, and with scant discussion in he media or elsewhere, the proposed new funding model for universities has a requirement for “high quality research and innovation” as a core element.  When did the two get conflated? By whom? Where was that debate played out? Do we now take it that only research which is likely to produce innovative wotsits is worthy of funding? Recognition? Approval? What a dreary academy that would be, a higher education “Brazil”


1-s2.0-S0048733303000234-gr2One of the proposed key system objectives is to foster increased university-enterprise connections, the so-called “triple helix model” of universities, government and industry, and have these measured by an EU level index (the summary Innovation Index). that the overlap of all these bears a remarkable similarity to the Danger trefoil is perhaps unfortunate.  This approach has very little to do with innovation and a lot to do with how many graduates there are and how much is spent. It is a classic inputs driven approach to evaluating outputs, which is easy for bureaucrats and meaningless in terms of actually fostering improvements. It will foster systemic gaming, as what gets measured gets managed and wha gets managed gets funded.  Within universities there is a push towards making innovation a key element of strategic planning, in some cases with the wholesale repositioning of business schools towards innovation centered units regardless of capacity, competence, ability or interest. IBEC, a lobby group, is to be given a key role, via satisfaction surveys, in the measurement of how universities are adhering to national strategic objectives. Again, I must have missed the debate on whether or not a single member of the Bertie system of social partnership is an appropriate body to be involved in the process of evaluating  Irish education. Why is the happiness of IBEC members more, or less, important than any other? Again we see the wholesale stealth movement of universities away from being handmaidens of knowledge and towards the concubine of industry. When did that debate take place? 


CU_handbookWe have seen in parallel over the last decade a growing corporatization of universities. At one level this is not problematic, as these large organizations require professional competent management, but it is a worrying trend. In the US, 40% of the increase in the cost of higher education since 1988 has been attributed to administrative costs. While universities can be run on a for-profit basis there is little desire for this in Ireland, but declining state funds and funding incentives designed to cover up this reduction of resources drive universities towards greater corporate involvement as a requirement for survival. When you are drowning  any port is a haven, regardless of what lurks on land. Irish (especially) domestic and (to some extent) multinational firms have shown little willingness to develop long-term linkages with universities beyond the requirements of public relations and photo opportunities. All too often there is an appearance that short-termism is all that is required, cheerleaded, most sadly, by local representatives and parliamentarians.  


bureaucrat1It is also ironic that increasingly bureaucratically managed universities are now expected to lead innovation. In most cases this involves a plethora of committees, new appointments to lead academies and centers, and a host of administrators. A less conducive approach to fostering innovation could hardly be thought of. Those of us that work in universities are aware that  at the bottom of the heap there is a veritable tumult of ideas as to how to improve the student experience, make the system work more effectively, increase research productivity and improve staff morale. By the time these ideas are filtered through the increasing corporate sclerosis that passes for management few ideas if any are discussed not to mind approved. Just try to get a flipped module on the financial crisis and what it tells us about the nature of management responses to crises generally onto the teaching roster in a leading business school and see how far you get …Universities are being managed more and more in a mechanistic, Taylorist manner which is the exact antithesis of how a knowledge organization should be managed. Alas, such methods are attractive to government and funding bureaucrats and provide ample opportunities for academics to move from the coalface of teaching and research to administer and micromanage. Whereas before that would have involved much liasion with students and faculty now exciting vistas of corporate engagement open up. Until and unless a culture of innovation and an acceptance of the need to allow this all across the universities emerges they will not be able to lead any innovative or entrepreneurial charge. Being innovative involves risks. Most university managers are enormously risk averse and so innovation is stifled at birth or filtered through layers of committees until the downside of any risk is spread thin. 


nov_pol_pres_lunchHow have we ended up in a situation where the only representative body that will have a role in determining how universities are doing is IBEC? This represents the final capitulation of the government to the concept of universities as having an economic role only. IBEC has as much and as little role in assessing the output and fitness of the higher education sector as do Aosdana, or the ICA or the GAA. Universities exist for and to serve society, not just the economy. IBEC is the last man standing of the Bertite approach to social partnership, and it remains a powerful if shadowy lobby for its members. But the needs of IBEC members, or the wails of ISME, the Continuity SFA about quality are those of a sectoral lobby, nothing more nothing less. There is a clear perception from some recent pronouncements that that quality is narrowly definable as “immediately deployable at work, trained by the taxpayer so that business doesn’t have to incur the cost while reaping the benefit” 


transferable_skills1What universities provide graduates with are skills and knowledge.  These can be divided into two kinds – specific and general. The  focus of entrepreneurship education and the growth of innovation hubs is on specific skills, namely, those around innovating and starting a business. The best such recognize that these are in fact different – thinking up an idea and carrying it through require very different skillsets.  Entrepreneurs are risk takers and relish ambiguity and control of their own environment while innovators tend to add to those willingness to change and a restless curiosity. While there is overlap there is also distinction. One of the emergent findings  appears to be that while skills can be taught entrepreneurs may be born, not made.  Sure training can provide skills and techniques for successful carrying on a business, but it is highly debatable as to whether the mindset itself is teachable or learnable. While we devote resources to these specific skills we are of necessity not devoting them to other specific skills or to generic (transferable) skills. Indeed, it is these generic skills, many of which originate at second level, that employers actually value. If someone wants a specialist in finance they will seek someone with ACCA or CFA or CAIA qualifications. They will pay well for these skills but they do not expect (although might like) to have students emerge straight from college with them. What they expect is that students will have the skills in knowledge acquisition, in information processing and in interpersonal skills to allow them gain these subject specific skills and to keep them honed in a lifelong learning environment. These general skills, in mathematical competence, linguistic capacity, reasoning and inference, in juxtaposing theory with practice and linking the specific with the general are of benefit to society not just to IBEC or C-SFA ISME .  Making universities focus more and more on specific skills or chasing political fads is to ensure that universities blur into corporate training centers  and that private rewards are placed before the public good.  Instead of putting scarce resources into the dubious chase to create a generation of entrepreneurs from our universities perhaps recall what it is we want them to create – educated persons with specific skills sufficient to provide them with depth in an area but with a breadth of general skills which will enable them to be valuable members of society. These skills are costly to acquire, both in terms of students time and effort and in terms of the support and infrastructure required to assess their acquisition.  By all means encourage and support students who wish to demonstrate an entrepreneurial bent – but why should universities provide the infrastructure for these when such exist externally, both with public and private provision. I suspect that most of the rather few successful graduates of these accelerators would have found a way towards their aim without a university led and fostered hothouse. In some senses, state supported as they are, these incubators crowd out private competitors. 


 knowledgeispowerlicenseplatewebLets reward not just that but also social involvement through perhaps volunteering, or leadership qualities perhaps via sport or mentoring. If knowledge is indeed power a breadth of knowledge is power across a wide range of human endeavors. Lets reward skills in areas such as personal development and extracurricular cognitive skills.  Universities now work on a credit system within the European Credit Transfer System – each year is typically worth 60 credits. Lets mandate that 10 of these must be achieved outside the system. Lets devise a system where the student who achieves a high level in chess is rewarded as is the student who mentors intellectually disabled children, who captains a county or college camogie team or the one who sets up a company. Lets reward breadth of achievement and foster a generation of graduates who are embedded in society not merely aiming to create a generation of reluctant entrepreneurs. Universities are not,should not be made and must not let themselves become innovation bootcamps. 


The Garda should take pay cuts to maintain numbers – discuss

1224242572490_1aaaaSo it seems that the police are running out of money, with reports (here, here) that the force will not have the funds this year to pay for its complement. The commissioner has stated before that he would not like to see, and would feel that he cant really deliver a service, if numbers fall below 13,000. Complement now stands at 13,400.  If you are unsure of what a police officer in modern ireland actually does see this reflection of an officer leaving. I suspect that the cuts in numbers will, as usual, fall on frontline services. When, as RTE news reports this morning, the first person appointed in a murder investigation is not a lead detective, or a forensic analyst, but a financial controller, we have left logic far behind and are on the shores of la-la land.

There is a bit of a meme out there that instead of cutting numbers we should cut pay in the public service. Without doubt there are areas where police pay is rather….strange. There are lots of unusual allowances and these need to be worked out over time. But the principle, of cutting pay and retaining numbers, is interesting. The logic, that instead of cutting 10% of the force we should cut 10% of the pay from the existing force, is one of the seductive logical traps. Why not cut 20%, and INCREASE the force. Hell, why not cut 50%, or 85% and get a cop on every corner? Of course, thats never argued. But its the logical counterpart of this.

Karl Whelan once noted to me that there are a lot of people out there who feel that any wage greater than zero is too much for public sector workers. Hes right, I think….

Plan B needed, times three, for the dangers ahead

This is an extended and linked version of an Irish Examiner oped published 24 November 2012

Irish governments over the years , and especially in the last few, have not exactly shown themselves to be shining examples when it comes to contingency planning. Time and again we have seen plans advanced which when they fall apart reveal that little or no obvious alternatives were in place, or if in place paid any heed to. The most egregious example is of course the creation of that vortex of wealth destruction that is IBRC, where despite alternatives being presented to cabinet a bullheaded politicized decision was taken which shot the economy in the head although the full damage took time to be realized.

In planning one plans for the worst and hope for the best. And some things that are planned for, or should be planned for, are what one might call grey swans – low probability high impact events. It is unlikely for example that we will see a tsunami hit Ireland but if it did we would be best advised to have plans in place. Mind you, in a country where the effect of releasing millions of gallons of water from a dam into a flooded river already bursting at its banks downstream seemed not to be planned in an integrated fashion one wonders…

Three major events, none of which one hopes will happen, are now beginning to make themselves felt on the economic stage. It is probably too much to hope that the system which gave us the so far abysmal performance on legacy bank debt can plan for these but at least the public at large might want to think on them. The three main possibilities are the effective removal of our tax shelter for MNC profits, the sundering of the EU via Britain huffing off, and a hard landing in china.

Take the latter : one of the safety valves which we have relied on for a long time is the ability of friendly countries not economically screwed up to take our surplus labour, either legally or to turn an effective blind eye. With over 80 thousand persons per annum emigrating not all are going to the UK, many (possibly as many as 20k) going to Australia and upwards of 6k to Canada. Both Australia and Canada are very dependent on the worldwide commodity boom fostered in large part by the expansion in the Chinese economy. And as the Chinese economy is faltering so too is business sentiment in these countries turning. With uncertainty about the future path of the chinese economy and the knock-on effects on these importers of Irish labor, what is the contingency plan should we have to absorb tens of thousands additional jobseekers?

A further blow could come from the deepening rift emerging between an increasingly euro skeptical UK and a Europe/Eurozone that sees greater integration (sometime, on the cheap ideally) as the only hope of longterm survival. Although not nearly as dominant as in the 1950s and 1960s the reality is that the UK is our largest market – our economies are intertwined. 11% of UK exports go to Ireland, and they source about 7% of their imports from us. Meanwhile. 33% of our imports and 16% of our exports go to the UK. When one looks at the situation excluding chemicals the export dominance of the UK is even starker. There seems to be in the UK a belief that they can selectively withdraw from large parts of the EU, ditching what is known as the Acquis, the body of laws that govern conduct and ensure harmonization. Faced with an intransigent UK and an exasperated EU, the prospects for a nasty split are while low growing. A UK out of the EU would pose massive challenges to Ireland – it would be fundamental decisions to either follow them, and forever accept that we are economically a region of the UK, or to stay with the EU (and be a region thereof). A UK out of the EU would one suspects be treated quite vindictively by the EU and in the shortterm face massive trade barriers. How we would deal with that scenario is no doubt the subject of a detailed think-tank in government…no doubt…

Allied to that and doubled down from the US we see a ratcheting up of the pressure on the tax front. Irish based MNCs are on the face of it the most productive entities in the world making profit per employee four times the EU average. It strains credulity to imagine that at least some of this booked profit does not arise from creative tax inspired planning. MNC’s can plan in such a way that the dell PC’s manufactured in Poland appear as Irish exports…There is a worldwide revolt against corporations and high net worth individuals engaging in legal but costly tax planning. We have seen companies grilled in the UK parliament; the French have simply taken the situation into their own hands and sent tax bills to MNC’s; and the issue of tax harmonization vi the common consolidated tax base has not gone away Meanwhile the US Senate has described Ireland as a tax haven and Microsoft has been used an example of aggressive tax planning in the US debate on clamping down on same. With global scrutiny now on Ireland, with the EU determined to srive forward on tax harmonization, what plans are in place, if any, to determine the fallout were our MNC friendly tax system to come under threat

These issues may never come to fruition. But a mature open debate on them, without calls for green jersey wearing or not talking down the economy or other such guff is required. We were illserved keeping our heads in the sand in the boom years and should learn the lesson that open debate is vital.

Can investors not afford firesales or just dont want to engage in them?

Property prices  in Ireland have dropped precipitously  and yet we still see few (apart from those that Alssop Space) enough investment properties (buy to lets) coming on the market deeply discounted. A fascinating study (firewall alas)  suggests that it is not simply an unwillingness or inability to lock in the loss that causes people to hang on. The authors employ a survey of 750 investors, and find three main behavioural reasons why people dont list for sale underwater investments

  1. Familiarity bias : this refers to the trait that people “know” their own asset. The investors know their asset, their property, is different. They are too close to it. This bias causes people to overestimate possible returns and underestimate risk.
  2. False Reference : people have locked in the purchase price, and even when they “know” the fair value is much lower they find it impossible to change the reference point to a lower value. Thus they stay at the unrealistically high “frame of mind”
  3. Status Quo Deviation Aversion: it is psychologically costly to change your mind, so people stay the course and refrain from listing at a lower price. After all, prices might rise.

What they dont find is also interesting: the affordability issue is not as important as the (combined) behavioural issues.

All of these of course can be applied not just to individual us property investors : think of NAMA and government policy – we saw the setting of November 2009 as the (false) reference point for prices, we see that the argument of Ireland being fundementally different is still potent, and we see that there is no amount of evidence or argument that will sway the goverenment from its course….

The Psychology Behind Why UnderwaterInvestment Properties Are Not Listed for Sale
Michael J. Seiler, Mark A. Lane, Vicky L. Seiler ,  The Journal of Behavioral Finance & Economics Vol 1 (2)  Spring 2011

Public Sector, Private Sector, Public Money, Private Money

I spoke yesterday at the Irish Proshares Association ( a branch of IBEC), along with Jim Power and Constantin Gurdgiev. A gloom of economists indeed.Part of the discussion after our presentation got me thinking of the nature of the “debate” in ireland, where much focuses on public sector versus private sector. The debate is posited in these manichean, zero sum, hobbesian (both Eddie and Thomas….) terms. Sometimes it is overlain with the language of productive versus unproductive.  There is an unspoken assumption that all private sector activity is productive and all public sector unproductive. Speaking as we were in the spanking new PWC building, with a magnificent view of the skeleton of Anglo’s headquarters, I suggested that we reconsider our language.

Anglo was of course a private organization, and one would be hard pushed to find anyone that would concur with the statement “this was a productive use of money” to describe its last decade or so of existence. Similarly  one might well conclude that (steady now…) the HSE is a productive body – one can and must argue about HOW productive but the nature of public health provision is to increase overall economic productivity. Less contentiously, we can look at multinational tax arbitrage (private, but productive?) and the provision of second level education (public, inarguably productive). Much of the problem seems to stem from confusion about being productive (a net addition to economic wellbeing) and productivity (how many “units” of economic output are produced per unit of “input”).

A more useful approach might be to look at public money versus private money. Like all universities TCD is part public part private funded. We get a bloc grant from the state (because there is a public good in having a well educated population); we get a sum of money which the state provides us as opposed to charging fees to undergraduates; we obtain competitive scientific research grants from both public and private bodies; we charge fees for courses to private individuals; we have some campus companies and other activities which give a yield.  We might want to think of all the private sector bodies and how they obtain monies – there is a vast flow of money from the public purse to the private sector directly each year, not to count the indirect multiplier effects. Lets concern ourselves with how effective, how productive is the use of public money regardless in the first instance of whether the body is called public or private sector, itself a rather flexible legal distinction when the 100% public owned state bodies such as NAMA, IBRC and so on are not classed as public sector.  The contractual nuances of the individual disposing of the money might well be important but of prime importance is how the money is deployed. And in that context, the debate needs to mature (but it wont of course)….