How much the collapse of Anglo-Irish Bank was due to insider borrowing remains unclear. There seems to be much more to it than that, and perhaps in the end Seanie Fitz—and other insiders, yet unnamed—will repay with interest the millions they owe the rest of us.
However, in the (happily few) sensational failures like Anglo’s in Irish banking history, secretive insider borrowing has been a big part of the story.
The potential conflict of interest for bankers short of capital has long been obvious. For this reason, eighteenth-century Irish banking legislation banned merchants engaged in foreign trade from being bankers. The restriction, alas, led to undercapitalized banks.
Joint-stock banking met that problem, and produced the relatively stable banking system that lasted from 1825 to 2008. However, there were some failures along the way, and it may be worth recalling that the two most famous stemmed from the abuse of insider borrowing privileges.
In early 1856 the Tipperary Bank collapsed when it was discovered that its leading light, John Sadleir M.P., had committed suicide on Hampstead Heath. It soon emerged that he owed his own bank nearly £300,000 (something like €30 million in today’s money).
In 1885 it was the turn of the Munster Bank, laid low by the cronyism of a coterie of Cork merchants. For an account of that episode see http://irserver.ucd.ie/dspace/bitstream/10197/441/3/ogradac_bookchap_pub_068.pdf.
In the cases of the Tipperary and the Munster, unsuspecting but relatively well-heeled shareholders bore the brunt of the directors’ swindling. Like Anglo shareholders last week, they protested loudly, but they certainly did not expect the government to bail them out. In addition, the banks’ depositors were also badly burnt.
History says that insider lending may be work in highly unusual circumstances. On this the classic work is Naomi Lamoureaux’s Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (Cambridge, 1996). But Lamoureaux’s yankee banks may be the exceptions that prove the rule. In general insider lending is dangerous, and a bad deal for both customers and shareholders.
5 replies on “INSIDER LENDING, INSIDER BORROWING”
Those collapses were all in Munster Cormac. Hmm. Any in Ulster?
The amounts involved (currently about €180m?) seems small beer in the scheme of things. The main damage may be to the reputation of the system -not of the bank since it didn’t have much of a reputation to lose anyway.
I wonder how much of the collapse was due to short selling which wasn’t suspended in Ireland as it was, for 3 months, in the UK.
Not all the shareholders in Anglo Irish are rich. I am a relatively poor pensioner – no private pension just an 80% State (UK) one and relied on income from my savings to supplement that. I bought Anglo several years ago on the recommendation of a stockbroker and was under the impression that it had a good reputation. It was one of the few shares I was making money on till the recent collapse.
Seems to me that the global economic collapse is due to people investing borrowed money rather than their own, and as a result those who have invested their own savings are the ones who have really lost out. These loans should have been properly secured and over gearing should not have been allowed. I think it should be illegal to borrow from a bank of which one is a director.
In reply to Kevin, any possibility that this was just a pathological element of the otherwise useful Munster habit of risk-taking and innovation?
Jim, I would never suggest such a thing.