Measuring the Liabilities of the Irish Banking Sector

It is certainly quite difficult to measure properly the liabilities of the Irish banking sector, if this term is defined to mean those banks that are embedded in the Irish economy with significant domestic non-bank business.  The main problem is that the aggregate banking data (as published by the BIS and the Irish central bank) are dominated by the activities of international bank groups that run significant volumes through the IFSC. These operations are pure offshore financial intermediaries and should be ignored in terms of assessing the scale of liabilities of the domestic banking system.

Rossa White has a written a useful short note “Irish banking liabilities – True figure is just over 300% of GDP, one-third of bogus ratio being quoted,” which is available via the Davy website.

9 replies on “Measuring the Liabilities of the Irish Banking Sector”

There are two difficulties with Irish Central Bank or BIS figures, consolidation and the on-shore/off-shore distinction highlighted in Rossa’s Davy note. Table C1 in the Central Bank monthly release is the consolidated balance sheet of on-shore banks, not all of which are Irish-owned and not all of which are covered by the guarantee. Table C3 is aggregate rather than consolidated. Tables 1-8 in the BIS quarterly data include on-shore and off-shore banks, as does Table 9, which involves a partial (within-group) consolidation. None of these tables gives a measure which corresponds precisely to what the Government has guaranteed, which is (in effect) consolidated liabilities of a subset of on-shore banks choosing to join the scheme.

No table I can find anywhere, even unconsolidated and including off-shore banks, gives a liability figure of 900% of GDP. A fig of 1100% has also surfaced. Has someone been smoking something? The amount guaranteed has been stated by the Government to be €440 bn, which seems to me to be gross of some consolidation. It is broadly in line with Central Bank table C1, but clearly not the same in concept. Anyway, it is 250% of GDP, not 900%, seems to be falling gently, and is a contingent liability – only a fraction is likely to crystallise. There is no table published regularly which measures developments in this guaranteed magnitude. The BIS tables, and Central Bank C3, are misleading and much too high as a guide the contingent fiscal exposure.

The annual reports/interim statements of the covered institutions might shed some light on the matter

Sorry to go slightly off topic, but is it me or was this a bigger story than the coverage it got would indicate:

It appears that the government considered it imperative that Quinn’s 10% CfD stake in Anglo not go on the open market. Why exactly did the Department of Finance consider it the role of the Central Bank and Financial Regulator (and indeed of the Department itself) to prop up Anglo’s share price when Quinn’s CfD was being unwound? Surely if Anglo’s share price in March 2008 was a sound reflection of the bank’s value then the offloading of Quinn’s 10% stake on the open market would only affect the share price temporarily and/or marginally. If it wasn’t a sound reflection, then was the government complicit in a fraud perpetrated on anyone who subsequently bought Anglo shares at an artificially inflated price?

Was this already public knowledge? Why wasn’t it a front page “scandal” story?

Oh and doesn’t this make it more plausible that IL&P really did think that it’s September 2008 phony deposits with Anglo were the kind of thing that the regulatory authorities deemed acceptable as part of the “green jersey” agenda?

@Michael, while the reports/statements from individual banks are helpful, they are not sufficient to provide an overall picture, given the importance of inter-bank positions within this group. Also, it is important to facilitate the large pool of investors and analysts that would like a quick ‘snapshot’ of the consolidated system, rather than requiring individuals to attempt to proxy this via aggregating across individual banks.

I think this 900% figure came from a report from Dresdener which was a cross-country study of bank liabilities. I read somewhere that the analyst mixed up “Ireland” with “Iceland”.

On another matter, could anyone please tell what the effect of falling Sterling-Euro exchange rates will have on Irish bank liabilities? My impressions is that Irish banks have been lending heavily to property developers in the UK. Presumably these loans were in Sterling and presumably the funds were sourced in euros. Are the payments now being received are sufficient to cover the cost of the debt? Or were the UK subsidiaries of Irish banks using Sterling denominated wholesale money to supply British loans?

On a separate aspect of measurement in relation to the liabilities of the Irish banking sector, does it make any sense to consider a separation of commercial and retail banking? The idea is that the liabilities of financial institutions would be easier to identify if all they did was retail banking or commercial banking. In addition, there is another positive in that completely separate retail banks would allow deposit-holders to face a much narrower range of risks i.e. their deposits are not loaned out to property developers etc. (at least not directly). I must state that I’m not a banking scholar, and there may some aspects of the inter-bank market that would dampen the benefits of seprating retail and commercial banking. But for nowm I’ll define retail and commercial banking and proceed from there.

By retail banking I mean personal financial services such as mortgages, individual savings accounts and so on. By commercial banking I mean lending to business and lending to property developers etc. A little research on thie issue shows (as far as I can see) that there is a precedent for separating investment banking from commercial banking, but that there is nothing similar in terms of separating commercial banking from retail banking (in the context that I have defined these operations).
I did a quick search to see if I could find anything about separating retail banking from other banking businesses, but nothing explicitly relating to this was readily apparent.

According to Prof. Tim Congdon, the founder of the macroeconomic forecasting consultancy Lombard Street Research, “investment banking, commercial banking and fund management are distinct businesses, and have clients with conflicting interests. They must be kept apart.” He writes on this here:
While the title of his piece is “Separate retail and investment banking again”, Prof. Congdon does not make any explicit reference to retail banking.

He focuses mostly on the repeal of the Glass-Steagall Act in 1999, and states that this made possible the “foolish boom in structured finance products and led to the current financial crisis.” He is referring to the second Glass-Steagall Act here, passed on 16 June 1933 (officially named the Banking Act of 1933) which introduced the separation of bank types according to their business (defined as commercial and investment banking), and which founded the Federal Deposit Insurance Corporation for insuring bank deposits. Apparently, literature in economics usually refers to the second Glass-Steagall Act, since it had a stronger impact on US banking regulation.

While not a fan of Wikipedia, I put my trust in well-referenced pieces for an initial foray into some topics. According to an article on the site (and its references:, the repeal of Glass-Steagall II enabled commercial lenders such as Citigroup, which was in 1999 then the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities.

Others besides Prof. Hodgson argue that the repeal of this act contributed to the global financial crisis of 2008–2009 (alluded to in the above Wiki article). However, it is also noted that SIVs existed before the repeal of Glass-Stegall II – Barth et al. (JEP, 2000) is mentioned:
Nonetheless, the year before the repeal, sub-prime loans were just 5% of all mortgage lending. By the time the credit crisis peaked in 2008, they were approaching 30% (according to the Wiki article).

While the debate on separating commercial and investment banking does not seem not clear-cut (at least that I can see), I am inclined to agree with Prof. Hodgson’s recommendation that the two businesses should be kept apart. Furthermore, why not make retail banking separate aswell? If retail banking is kept completely separate, then surely deposit-holders in retail banks face a much narrower range of risks?

Perhaps I’ve leaned more towards the pros than cons here though… Would institutions exclusively operating in retail or business banking be big enough to survive? Would they have to merge? Are there any other consequences may be undesirable?

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