RBS Deal a Bad Precedent for Ireland

The banking situation is evolving at a rapid pace both here and abroad with a number of important developments having taken place even since I penned the IT piece linked to below.  I thought I’d pass on a couple of comments on what’s going on.

First, The Minister for Finance officially announced in the Dail that the government was examining “proposals such as an insurance scheme, the creation of a bad bank or other more innovative Irish solutions”.  (Please no sniggering down the back about innovative Irish banking solutions!) The Minister has since followed this up with some encouraging comments which show that he is aware of some of the serious problems with these ideas:

He said that removing bad bank assets through either the creation of a bad bank or a risk insurance scheme would involve “a substantial exposure to the taxpayer”. A bad bank would involve the State buying assets from the bank upfront at “a very substantial cost,” he said, while the risk insurance plan would be “a time bomb” for the taxpayer in the future involving an “indefinite liability”.

Second, on Tuesday, the Minister told the Dail

You will also be aware that the British Government has examined many possible options in this area and may well announce a scheme in the coming weeks. I am firmly of the belief that there is no huge benefit to being first out of the traps with a solution on this issue and that the best approach is to learn from other experiences and to move as quickly as possible when we have devised a scheme that uniquely suits the Irish circumstances.

Unfortunately, if yesterday’s RBS risk insurance deal is anything to go by, the British government’s plan is a stinker.  The bottom line:

The British government is ringfencing a portfolio of RBS assets – in this case about £325bn – which it will insure against future losses after the bank has absorbed an initial loss of £19.5bn. The government will take 90 per cent of the losses above this amount, with RBS on the hook for the remaining 10 per cent.

And a hilarious quote:

“In all scenarios this is cheap insurance and the right thing for us to do,” Stephen Hester, RBS’s new chief executive, said yesterday. “But that is quite different from saying it is a shareholder bonanza – it is not.”

Rough translation — “Her Majesty’s government has just handed us a pile of cash but we’ve still lost lots of money, you know.”  I’ve repeated myself enough here on this issue and will direct those looking for higher-quality invective than I can supply to Professor Buiter’s mildly-titled posts Insuring toxic assets: throwing good tax payers’ money after bad private money and A tax payer rip-off of surprising boldness.

From an Irish perspective, I fear it may be difficult to convince the Minister that “innovative Irish solutions” will require avoiding the approach of Her Majesty’s Treasury. 

3 replies on “RBS Deal a Bad Precedent for Ireland”

But, but…HMG owns ~70% of RBS, so is largely insuring itself, freeing up balance sheet at the stroke of a pen (HMG doesn’t have risk-weighted capital ratios to maintain). Private shareholder gains / losses are a second order effect.

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