I find the idea that should accept that certain private enterprises (banks) should be allowed to make profits but not be allowed to fail as the biggest moral hazzard.

You might as well nationalise the entire financial industry!

Talk of insuring against failure doesnt make much sence in a globalised world where there is a likelyhood that insurance will be called upon by so many institutions at the same time that the insurer cannot pay. Wasnt that what caused the most problems for AIG?

There are many proponents of the insurance scheme. My opinion is if insurance schemes are introduced the crashes will happen more often.

My reasoning is:
The insured get to keep the profits.
The insured is indemnified from losses.
->Competition for profits will push down the price of risk to a level that will be to low.
->Many companies will take too big risks and the insurance company cannot cover them. -> State intervention again…..

The only way it could work is if, unlike AIG who failed miserably, the insurer can price the risk correctly. Anyone that good at pricing risk would do better (more bonus/more profit) at/as a bank issuing loans so even if that situation ever were to happen then I believe it will be very temporary.

Interesting idea.

In essence it will be personal freedom (to make good/bad economic choices without state interference) versus the level of protection to be given/had by the state.

I believe in times like these it might be possible to push it through, in bubble times there will not be a single politician arguing for it.

I also suppose the workability would depend on how the compromise between freedom and protection would look.

I believe (although it is impossible for an outsider to verify) that all the regulations were followed. Maybe it is being verified now? There seems to be plenty of reasons to do so

It seems like they just made bad decisions in approving the credit. If that is the case, then we’re in trouble as it is impossible to legislate against poor judgement

Of course there might have been a regulatory failure. To me the failure could be in two parts:
1. The body monitoring the banks verified that laws were being followed but either they noticed that excessive risks were being taken and were powerless to stop it or they didn’t notice that excessive risks were being taken.
2. The body monitoring the banks noticed and also raised the issue with the legislators but the legislators didn’t listen.

So, I’m wondering:
1. Did the monitoring bodies notice the excessive risk?
2. Are the current legislation minimising the risk for the state?
3. Who are the monitoring bodies? The board of directors, internal auditors, external auditors, government representatives? If any, what are their respective failures?

My answers (personal opinion):
1. Should have noticed. Very unlikely they could have influenced the legislators to change the laws to stop what was happening.
2. No, the current legislation is not sufficient. New is needed. The question is which legislation?
3. Internal auditors verified if processes were being followed. I think it is likely the processes were being followed. External auditors, probably the same answer. Government representatives verified if laws were followed, the laws were probably being followed. The board of directors…… Should have etablished goals for the organisation & should have balanced risk & reward. Should have arranged for processes that supported the risk & reward structure that was decided by the board as representatives for the owners. The board of directors failed the most.

And a small observation: Bondbuyers seems to be able to demand a lot from states that are selling bonds, otherwise they won’t provide the cash. If they had put the same level of demand on the Irish banks before agreeing to buy their bonds then maybe the Irish bank crisis wouldn’t be so bad…..

My own view is heading for the idea that the major developers were bust in 2002, that a correction was about to take place, and that there was a conscious decision to loosen credit standards, increase tax allowances for property and inflate a property bubble (or rather, to pump more air into the existing property bubble).

But 100+% mortgages, 100% allowances for investors, mortgage interest relief, self-certified mortgages, the move from income multiples to ‘affordability’ criteria etc. etc. vastly loosened credit standards, the requirements for business plans (e.g. from investors) and the whole prudential aspect of lending. Anyone could qualify for credit, so all banks were concerned with was growing market share…

Aside from this, the regulator could have required larger loan losses, higher capital ratios etc.

This was within the power of both the regulator and the government to do something about. The idea that central bank interest rates are the only method of restricting house prices is nonsense, IMO; it is an attempt to absolve oneself from responsibility - not only did nobody not see it coming, but even if we did it’s not our fault, we could have done nothing - lies, damn lies, and what the government says…

Thanks.

I’m trying to understand how the regulator could have stopped this. Can’t say that I have understood it yet. I might be wrong and I don’t mind being corrected so:

The Irish banks were taking risks that turned out to be excessive (should be able to conclude this by their results?). The regulator (central bank?) could have told them that the risks were excessive? But the banks could have answered: “We follow the law, stop trying to tell us how to do our business.”

Glass-Steagal might not have stopped the Irish banks from getting into trouble. What kind of law/regulation would have stopped them without having the banks cry foul?

All Irish banks would be largely commercial, with only small investing bits. We don’t know yet that the investing bits have lost vast amounts of money… given the relative size of its derivative book, Anglo was probably closest to an investment bank? Although some of the treasury operations at BoI and AIB must be quite substantial too?

The cynic in me were wondering if the banks were considering lowering their standards to spread the risk from the investment loan to the developer to the utility loan for a home owner.

The options for them were either to wait for better quality buyers/borrowers or deciding that 200 (pick a number here, that’s what I did) moderate to high risk borrowers are better to have than 1 large developer with high (some might say extremely high) risk loan. NAMA might have stopped that from happening for now….

Does anyone here have the definition of investment bank from the Glass-Steagal? Would AIB, BOI or Anglo have qualified as investment bank or retail bank?

“Our banks uniquely have weathered this storm . . . We are in a zone of financial stability in a very troubled financial world.”? Two weeks later, having been panicked into his catastrophic bank liability guarantee, the Minister assured us that we had “the cheapest bailout in the world so far”, and six weeks later averred that: “It is not the function of the Government to fund or bail out the banks.”
http://www.irishtimes.com/newspaper/opinion/2009/1013/1224256508947.html

But now we know that from early 2007 the government knew at least one of the banks were in trouble.

http://www.irishtimes.com/newspaper/opinion/2009/1230/1224261408353.html

Our public, from whom all sovereignty is derived, (and their representatives, who are their employees,) wasn’t given the full facts - in fact were deliberately mislead - at the time of the guarantee. They are still being deliberately mislead. The blanket guarantee must be repealed. If a government had mislead a private company like this when signing a contract any court would tear up the contract, and award massive damages to the private company.

Misleading the public is hugely, massively more serious than misleading a private company, but the outcome should be the same. The blanket bank guarantee must be torn up.

Repealing the blanket guarantee is now a moral, political and economic imperative.

I would argue that it becomes investment banking when the same banks are funding both sides of the game… they are funding developers to build and funding buyers to buy from them (whether for PPR or investment). The developers are bigger, in terms of loans outstanding, so there is an incentive set up for the banks to not do due diligence on behalf of small individual borrowers, because it benefits their large borrowers. With banks also taking equity stakes in developments, that incentive becomes over-whelming.

Where a decreasing number of growing corporations can heavily influance public policy, to the point where they know they can make risks that may result in their insolvency and yet will still have no effect on their viability. this is because the general population will hand over x billion of future earnings until they are solvent again. The only thing that can effect their viability are larger corporations.

Its called corporate capitalism.

That is the tricky bit & should be debated.

Currently I’d say the Irish collapse would be due to the lending to the developers.

The utility banking should (my personal opinion) be more focused on ability to repay than the value of the underlying security.
The lending to developers seems to have been much more focused on the value of the underlying security. The value of the security has shown to be less than anticipated and the developers ability to repay is…….

Therefore I believe the current collapse about the developers inability to repay.

Btw, the only thing I can think of to separate investment loan from utility loan is: If the borrower is using the security that the loan is for, then it is utility loan. If the borrower is trading in the security the loan is for then it is an investment loan. This is also very debatable, then again I believe that is part of what this forum is for

Utility banking (which cannot be allowed to fail) has been used as a base to leverage investment banking (which can and should be allowed to fail).

Break the link between utility banking and investment banking and we’re sorted.

Utility banking should be easy enough to regulate. Electricity supply might not be the best example of successful regulation of utilities, but it seems like the regulators are at least capable of ensuring that consumers aren’t completely ripped off by the dominating suppliers. Therefore I believe that consolidation of utility banking wouldn’t necessarily result in a bad thing.

I think I agree with Eoin in that complicated legislation will not work. Complex legislation leads to holes in the legislation and the incentives for the bankers to find and exploit the holes will be too great. The legislators would never keep up in trying to plug the holes.

So having a filibuster proof majority can also be a problem!

Granted, this financial crisis has only just begun to unfold and has some way to run.

But usually, painfull lessons are learned and then forgotten over decades resulting in the next crisis.

It’s ironic that the only progress we seem to be making is in forgetting the lessons more quickly.

my initial and ongoing view has always been that banks that are not viable should shut down - in particular Anglo, we only should have saved banks that were the very infrastructure of banking.

http://misc.mortgagebrokers.ie/audio/2009-01-23.KarlDeeter_Newstalk106.mp3

the things I said about the bankers getting out with golden handshakes and the ongoing cost has all been shown to be fairly correct.

the pro-NAMA stance - which I still maintain - came about when the government started to get involved and give certain, and distinct promises to the market, once made they must be fulfilled. Confidence hinged on a state promise, one that you can’t turn away from once made.

Which is why the 46, and anybody else wasn’t going to make a damn bit of difference - even if you are right, its a bitter pill i suppose but that’s life.

This is also mixed with a powerful banking lobby where they have convinced the state not to allow any bank to be left behind, and a state without the mettle to do the right thing, in fact, removing their ability to do the right thing via a universal guarantee- hence 2009 was a great year for bank-shares! (every dark cloud etc).

in short, i don’t support taxpayer bailouts, but when our state decides to underwrite the banks via the taxpayer then i do because we are pushed into honouring a promise made with or without our consent and that promise is what keeps the broken machine afloat.

Thank you. You are helping to confirm my suspicion that this comprises both business model and policy questions that might be susceptible to empirical resolution - though not by me! I see that consolidation and innovation have gone hand in hand, but I’m not sure that consumers have benefitted as they should have. In fact I think they have been subject to overcharging, mis-selling and enforced docility that have reaped super-normal profits for the banks. Since I am not a Luddite I quite favour your idea about encouraging/requiring “banks of limited scale [to] find better ways to cooperate on innovation and technology with peers in other markets without having to merge to achieve this”.

It seems to address the scale (TBTF) and innovation issues.

I presume that it will be no less compelling post-crisis unless barriers are placed in the way of consolidation, innovation is somehow suppressed, or banks of limited scale find better ways to cooperate on innovation and technology with peers in other markets without having to merge to achieve this.

As Karl notes, the noises from the US policy and regulatory areas are not encouraging. In the EU, Neelie Kroes, who has proved to be a very effective Competition Commissioner, has been sidelined. Hard-nosed nationalism and, in the EU, a mixture of regionalism is preventing the action that is required. Nobody wants to jump first and to hobble their banks. It will probably fall to the gnomes in Basle - and we could be waiting a long time for something quite anaemic.

“if they can’t stand up on their own they should close just like any other business”

Is this a shift in position from your pro-NAMA days, when you supported taxpayer funds being used to rescue banks from insolvency?