Colm McCarthy makes a strong case for a bank resolution regime in today’s Sunday Business Post (article here). If I understand intent of the argument correctly, however, Colm is proposing the regime as a critical element of a new regulatory system for the long term. He is not proposing it as a means of imposing loss sharing on existing creditors. Looking to the longer term, he argues that a resolution regime will make it possible to withdraw the guarantee.
The wide-ranging guarantee of bank liabilities announced at the end of September 2008 runs out in little more than six months. Assuming that the banks have been recapitalised by then, the government can minimise subsequent risk of exchequer cost through getting out of the guarantee business as quickly as possible.
Bank resolution legislation – clarifying the power of the authorities to ensure that all providers of risk capital share quickly and appropriately the losses incurred by failed banks – is an important component in the state’s exit strategy from the banking collapse.
I believe the more pressing issue is to have a resolution regime in place for the period after the current guarantee expires and before existing subordinated bonds mature. If the banks are insolvent, or at least incapable of reaching minimum capital adequacy requirements on their own, there should be a willingness to impose these losses on creditors, most likely as part of the debt-equity swap long advocated by Karl Whelan.
While it may just be semantics, I think it is better if this is not viewed as temporary nationalisation, which raises the spectre of a (possibly long) period of political control. There is a dangerous appetite for political control of lending. Thus we get this in an otherwise sensible analysis by Alan Ruddock in the Sunday Independent:
If the Government’s new policy is to have any teeth it must be able to force the banks to do what they have not done for a long time, if ever: support the Irish economy. That will have to involve very close monitoring of margins and lending quantities, but without the political system becoming too involved in the day-to-day operations of the banks. In other words, effective regulation.
The real sin of NAMA may end up being one of omission rather than commission: it has distracted from putting in place the needed resolution regime. I fear that a banking commission, though ultimately essential, might be another expensive distraction for the coming months. The focus now should be on the joint tasks of ensuring losses are fairly borne by the providers of risk capital, recapitalising through debt-equity swaps and ensuring control of lending is kept as far as possible from politicians.