Business and Finance Piece on Banking Policy

With almost two years having passed since the Irish banks reached crisis point, it’s worth reflecting on how effective the government’s policies have been.  Here‘s a piece I wrote for this month’s Business and Finance on this subject. I gave the government A for effort and D- for execution. Written prior to yesterday’s Anglo figure, the D- might have been generous.

14 replies on “Business and Finance Piece on Banking Policy”

Congrats on the excellent article. It’s extremely clear.

Dragging things out increases the present and future costs to Irish taxpayers. This causes a negative feedback loop with higher cost of gov’t borrowing and further tightening of credit which will only make it harder to recover.

Is it time to cut our losses and insist on a clean-out of upper-level bank, DoF and regulatory staff who got us into this mess?

Recent figures from the Central Bank show a steady pattern of reductions in the loans available to Irish firms and households since late 2008. This has undoubtedly added to the severity of the Irish recession.

I used be an accountant, so I’ll avoid OAC’s superlatives!

The only quibble I have is on the point about credit availability.

On Tuesday, the FT had an article on credit in the UK and it could have been about the Irish situation.

Banks saying they are accommodating while it’s difficult to estimate the impact of the recession on demand.

Also on Tuesday, the FDIC reported in Washington that US lending fell in Q2, having grown at the slowest rate last year, since 1942.

FDIC chairman Sheila Bair said banks are beginning to ease their lending standards for some types of loans but warned that “lending will not pick up until businesses and consumers gain the confidence they need to hire and spend.”

While the glacial response to the banking crisis does not help the Irish situation, the lending situation would still be a serious problem after the end of a period of lax standards, the uncertainty about employment in the private sector and the collapse of housing market volumes.

Outstanding residential mortgages are down 25% since mid 2008.

In the business sector, lending to start-ups for example is always speculative but now much more so.


Maybe they should not have had to sit the paper in the first place. Banks were arguably properly regulated up to the the turn of the century. Which of the two systemically important banks went bust in the previous down turns 1970s-1980s due to running amok on its core banking business.?…answer neither. I know about AIB adventure into insuring satellites and bloodstock. I am not sure about an A for effort in attempting to answer questions that should not have been posed.

As regards the D for execution. That might be a tad harsh. the Irish banking books are at least better marked now which has negative consequences for all of us. Many other countries in Europe are behind the curve on this. I am thinking particularly of Spain and Germany. On the other hand, the process of moving assets to NAMA is laborious. AIB is worrisome and the silence from the regulator on the Permo is deafening. Maybe a C- might be more appropriate.

Good article. Glad to have you back from the diversion into the Ricardian forest.

A for effort and D- for execution.

Evidence of grade inflation if ever any was needed. An F would be more appropriate.

Points well made on poor quality of execution. There is absolutely nothing to be gained by dragging out the loan transfer process to NAMA. That loans are lacking in security and are poorly documented is merely partial evidence of their damaged nature. Without doubt, and notwithstanding EU state aid rules, delaying the process whilst seeking to remedy the flaws or split hairs over the precision of valuation of loans as they are transferred from the State’s left pocket to the right hand merely further weakens the banks retained loans.

“History shows that best practice is to recognise these losses in a realistic fashion and get the banks recapitalised as soon as possible.”

In the absence of a rock-solid bank resolution process would this not have required full-scale IMF intervention – something the Government and, possibly, the institutional EU were not prepared to countenance?

That is an excellent summing up of current (failed) banking situation in this country.
“The Irish bank reparations are financial lunacy and they are politically unacceptable. Anglo’s results yesterday only substantiate this view.
Ireland’s bank reparations will cost us €26,315 per worker in the economy. Is there any way that social peace and cohesion can be maintained when the average worker — who is entirely blameless — is being asked to cough up €26,315, while every foreign creditor, who is (in large part) to blame, is being subsidised by the average worker”


I’ll give you an A for that, but not an A*.

Nama is tortuously slow, but you should have referred to the sheer beauty of its liability side. You blame the bank guarantee on our embroilment in Anglo; I would dispute that without the guarantee we would have ditched Anglo by now.

Anglo has conned us all, surely there is some prospect of criminal proceedings, is Treason not still an offence? Maybe even a capital offence.

I think comparisons with other government responses is unfair. It is clear that relative to our GDP our banking crisis is in a league all of its own. We also have less human resources and presuming we wish to maintain our law based democracy this mess was always going to take time. The only speedy course, and you allude to it, was nationalisation and that leads to a whole different debate – would we be in a better place if we had simply nationalised the whole banking system in September ’08?

A good article.

However, a D for execution is far too generous, unless you are talking about the US grading system, where a D is a fail. The government’s policy of blanket guaranteeing of all the banks and NAMA have failed to deliver a healthy banking system and the costs to the state will take more than a generation to overcome. A failure in any sense of the word.

As regards an A for effort. At no point in the last 2 years have the government faced up to the facts and made the difficult decisions required of them by the Irish people. At every point, from the guarantee to the nationalisation of Anglo to NAMA, the government took the path of least resistance and shied away from confronting the powers than be in Brussels, Frankfurt and Berlin. The result is that the full burden of this crisis will be shouldered by the Irish people. That is not effort. That is moral cowardice.

You have awarded a D- for execution of bank policies, but I think the Government should get an A* for the execution of its ‘let’s kick the can down the road’ policy. The intestinal fortitude of (most) FF backbenchers and the Greens has been remarkable. As well as can-kicking this policy has included setting and crossing a series of hurdles. These include a series of harsh budgets, establishing NAMA, Lisbon II, loan transfers to NAMA and sizeable capital transfers to Anglo.

Next up are this month’s EC decision on Anglo and December’s Budget. The hope is that the appointment of the State Asset Review Group may give the markets some pause for thought and that, following the Budget, the NTMA will be able to get away a sizeable and, hopefully, reasonably long-dated bond issue. Fingers are also crossed that property-related losses will be less severe and that a double-dip is avoided.

The fear, of course, that dare not speak its name is that, if there is any hint of the wheels coming off this vehicle, the next stop is EC/ECB/IMF administration a la Greece. The bond market had a little flurry last month, but there is no certainty it won’t have a go again. This, perhaps, is the biggest risk to the ‘kick the can down the road’ policy. However, the Government seems determined and the institutional EU appears permissive, though, perhaps, somewhat anxious.

It looks like it’ll be a damned close-run thing. My sense is that the bond market will continue to push. There seems to this view that the market operates with a single mind, but one player’s loss is often another’s potential gain. The lack of certainty about the extent and nature of the institutional EU’s support for the periphery remains a huge issue and will continue to exercise the market.

Ireland is next in line.

Your piece is concise and to the point.

There are glaring questions which emerge from the critical issue as to how the catastrophe developed in terms of the erroneous claims at the outset that the banks were well capitalised but were caught in a liquidity crunch owing to the seizure of international money markets.

I can understand that the minister might not have known exactly the exent of bank exposure on the night the crisis broke – to an extent the true depth of the abyss into which they were sliding could only become known as detail emerged about their loan books and as the extent of the market collapse continued to emerge.

Yet, even at the time, it was widely perceived that big Irish banks were perilously exposed. And as we progressed into October 2008 and a terrible darkness fell over the landscape of Irish banking, there was still denial in officialdom : the Neary interview of that month was – even at the time – frightening.

You say that banks generally hold off on calling for capital injections because they don’t want to dilute existing equity. Fair enough, so the banks basically lie about their positions?

But what about finance and government. Why did it take the minister so long to recognise that these banks were nursing catastrophic losses?

Even if an exact figure couldn’t be arrived at and even if, to a certain extent, it was a moving target, the overall picture surely must have been discernible at a relatively early stage?

Or is it possible that the minister and his advisers more or less believed the banks when they (wrongly and knowingly) stated they were sound?

Those who were wise, stand well to make money out of all this folly, eventually.

Those who are being “repaid” with all the borrowings are among them, particularly if they accept a quick payment with a discount as eventually the sovereign debt will overwhelm the “system”. Even GFF will stop paying then.

Those who sold houses at the peak? Those who leave Ireland. They will gain too. Those who stay behind to squeeze the rest will also gain.

Advice to the rest is to get used to being worse off and having them ease many out of their roost, to fall into the dirt below. Do not trust any economic pronouncements at all. At least Iceland has enough energy surplus to heat houses in winter. How many are destined to die this winter in Ireland due to the cold and a lack of funds to pay for fuel?

The governments primary objective/strategy should be (and should have been) to create a strong negotiating position and by doing so getting the best possible deal for the taxpayer when doing the buybacks, recaps etc.

I’m not convinced that they should receive more than an F.

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