Recapitalisation of Failed Banks: Some Lessons from the Irish Experience

Organised by my colleagues Paul Scanlon and Michael Wycherley, the Money, Macro, Finance (MMF) conference is on in TCD at the moment – details here.

Patrick Honohan delivered a keynote address this morning – the text is here.

50 replies on “Recapitalisation of Failed Banks: Some Lessons from the Irish Experience”

PH: “…for deailing with failing banks it is deemed necessary to save”

Why does it seem to me that, all over Europe, nearly all banks are being deemed as “necessary to save” ??

So he is now saying Senior bondholders in future should be burned. We didnt do that tho.
Im now confused again : are they capital or not?

Fail – 64bn
Fianna Fail fail
Fail again – how much ?
Fianna Fail again

What is the purpose of a bank anyway? Isn’t it to facilitate the flow of commerce ?

I wonder how many of the banks being saved now on the backs of the people will be around in 2022.

All PH seems to have done is highlight sentences in his eponymous report that the Brians bluster had managed to obscure. But rte thinks it’s news.

What a mess. The taxpayer had no chance

*systematic loan underwriting errors of Irish banks over a number of years into a massively over-heated property market opened-up an extraordinarily wide range of uncertainty.

*the absence at the outset of comprehensive specific legislation to deal with bank resolution exposed the authorities to litigation risks that slowed action.

*The banks had made their own unpublished estimates for these, but the Central Bank made an independent top-down estimate of loan-losses over a three-year horizon for a base and stress case. These estimates were considerably higher than those of the banks, and the latter strongly contested them.

* loan losses projected were outside past experience

*it seems fair to say that transparency of the process was high in Ireland, but that it proved hard to generate reliable and precise information quickly. Clearly it would have been better if comprehensive accurate estimates of future loan-losses had been available from the outset.

*there was some tension between accounting and economic approaches. It was deemed, from the accounting point of view, unnecessary to insist that the banks hold sufficient capital immediately to meet all of the lifetime projected loan losses. On the other hand, holding enough to meet projected three year losses (and still end after 3 years with 10.5% Core Tier 1 capital in the base case and 6% in the stress case) was deemed insufficient from the perspective of the underlying economics of the situation

As Morgan Kelly said in 2011 the decision to guarantee the banks was insane but it was so insane that it could have been reversed. The level of ineptitude of the local elite was mind boggling.

An acquaintance of mine met Martin Cullen , ex FF minister at a function in 2006 and asked him what would happen when the boom came to an end. The reply was “you don’t understand. This is permanent”.

They didn’t know anything about the risks in the banks and the bankers were sure it was permanent too.

PH last paragraphs are interesting:

“..By removing the possibility of more extensive burden-sharing with private creditors, the initial guarantee narrowed the options available to Irish policymakers and pushed public debt levels to the limits of sustainability. Not only was over-capitalisation no longer a serious option and the chance of deeper burden-sharing with bank creditors shut-off, but in addition some resolution actions had to be deferred lest they trigger an immediate cash call on the guarantee. Likewise, the absence at the outset of comprehensive specific legislation to deal with bank resolution exposed the authorities to litigation risks that slowed action.

To be sure, it is very doubtful that, absent the guarantee, European official partners would have countenanced the imposition of losses on senior bank creditors at any stage during 2008-11, so it is probably wrong to over-emphasise the guarantee: some form of guarantee or de facto cover would probably have been insisted upon. Because that propelled Ireland to a very stressed level of public indebtedness, it seems implausible that any subsequent decisions on recapitalisation modalities could have materially improved the eventual outcome..”

The official European partners didn’t like to see their buddies in the banks they were supposed to have been regulating lose money. That’s what went on here. You can read much more into comments in what PH is not saying versus what’s actually being said. In simple terms he seems to me to be suggesting on a full reading that all bank financiers should have been wiped but stupidity on the Irish side and European officialdom fears of the mythical Kaiser Sosa appearing on the scene and killing them all prevented this from happening . No Kaiser Sosa”s have appeared in Iceland or Denmark where bond holders have taken it where it hurts and the sun still shines etc etc.

“To be sure, it is very doubtful that, absent the guarantee, European official partners would have countenanced the imposition of losses on senior bank creditors at any stage during 2008-11, so it is probably wrong to over-emphasise the guarantee:”

It probably is but not for the reasons mentioned. Portugal didn’t have a guarantee and neither did Greece but they got the same shafting. Private foreign capital got out and much local capital was simply wiped out.


Not read the speech yet, but the bit you lifted above has instantly tinted my bullshit-sensitive sunglasses. Couldn’t you argue that it was Ireland’s unilateral decision yo issues the guarantees that created new facts on the ground and a precedent about senior creditors that it became difficult for others to then avoid. Remember all the arguments about how it was imperative not to talk about touching bank bondholders because investors’ creditworthiness assessments oh Irish government bonds would be negatively affected!

The idea that having foreign interests asking Dublin to keep bank bonds whole (if it hadnt already cooked its goose)
would have been of zero use in a negotiation is not immediately persuasive.


Do you think they had anything to negotiate? It must have clicked with the Continentals very early on that the local Dublin wallahs had no idea what they were doing or what the damage was .

It was easy enough to manoeuvre them into a “bailout” in the end.
Like herding sheep.

It looks like a fascinating game.


I think I was fairly vociferous at the time in insisting that Ireland had absolutely no negotiating position – along with the reasons why the other parties could work this out. Had different lines been taken earlier that need not have been the case.

@ Grumpy

Maybe there were a few turns in the road that could have been taken but it was rotten well before the guarantee.

All the eggs in one basket. I was in a museum last week and there was an exhibit about a bird that eats pine cones in the winter . And the bird
hoards them in autumn but uses several different hiding places. Because it is stupid to put them all in the same place. They may be stolen or go off. And if that happens in one cache and you have 5 different caches you only lose 20% of your cones. But if they are all together the bird dies.

And did anyone with any influence in any of the banks, in government or in the regulator’s office understand this principle ?

And it was very unfortunate to get shafted then. A very expensive lesson.

I thought this was good at the time. From Kevin Donoghue

“But I suspect Daniel Davies is closer to the truth with his pithy statement of the EU’s approach to Ireland: It puts the lotion on its skin or it gets the hose again.”

‘… the bulk of the professional literature would favour transparency and depth, but not socialisation.
… The Irish case, involving proportionately the largest fiscal costs of recapitalisation incurred anywhere in the current crisis, provides some important practical lessons. [The Guv’nor]

[1] Irish Citizen-Serfs are the biggest eejits in the world.

DOCM: what if someone pushes you into it? Then do you pay or them? And what if they insist you pay? What does that make them? And what does it make those onlookers who cheer them on, like you?

Since we don’t know who was consulted on the night of the guarantee, we can’t tar and feather them.

We do know who wasn’t consulted, though:
– One P. Honohan, international expert on banking and currency crises…
– Any of the other contributors (current and former) to this blog.
– One M. Kelly
– Any European partners

So who do we know who was there:
– B. Lenihan
– B. Cowen
– The incontinent cabinet
– K. Cardiff and the DoF?

@ Anewdawn

I am not cheering anyone on. I am simply commenting on the basis of the facts as I see them. If I have the facts wrong, you are welcome to correct me.

‘The extensive socialisation of losses – initially through the September 2008 guarantee and subsequently when the Troika refused to countenance burden sharing with the unguaranteed senior bondholders – has been rightly subject to extensive criticism.’

The Troika? All three?


Plenty of folks involved in breaking it, many of whom have not paid a penny. Irresponsible lenders to Irish banks have mostly got off scot free. The folks who devised an inherently broken currency have mostly avoided paying.

@Colm McCarthy

The ‘rhetorical’ is very useful at times!

And aesthetically very diplomatic in this case.

@Colm McC

He might not necessarily mean that each of the members said no. He could use that form of words to back away from naming one or two members of the Troika.

It’s a sign of the times that a nation that once discussed Towards 2016 now waxes eloquent about Towards PCAR2013.

@ All

The leaked Banking Union proposals (as per Telegraph link above).

N.B. Recital 8 on recapitalisation of banks once the ECB supervisor is in place.

The other elements are as widely signalled. An important feature is the use of Article 127.6 TFEU and the legal form of a Regulation, the most federal of the legal instruments available as legislation adopted in this manner becomes part of the legal order of Member States directly.

Another notable feature is the fact that the text reflects a considerable amount of pre-negotiation, the arrangements with regard to non-EZ members not being such as create major problems for the UK. If the political will is there, it is perfectly feasible for the text to be adopted by the end of the year. Given, however, the hulabaloo in Germany regarding OMT, both Schaeuble and Merkel are under considerable pressure.

On the other issues, the Troika is the Troika is the Troika. If there is evidence that formal reserves were entered, the situation would be different (as in the case, apparently, with Buba in relation to OMT).

I remain puzzled as to why Ireland’s participation in the EA should be viewed to an extent as a morality play when the same view is not taken with regard to domestic issues. The negotiations on budgetary and financial issues at an EZ level are an extension of those at a national level. The latter – as the dogged defence of indefensible positions demonstrates – is anything but a morally edifying spectacle.

Apart from the new “timing issues”, does anyone seriously imagine that there is any willingness in the EA to give an excuse to the present government to further retreat from difficult budgetary and reform decisions?

I wonder am I the only person that believes that seeking a ‘bank deal’ at this point is a major mistake.

Whatever deal is agreed to, and it will not be the full €64 billion, the ECB/IMF/EC is exonerated from thereon in. Exonerated at the cost of a few billion, a pittance when set against the destruction of a country. A country that is still in the middle of the battle, with the finishing line still a distant mirage.

Ireland would be better off, refusing to negotiate on anything less than the full €64 billion, reserving fully the right to extract that money from the banking sector in the future. And also reserving fully the right to take a case to the ECJ on the bonds still in issue at Sept/Oct 2010, the payment of which was clearly forced on Ireland.

Seeking a deal now is similar to negotiating for the return of hostages from hijackers, thanking them profusely when a few are returned and saying politely to them that the rest of the ransom payment was no trouble at all ,at all, and shure we wouldn’t want to make a fuss over it.

I have been somewhat calmed in recent times by the prospect of restitution for bailing out the eurozone financial system. It seems that is no longer a serious prospect – even the proposals now failing to get traction barely scrape the surface of the issue.

It’s time to start saying clearly again that without a large measure of restitution the likelihood is that the Irish sovereign is insolvent, with the ratio between debt and the most relevant macroeconomic measure being about 150% in comparison with the 120% optimistically seen as being solvent elsewhere.

The next budget should target an immediate return to a positive primary balance to give the Irish state freedom of action, and we should then force the matter of restitution with the rest of the eurozone. We can offer the choice of doing it all friendly, or pulling out of the bailout programme, with the ECB and eurozone bailout mechanisms first in line to suffer if we can’t pay our bills.

@Colm mcc

Surely he could just be being diplomatic (troika could not all agree, therefore, troika said no)?

It could mean
A) all of them said X
B) one of them said X
C) two of them said X

X could be anywhere between “that’s not cricket” to “look into my eyes…..your nation is defined by it’s network of contracts” to “if you do that we will collapse all your banks and those of the entire periphery, probably including France and then leave for our secret colony on the moon”

Straight talk is long overdue.

I must go back and read PH’s speech in the context of it being used to manage expectations. Only whizzed through it the first time.

I am afraid you are erecting a straw man. The Troika signed up for the “no bondholder left behind” policy. The IMF seems to have a different view that this is unwise, in much the same way as FF backbenchers opposed policies on the street but supported them in the lobbies. In the end the IMF have effectively signed up the the above policy by staying in the Troika but have tried to distance themselves from the decision in private briefings. The could have decided to pul out.

we would have to move to Primary Balance and contrive to warn citizens to get their money out of the covered banks pronto and into non EZ banks. We might as well balance the budget and announce we are leaving the euro.

Denial, denial, denial!

There is an enduing pattern in Irish governance — respond only when a crisis becomes dire.

During the 18 months after the news of the subprime crisis in the US in Feb 2007 to the issue of the State bank guarantee, denial was matched by delusion and monumental incompetence at the Central Bank.

With the aid of the cheerleaders in the amen corner chanting ‘Soft Landing,’ fools elsewhere in positions to make a difference, believed in the assurance of ‘resilient’ banks.

It’s not that different today to the hope that tough choices can be avoided in tackling continuing bubbletime costs, built on economic froth. Like the Wilkins Micawber character in Charles dickens’ ‘David Copperfield,’ the hope is that “something will turn up.”

@ Joseph Ryan

Seeking a deal now is similar to negotiating for the return of hostages from hijackers, thanking them profusely when a few are returned and saying politely to them that the rest of the ransom payment was no trouble at all ,at all, and shure we wouldn’t want to make a fuss over it.

I am among the tens of thousands of victims of the other Troika, the over-compensated and superannuated Ahern-Harney-McCreevy.

However, to argue that Europeans should dole out the full €64bn bank cost of the Celtic Tiger hysteria is leprechaun economics.

I suppose when a civil servant at 57 in a bankrupt country, who had not once had to make a consequential decision in his professional life, walks away with a bonanza of €700k and an annual pension of over 3 times annual average income, foreigners are also obligated to support and fund this carry on?

Michael H
And that’s a regular occoursnce is it? Sounds like opt our advocating the ghastly Israeli “collective punishment”….top echelons got away with economic grad larceny, so you all must suffer… Must be easy to say that in your exile.


” foreigners are also obligated to support and fund this carry on?”

I agree with virtually every point you make concerning the way the ‘Other Troika’ has shafted people outside the tent in Ireland; mostly a PS tent or people suckling at the PS teat. I believe it is an abominable, appalling and unforgivable policy choice; And it is a policy choice;very definitely.

But the bond holders issue cannot always be conflated with the issue of the people of Ireland being skewered by their own elite. They are separate issues, albeit both are of high importance to the State.

You misunderstand my position on the €64 billion. My position is simply this. As a citizen of this country I want the money back. The question is from whom.

The ECB/EC/IMF are only directly responsible for the post Sept/Oct 2010 imposition, ~20 billion as I understand it. That is the outstanding bonds in all banks at that date. There was no legal imposition on the State to pay them. Any of them. [The present argument from the government that AIB/BOI / Ir Life senior bonds should have been paid by the taxpayer anyway is, quite frankly, arrant nonsense.]

What about the other €45 billion. Who should pay that? My position is simple. The banks should remain in State ownership until every cent of that is paid, no matter how long it takes. Or if sold, are sold with the liability attaching.
One of the many, many stupid things agreed to in the MOU, was that the banks be ‘sold back to the private sector at the earliest possible opportunity’?
Why? To satisfy who? The EC? So that we can have a level playing field?

So the State takes the losses; the banks go back to the private sector,; and the field is again level? Really? We saw just how level the playing field was when it came time to shift losses.

We as a State need to recoup the ~45 billion. We should have a bank levy (or ELG levy) for years to come; we should insist on it and we should not take no for an answer.

Here let me agree with you again. There is an almighty fuss about the ‘bank deal’ with Europe, again from the insider circle.
But why do we not already have cast iron legislation to recoup the ~45 billion guarantee from the Irish financial sector, for all banks/ financial companies operating in Ireland.
Simple, we don’t have the guts and the banks and the unions are still setting their own insider agendas. The argument that it would fall on Irish citizens (bank customers) anyway does not hold water. It is a ‘sectoral pleading’ cop-out.
In fact the history of the past twenty years has been made up of one macabre insider dance after another. First Bertie and the PS unions, then Bertie, McCreevy, builders and the PS unions; then Cowen, builders, banks, PS unions; and now Kenny, Gilmore, professions, banks and PS unions.
Unions representing, not the left or left out, merely their own members interests.

But my position holds on the bank bond money.
~€20 billion from the ECB and €45 from the Irish banks, and no negotiation. If the non payment by either party sinks the country, so be it.

@ Joseph Ryan

The banks, while either remaining in government ownership or whilst being entirely domestically operated (ie BOI), will remain a contingent liability of the state and will end up costing the taxpayer, regardless of even well structured resolution mechanisms, should they ever get into trouble again. That’s why both the Troika and the Irish government are super keen to offload them into the market (preferably via a trade sale) at some point in the next few years.

This is getting beyond silly. Either one expects the banks to be profitable over time – in which case we should hold on to them and get them to pay us – the citizens back. Or the banks are going to lose money in the long run – in which why the f*** would the market participants buy them? Unless they are planning to do a heist and leave the citizens with even more debt.

So which is it BEB, despite the contingent liability – is owning the banks a positive expectancy game?

@ Garo

I’m saying that having so spectacularly shown that we cannot regulate our own banking system, the Troika is not going to let us have a second stab at it. Havig a big banking system used to be an asset, now the opposite is the case. Further, the markets also would prefer if either (a) our banking system was so small as to never be a problem again or (b) someone else is either taking the decisions or writing the cheques. If we maintain ownership of (and thus responsibility for) the banks at anywhere near their current size, we will continue to have a large premium placed on our sovereign debt. The people we want to buy our debt are different to the people who may buy our banks, one are risk averse, one are risk takers.

Look at how Finland has fared in this crisis – massive trade collapse, but no banks, so never any questions over creditworthiness. That’s what the Troika views as our future.

@Bond. Eoin Bond.

Your argument for selling the banks without the attachment of liability or retaining them in public ownership in order to extract what they cost the country, is rather thin.

Essentially your argument boils down to the fact that Ireland or the Irish cannot be trusted to run a banking a system.!! Well can the Irish be trusted to run anything? You may have a point, but.
Is there not a proposal afoot to have all banks supervised by the ECB, an organization that, as you know, is a model of success.

The fact that the Troika is super keen to offload the banks should not the primary consideration for this country. Ireland should insist on its pound of flesh.

Now, I’m off to Croke Park-that word again; hoping the underdogs can triumph. Hope springs eternal.

The banks, while either remaining in government ownership or whilst being entirely domestically operated (ie BOI), will remain a contingent liability of the state and will end up costing the taxpayer, regardless of even well structured resolution mechanisms, should they ever get into trouble again’

I beg your pardon. Our banks are still in deep trouble and so is our state. The banks are ever more credit constrained, and the state is ever more fiscally constrained. Ireland is on a debt deflation path. To say that we failed to regulate our banks is to state that we were unable to run our state, so we are losing both. With apologies to some decent, capable folk, we have far too many clowns in suits.

It’s a small consolation, and maybe important for self-esteem, that we didn’t screw up all by ourselves. The EZ financial sector accounts for a massive proportion of GDP, as financial engineering replaced large parts of the manufacturing economy. Wall St and the City of London marketed some lovely drugs, which were lapped up in all the most respectable European quarters. The magic of derivatives, leverage, bonuses and capital gains, with the accounting and legal professions corrupted in the process.

They say the hardest thing to predict is the future. Draghi is getting ready to monetise, so I’d guess the troika have more on their minds now than little Ireland.


One point about the running of the banks that hasn’t been given enough attention IMO is whatever valuation ideology they were running post 2004 – There would have been all sort of metrics flying around and well paid consultants advising on calibration. Risk would have been the name of the game and as long as the model was grand sure there was no problem. This on top of the data issues, the lack of a resolution law, the plonkers in charge and the Gimp aspects of the bailout.

The pity of it all.

@Bond Eoin Bond

Only a fool believes that the Irish banks over time wil prove profitable enough to pay back the Citizenry for what has been pumped in. They continue to carry tidy black holes – mortgager arrears, trackers, debt still to be written down etc Tidy them up and sell them off I say: ONLY HOPE HERE IS A DEBT DEAL WITH EUROPE THAT THE IMF STRONGLY SUPPORTS. BUT GIVE US BACK THAT FINE BUILDING ON COLLEGE GREEN. None of them have any expertise in what really matters – industrial developent – the real economy – and the only hope for the future.

We need an Industrial Dev Bank. One that understands industrial sectors, reasonable risk, and entrepreneurship, engineering, science and technology.

Many admire the German Mittelstand – these SMEs, strongly export oriented, have strong relationships with their banks built up over time – and many banks take equity stakes in these firms. No Irish banking equivalent exists. This is a key institutional weakness that needs addressing for the future of Irish economy, society, and psychological well being.

Fool me once, shame on you: fool me twice, shame on me. Irish Citizenry.

BEB: “the Troika and the Irish government are super keen to offload [the banks] into the market (preferably via a trade sale) at some point in the next few years.”

I hope that’s true. My preference would be for direct foreign ownership of the bank branches, as happened with NIB. That way there’s no ambiguity about the fact that the Irish taxpayer is absolved of all responsibility for them.

But if the government is as keen as you say, why have we heard so much guff about pillar banks? I haven’t been following this closely, so apologies if I’ve missed some clear statement along the lines you describe.

Joseph Ryan: “The fact that the Troika is super keen to offload the banks should not the primary consideration for this country. Ireland should insist on its pound of flesh.”

I don’t think anyone is advocating selling off assets at bargain-basement prices. But please note that in terms of your pound-of-flesh analogy, we’re not talking about a slice of Halle Berry here. For a tub of lard you get the going price of a tub of lard. If we can show that we were victims of ECB extortion then we can fairly ask the ECB to make amends. We have no claim against the lard-buyers.

Prediction: Ireland will never ever recoup the full cost (or even a meaningful chunk of it) of what the banks – domestic and other European – have cost this country….. and that cost has been in more than Euros.

Personally, I think we are only at the end of the beginning of the European crisis (and Chinese crisis?).

Draghi knows that the worst is yet to come hence buying time actions since he took office in the hope that something will turn up or someone will come up with a really bright idea or that politicians might change their spots or…….
My take on the guy is thank goodness he’s around and not JCT. I reckon it might be a lot worse today if JCT had stayed in place.

@ Seafoid/PR

Mario lives in the real world. Anyone particularly worried about inflation right now (in the EZ – food inflation in Asia is a different issue) does not count as a serious individual.


Bond investors in Stg,dollar and Northern Europe are looking at negative real yields so inflation is not irrelevant but Draghi is right to focus on the real wolf at the door.

Brilliant grand slam for Serena Williams vs Victoria Azerenka in New York – 3 sets – magic! Nite now!


Reams of un-serious individuals around; we need a serious collective!


I passed a Swiss politician on Saturday standing in front of a poster of his own face , representing the right wing party.

The slogan was “rational, competent, responsible” and it raised a chuckle.

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