On the Hook for Impaired Bank Lending: Do Sovereign-Bank Interlinkages Affect the Net Cost of a Fiscal Stimulus?

The new issue of the International Journal of Central Banking includes this article by Robert Kelly and Kieran McQuinn – here.

17 replies on “On the Hook for Impaired Bank Lending: Do Sovereign-Bank Interlinkages Affect the Net Cost of a Fiscal Stimulus?”

The authors say:

“Therefore, government policies that return distressed households to employment are likely to yield an additional benefit above and beyond that traditionally considered. Namely, by alleviating levels of mortgage distress, the solvency position of these institutions is ameliorated, thereby reducing the Irish State’s future capital obligations.

Governments would always wish for this solution but unless it provided direct jobs or subsidies itself, it’s not easy to achieve during a crisis.

John Plender in the FT makes some related points of interest today on the cost of the next financial crisis.

The $16bn BofA fine in respect of two struugling banks it acquired during the crisis means that stronger banks will not bailout such banks in future.

Gordon Brown pushed for a merger between the stronger Lloyds Bank and BoS Halifax but it was a bad marriage.

“A paradox at the heart of this new approach to systemic crises is that bailing in creditors is likely to have far-reaching effects because, unlike a bailout, it will inflict losses on other systemically important financial institutions. The Dodd-Frank Act looks to the banking industry to meet any losses in excess of what equity and debt are capable of absorbing. This is a recipe for panic.”


In case anyone hasn’t spotted it:


Here is a taster:

“There was a quarter-on-quarter increase of 9.4 per cent in BTL accounts in arrears over 720 days during Q2. At end-June, there were 14,536 BTL accounts in arrears over 720 days, with an outstanding balance of €4.5 billion. This is equivalent to 16 per cent of the total outstanding balance on all BTL mortgage accounts….

…A total of 97 properties were taken into possession by lenders during the quarter, of which 23 were repossessed on foot of a Court Order, while the remaining 74 were voluntarily surrendered or abandoned. During the quarter 59 properties were disposed of. A further 5 properties in possession that were reported previously as PDH properties were reclassified as BTLs. As a result, lenders were in possession of 611 BTL properties at end-June 2014.”

In its 2012.1 Macro Financial Review http://www.centralbank.ie/publications/Pages/MacroFinancialReviews.aspx
the Central bank found that PDH mortgage arrears could be fairly well explained by the unemployment rate, house prices and mortgage rates, with suitable lags (2 to 3 quarters). The implication is that arrears should now be falling, given the recovery in house prices and the decline in the unemployment rate, and a re-estimated model incorporating more recent data tracks the arrears trend fairly well; PDH arrears peaked in q3 2013 at 12.9% and in q2 this year had fallen to 11.8%
The central Bank’s Buy to Let model in that publication had far less explanatory power with rents appearing to have little impact. BTL arrears are still rising , reaching 22% in q2.


I would venture that the improvement in rents in the BTL sector may be feed ing its way into improved activity in the Ring at Galway and in the sales of high end Mercs. Someone has dammed the river of cash flow from renters and diverted it to an unapproved reservoir.
Perhaps we should set up a review group to examine the old Roman policy of decimation.

With respect to the authors, I find the idea that house prices and unemployment are closely correlated not very persuasive. The following is a quote from the report , while fully acknowledging that the mathematics of the report are beyond me.
The following is a quote from the report:

“Central to our analysis is the relationship between mortgage arrears and key macroeconomic factors such as house prices and unemployment. In particular, for the Irish economy we find a very strong relationship between unemployment rates and house prices. Over the sample in question (1983–2011), which spans both before and after the introduction of the euro, Irish house prices and unemployment rates have a significantly inverse relationship (a correlation coefficient of –0.82). This period covers profound changes in Irish house prices—over the period 1995–2007 house price increases in Ireland were the largest across the OECD, while since 2007 the falls in Irish prices have also been the largest.”

1983-2011 is a very long period indeed for consideration of the subject at hand. Lets take the period 2000 to 2007. During that period unemployment hovered above 4%, yet house prices probably increased by 250%-300% in that period.

The main drivers, as far as I am concerned from memory of that period were, significantly lower interest rates, significantly reduced taxes, significant pay increases and corrupt and inadequate planning. The unemployment barely moved during that 7 year period.

Many people would welcome a significant public investment in housing, and there is no doubt it would be beneficial to the economy. But hopefully its benefits can be availed of without house price increases, and in that respect respect alone I hope the authors are incorrect.

I forget to mention bundles of credit as another and probably main driver of house price increases.

PS: A public investment program to reduce unemployment would be fantastic in my view. The fact that it might benefit the banks, (the banks again) should not come into the equation.

I see we have a “Special Relationship” with the banks. Is it like the UK and USA, when when one says jump the other says how high?

“Given the special relationship between the Irish sovereign and
its main financial institutions”

‘… the special relationship between the Irish sovereign and
its main financial institutions …’

EUphemistically misleading in the extreme ….

Minor point:

‘… the PARASITICALLY ODIOUS relationship between the Irish sovereign and
its main financial institutions …’

= ~40% of total cost of EZ Banking Crisis

associated with ‘overpriced property’ statsig***** and louzy ECB regulation statsig*****************************************

leads to debt/gnp = 140%

which is ‘probably’ unsustainable ….

… unless – the Oirish Admin finds some ‘balls’ and ceases interest payments on its odious component [inc. IMF] to force EZ/ECB to ‘cut the balls from the Parasite’ which may provide the Host some time to realistically recover and the Parasite to reasonably quickly die.

Just a thought …

Text from Blind Biddy in Novorossiya:

…. a statement from the Oirish Foreign Minister that we are considering joining The Russian Federation …. a mere statement of possible intent ….


… just might do it! Timing of action in real time context is everything …

Ukraine [contd.]

Exclusive: Official Washington draws the Ukraine crisis in black-and-white colors with Russian President Putin the bad guy and the U.S.-backed leaders in Kiev the good guys. But the reality is much more nuanced, with the American people consistently misled on key facts, writes Robert Parry.

‘… the once-acknowledged – though soon forgotten – reality was that the crisis was provoked last year by the European Union proposing an association agreement with Ukraine while U.S. neocons and other hawkish politicos and pundits envisioned using the Ukraine gambit as a way to undermine Putin inside Russia.

The plan was even announced by U.S. neocons such as National Endowment for Democracy President Carl Gershman who took to the op-ed page of the Washington Post nearly a year ago to call Ukraine “the biggest prize” and an important interim step toward eventually toppling Putin in Russia


Robert Parry well worth reading …

A very interesting discussion between Lars Schall and John Butler of Amphora capital in Zurich. The Matterhorn London Interviews. Intended to promote gold but valuable nonetheless.


Another in the series Lars Schall with Ambrose Evans-Pritchard.
Wide ranging.



‘Ireland is an outlier on mortgage arrears’

Almost completely explained by the fact that the Irish house price rises – funded by crazy lending decisions – gave rise to a massively mis priced market which was not replicated anywhere else in the EU – hence the reason for Ireland being the outlier.

Oh yeah and the other never to be forgotten reason that Ireland spent €64bn keeping these lenders alive and have significant equity on the table so turfing people out of their homes and crystalizing negative equity losses as a result is a guaranteed vote loser. Ireland being an outlier is no mystery. All explainable.

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