New Working Paper on the Restructuring and Recovery of the Irish Financial Sector

Tom Flavin, Brian O’Kelly and myself have a new working paper on the restructuring and recovery of the Irish financial sector, covering the period late 2008-2014. Helpful comments (cautiously) welcomed.


5 replies on “New Working Paper on the Restructuring and Recovery of the Irish Financial Sector”

Re: What have ‘Stress Tests’, got to do with anything?

I still cannot believe, that intelligent, well-intentioned, super-qualified economists, manage to write these papers, and still not include the basic, basic design elements, which were faulty at the core of the Irish economy from the beginning.

We don’t need stress tests or anything mentioned in the paper, to the same extent, as we need some basic, lowest common denominator ‘clue’, about financial engineering, in Ireland.

If we never again, had a single stress test, and we had the later, we’d be half ways there, and more.

Economists are busy focusing on details, and miss the whole picture.

What you heard today in the Irish parliamentary banking inquiry hearing, from two real estate consultant professionals, was quite plain – that real estate as an asset class, over time can prove to be a decent performer – but in that ‘time line’ between investment and realization of ‘value’ over time, the value of the same, is probably one of the most volatile.

That wouldn’t matter high up, or low down, except for the fact that in Ireland, . . . as was also mentioned in the hearing in front of the banking inquiry committee, . . . that Irish banks had tried to fund, what are very long term kinds of assets, using a very short term capital structure.

It’s like one would endeavor to engineer some piece of financial contraption, and simply grab two parts, which weren’t exactly designed to dovetail together.

For example, if I were to attempt to get away with this in the everyday world, as a designer or engineer, I would probably find that there are regulations and inspection in place, to some degree, which would point to the fact, that I have really designed a ‘botch’.

However, we need to realize, there are a couple of areas in the modern world, that are sort of invisible to the eyes, ears and surveillance of regulation and responsible behavior. Those are areas like software engineering, and areas like large scale finance.

A professor, whom I interviewed not a long time ago in relation to this for research purposes, who works with more data than most people do (all kinds of area where analysis of large sets of data are needed, such as political elections), expressed a concern that much of the world is now held together using ‘spreadsheet’ technology, . . . a technology, which was originally intended for little more, than lining up numbers and words in rows and columns. But it has sort of grown wings, and spread into everything.

But just to return to Irish banking for a moment. One would have imagined, that having first ‘engineered’, for want of a better term, the mis-match in terms of compatibility, between two things which are on opposite ends of a spectrum of ‘finance’, . . . one would have imagined, that it would have been difficult to make that arrangement even worse.

One would be mistaken, for we cannot ever underestimate the capability of human beings, and human nature in general, to take situations that are almost a disaster, and make them into potential Armageddon kinds of situations.

All that one had left to engineer so to speak, between the short term inter-bank funding arrangement, . . . (what was described as a ‘new normal’, in finance, at the time of the boom here in Ireland, by the witness at today’s banking inquiry hearing), . . . and the said assets, those of various times of real estate – be it retail, resi, work space and land, . . . was some kind of connection, between these two already poorly matched financial engineering components.

And in doing this bit of cross-connectivity, between two major financial engineering components, . . . Ireland didn’t succeed in dampening down the effect of volatility, on both sides of this divide, . . instead, Ireland succeeded extremely well, in exaggerating the level of volatility, which was going to be transmitted from one, in to the other, . . by creating the class of highly leveraged, mega, mega, mega scale borrower, upon which banks focused the great bulk of their credit supply.

And just in case, Ireland wasn’t done in terms of its ability to engineer, probably the worst contraptions ever seen, in the pantheon of lousy financial engineering solutions, . . . we then, succeeded in connecting the volatility, which could be sourced from the wholesale inter-banking markets in the late 2000’s, and delivering that via the route of over-leveraged individual borrowers, directly into the national banking infrastructure, . . to which we then attached, the balance sheet healthiness (or lack thereof), of Irish sovereign itself.

And to cap it all off, someone (probably of a political or some such ‘tradition’), will probably turn around and hold this up, of an example of ingenuity and achievement. At which point, one takes a very deep, deep breath, and wonders. Wonders, wonders.

The real question remains – should the Irish be allowed to build anything? BOH.

Gregory, if one looks at actions rather than public words, I think it is hard to avoid the notion that the property market may have been actively managed by the Irish state, with the apparent purpose of nursing the banking system back towards health. Between stalling the Troika on repossession of owner-occupied properties, providing cover to the banks to refrain from repossessing rental properties, and keeping NAMA properties away from retail markets, I personally have the impression that until recently the Government (or at least the Economic Management Council) has done its best to limit the supply of properties on the retail market. Perhaps I’m not being fair, but it seems to me that this is a rather large “elephant in the corner” that your paper leaves unobserved.

Figure 5 “Sectoral Breakdown of Irish Bank Lending” is very interesting and well worth a look. To me it shows that the banking system has a very long way to go to re-balance its sectoral lending. However I assume the figures are gross figures, so the net of reserves sectoral picture may be closer to pre-bubble norms.

The paper did not comment on the amount trackers remaining in the banks and the extent of their drag on future bank profitability, as well as being a source of friction in relation to their favourable treatment.

Paper is very well set out and very readable.

Re: The bone shaker economy

Put it another way.

There is such a level of votality, which is pumped directly into, and transmitted to all elements inside of the Irish economy, from outside via these mechanisms that we deem fit, to assemble, that the ‘ride quality’ for those who are contained inside it, are treated to an experience that can only be compared to one of those old 19th century steam-power vehicles, driving on bumpy roads.

The whole thing is rattling like crazy, from the very top down to the lowest foundations.

But there is some strange little engineer guy, inside in the vehicle looking at the instrument panel and shouting out to the inspectors standing by the road side, that the ‘street tests’ have been passed.

Like, let’s all celebrate.

Stress tests are important yes, because when a central bank issues a statement using these words, it sounds in some way impressive. Then the department of finance spokesperson, can recycle the same statement, and use it as a sound byte, for the six o’clock news bulletin. And everyone can retire for the evening, fully content.

The other major engineering component, which enabled us in Ireland in the late 2000’s, to experience the true reality of what a ‘bone shaker’ economic experience felt like, was the so-called ‘savior’ to the Irish economy, known as emergency liquidity assistance.

Again, this is yet another area where Irish who want to sound as if they known something about financial engineering, shorten to the acronym ELA. Like as if the ability to describe any of these concepts, by means of a shortened three letters, implies than one has any idea of the financial engineering cost of depending on such a component.

As if the transmission of volatility, from the outside was not sufficiently acute, by borrowing short and lending long, through the means of lending concentrated in a handful of borrowers, . . . we decided to make the ‘ride’ even more interesting, by ensuring that wholesale deposits, could exit the inflated banking system, via the backdoor, through ELA as well.

The vibrations and reverberation, in the steam powered shovel, known as the Irish economy, which became choked through inability to introduce funding through one of it’s spouts, . . was made even worse, by the mere fact that the ‘steam’ that it had already managed to capture, . . . was getting released rapidly via another.

And between all of the smoke, and noise, and clatter and reverberation, there’s some guy standing on top of the steam shovel, blowing and whistle, and claiming the ‘boiler’, can take the stress. Which is reassuring to those watching, except that it isn’t.

Just as the economy goes into another one of those body-wrenching plunges and smashes into yet another pot-hole on the high way.

Is it any wonder, that we left behind us, a long and miserable trail of all of the youngest and most talented persons, who simply viewed it as safer to jump overboard, and take their chances (whom Mr. McWilliams is claiming, these ‘near dispora’, we should be be able to attract back on to our contraption in some way)? BOH.

Very bad non farm payrolls just out. The Fed June target to raise rates doesn’t look likely. Markets are way too optimistic. Implications for the Irish recovery ?

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