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Capital Sources for Pandemic Emergency Funding of Irish SMEs: Can Ireland Mimic the US Approach?

The effective closure of the Irish economy due to the pandemic generates very difficult problems in economic analysis; Irish policymakers are struggling to respond quickly. The situation is unprecedented, and it is hazardous to speculate about best policy responses. Nonetheless, with that caveat clearly stated, I want to make some informal remarks about the best ways to get adequate lending to Irish SMEs to help them resume normal business, and the role of the Irish banking sector.

The main point that I want to make is that the best approach to SME support might be through bank-mediated lending in tandem with capital replenishment via loan purchases by the government or central bank. The US Fed has already demonstrated that this works, with a very large loan purchase program already showing positive impact [1]. If loan purchases are not feasible, perhaps some other method of providing contingent capital to the banking sector (to encourage lending) could be used.

It is useful to strip the problem back to some basics: there are three possible sources of funding in this context: government expenditure, private bank capital, and monetary financing through the central bank, and two funding types: cash subsidies or loans. There are of course numerous potential mixtures and combinations of these three capital sources and two funding types.

In the USA, the $349 billion Paycheck Protection Loan Plan (PPLP) is being run by the Small Business Administration in collaboration with the commercial banking system (the $349 billion authorization was quickly exhausted; the amount will likely be topped up this week with an additional $250 billion). Ireland quickly implemented a somewhat parallel scheme, the Covid-19 Pandemic Temporary Wage Subsidy Scheme (TWSS). The PPLP and TWSS have similar objectives, but the TWSS is a direct wage payment/subsidy whereas the American PPLP is packaged as bank-mediated lending with a subsidy attached if the SMEs workers are successfully retained.

The direct-subsidy approach of the TWSS provides a fast start but is limited by its expensiveness per euro of impact. TWSS unlike PPLP also fails to take advantage of the well-developed lending and credit monitoring capabilities of the private banking sector. The Strategic Banking Corporation of Ireland Covid-19 Working Capital Loan Scheme uses the private banking sector but is limited in scope [2].

In the case of SME support based on private bank lending rather than subsidies, it is fair to ask why not rely entirely on private bank capital? Again, it is important to strip back to some fundamental issues. One, the capital at risk from emergency SME lending is potentially large in magnitude and very risky. Two, there is a big public interest in this emergency lending taking place quickly and aggressively to get the economy back up and running normally. The risks are large and the potential (public interest) rewards are also large. The restructuring of the Irish economy post-pandemic could be modest, or it could be massive, and the downturn could be brief or prolonged. Generous SME lending is macroeconomically vital, but risky.

In the USA, the central bank (Fed) quickly implemented a $2.3 trillion debt asset purchase plan backed by its monetary resources. The $2.3 trillion authorized amount equates to 10.7% of 2019 GNP. The Fed is putting a huge amount of risk capital into unusually risky debt assets relative to the classes of assets it has previously had in its portfolio. If this program is successful in helping to restart the US economy, the Fed will get its money back and will have served the national interest. If this risky lending goes sour, which could happen, the risk capital is backstopped by $454 billion (19.7% of the capital amount) that the US Treasury has handed over to the Fed as credit insurance for the program. It is a type of contingent monetary financing which makes good sense under the circumstances.

The Fed purchase program will be split between purchases of private sector debt (78% of the total) and state and municipal debt (22%). As one component of the program, the Fed has stepped in to help facilitate the PPLP; it has launched a $350 billion program to buy up PPLP loans from banks, leaving a residual 5% ownership position in the banks. In tandem with the $350 billion purchase authorization for PPLP-linked loans, the Fed has initiated a $600 billion loan purchasing facility called Main Street Lending Program to purchase non-PPLP bank loans of small and medium-sized US firms. Additionally, the Fed has begun corporate bond purchases of up to $850 billion; note that the US corporate bond market rather than bank lending often serves as a lending vehicle for larger US firms (less true in Europe).

In a rough parallel to the Fed program, the ECB has launched the Pandemic Emergency Purchase Program (PEPP) with authorized funding of €750 billion, which equates to 6.3% of 2019 euro-area GDP. The credit criteria differ from previous ECB asset purchases in that Greek non-investment-grade sovereign debt is included, but there are no major changes to the credit criteria for eligible private debt assets.

One difference between the Fed’s debt asset purchase plan and the ECB’s is that the Fed’s approach is mostly about purchasing private debt assets whereas the ECB’s is mostly about purchasing government debt assets. The ECB’s focus (very understandably) is on preventing a sovereign debt crisis in Italy, Greece and/or Spain; purchasing credit-risky private bank assets is not on the agenda.

Unlike US banks, Irish banks cannot rely on any direct capital support for emergency SME lending from their central bank. Could private bank capital in Ireland prove adequate to fund all pandemic emergency SME lending? Just prior to the pandemic Irish banks had healthy capital ratios and very ample liquidity ratios. Nonetheless, it might be better if these unusual debt assets could be moved off the banking sector balance sheet, as is being done in the US by the Fed’s purchase program. This segregates this unusual lending stream from the other lending activities of the Irish banks and allows them to continue normal lending channels for mortgages, automotive finance, new business finance, and SME expansion. Commingling the normal lending portfolios with this unusual emergency lending is potentially damaging to normal bank lending. Also, if private bank risk capital is used for this SME lending, it does not capture all the public interest rewards from this lending in helping to stabilize the economy. There is a “tragedy of the commons” market failure since the economic gains from a successful lending effort by the banks is shared widely across the economy, but the potential losses associated with the program are paid from private bank capital. This could incentivize banks to under-lend relative to what is needed. Something like the US approach seems appropriate in the circumstances.


[1] See “Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy” Press Release, Board of Governors of the Federal Reserve System, April 9th, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm; “With $2.3 Trillion Injection, Fedʼs Plan Far Exceeds Its 2008 Rescue” New York Times, April 9, 2020, https://nyti.ms/3caFiH1 (behind paywall) and “Fed Rolls Out $2.3 Trillion to Backstop Main Street, Local Governments,” New York Times, April 9, 2020, By Reuters, https://nyti.ms/3c5qPwk (behind paywall).

[2] See “SBCI Covid -19 Scheme,” Strategic Banking Corporation of Ireland, April 20th, 2020. https://sbci.gov.ie/schemes/covid-19-loan-application

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Science-Policy Interfaces and the Environment [SSISI online talk, April 23]

The Statistical & Social Inquiry Society of Ireland invites you to attend the sixth Ordinary Meeting of the 173rd session. The meeting takes place online, at 5pm on Thursday April 23rd, and is the Society’s annual Symposium.

This year’s Symposium is entitled “Science-Policy Interfaces and the Environment” and assesses the power of science to understand and navigate the relationships among the social, environmental and economic objectives of sustainable development, with the view to strengthening the Science-Policy Interfaces on the UN Sustainable Development Goals (SDG) Environment targets, with a special focus on Ireland.

The Symposium will be chaired by Danny McCoy (the Society’s President and CEO of IBEC) and contain three papers:

  1. The Future is Now: The Science-Policy Interface for achieving Sustainable Development, by Astra Bonini, UN Department of Economic & Social Affairs
  2. Developing solutions and informing Irish policymakers acros the pillars of Climate, Water & Sustainability, by Dorothy Stewart, Environmental Protection Agency
  3. Benchmarking Ireland’s performance on Environmental SDG targets for policy-making, by Patrick Paul Walsh, UCD Geary Institute for Public Policy (and an Honorary Secretary of the Society)

Following feedback from our last Ordinary Meeting, we are hosting the Syposium on the Zoom platform, which allows logging in through the Zoom app, through a web browser or by phone. To attend the event, please register here, on Eventbrite, and the specific details for attending will be sent to you by email on Tuesday April 21st and again on the day of the event.

As always, non-members are welcome to attend and participate in the discussion and, given the new format, feel free to circulate this to others who may be interested so that they may also register their interest and attend on the day.

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The Northern Ireland Economy: Problems & Prospects [SSISI online talk, April 9]

The Statistical & Social Inquiry Society of Ireland is holding its fifth Ordinary Meeting of the 173rd session, where a presentation entitled “The Northern Ireland Economy: Problems and Prospects” will be given by John Fitzgerald (Trinity College Dublin & Economic & Social Research Institute) and Edgar Morgenroth (Dublin City University).

Given the measures taken to address the covid19 epidemic, this meeting will take place online, using Microsoft Teams. The talk will take place on Thursday 9th April 2020 at 4.30pm, with the vote of thanks led by Esmond Birnie (University of Ulster).

Abstract: This paper considers the lacklustre performance of the Northern Ireland economy in recent decades, in particular the very low productivity growth. The low level of human capital and the continued low levels of investment account for much of this poor performance. To address its economic weakness, Northern Ireland needs to reallocate resources to investment in physical and human capital over a sustained period. To date, large transfers from central government have ensured that the standard of living in Northern Ireland is close to the UK average and above that of Ireland, in spite of its weak economy. However, the dependence of Northern Ireland on these transfers leaves it very vulnerable to shocks. Because of Northern Ireland’s dependence on transfers and its weak economic structure, Irish unification, however it was handled, would be likely to be very expensive for both the Republic of Ireland and Northern Ireland.

In order to allow the Society to plan the meeting effectively, if you are interested in attending, please register via Eventbrite. As always, non-members are welcome to attend and participate in the discussion.