Alan Ahearne’s Paddy Ryan Memorial Lecture at NUI (for now) Galway is available below. He gives a rationale for current government banking and fiscal policy (HT Stephen Kinsella).
Category: Banking Crisis
Last month, we discussed how the the EU had prevented AIB from paying coupon payments on certain bonds, which will prevent them from paying dividends on the government’s preference shares, which in turn will trigger the right of the National Pensions Reserve Fund Commission (NPRFC) to acquire ordinary shares equivalent to the amount of the dividend. Bank of Ireland has now made a similar announcement. Here‘s the press release. The highlight:
In accordance with the terms of the 2009 Preference Stock, the NPRFC would become entitled to be issued, on February 20, 2010 or on a date in the future, a number of units of Bank of Ireland Ordinary Stock (based on the average trading price of Ordinary Stock in the 30 trading days prior to February 20, 2010, assuming the Ordinary Stock was settled on that date) related to the cash amount of the dividend that would otherwise have been payable (€250m), should there be no change in these circumstances. The Bank is, however in ongoing discussions with the Department of Finance and the EC on this and other related matters as part of our overall engagement on the Bank’s restructuring plan and accordingly, this outcome is not certain.
So they’ve got a month to engage their way out of what would be a serious dilution of the current private ownership, even prior to any recapitalisation required by the losses triggered by NAMA.
After repeatedly ruling out the idea that a banking inquiry would occur in the near future, the government has now released its own proposals for exactly such an inquiry. The formal proposals are here (this is an amendment to Labour’s proposal) while the Minister for Finance’s speech on the issue is here.
The essence of the proposals are as follows:
The inquiry will have two stages.
First, the Government will immediately commission two separate reports – one from the Governor of the Central Bank on the performance of the functions of the Central Bank and the Financial Regulator and the second from an independent ‘wise’ man or woman with relevant expertise to conduct a preliminary investigation into the recent crisis in our banking system and to inform the future management and regulation of the sector. These reports will also consider the international, social and macro-economic policy environment which provided the context for the recent crisis. I expect both reports to be completed by the end of May this year and laid before the Houses shortly thereafter.
The second stage of the inquiry will be the establishment of a statutory Commission of Investigation which will be chaired by a recognised expert or experts of high standing and reputation. The terms of reference for this commission will be informed by the conclusions of the two preliminary reports. The aim will be for the commission to complete its work by the end of this year. Its report will then be laid before the Oireachtas for further consideration and action by an appropriate Oireachtas committee.
A couple of initial observations. First, as I understand it, it seems unlikely that the second stage will involve any public hearings. The Commissions of Investigations Act of 2004 (link here) states that:
A commission shall conduct its investigation in private unless (a) a witness requests that all or part of his or her evidence be heard in public and the commission grants the request, or (b) the commission is satisfied that it is desirable in the interests of both the investigation and fair procedures to hear all or part of the evidence of a witness in public.
Neither (a) or (b) seem too likely to occur.
Second, to my mind, the request that the Governor of the Central Bank be charged with writing the definitive report on its past performance puts Patrick Honohan in an invidious position in light of the fact that he will have to work on a daily basis with many of the staff who remain on from the previous regime.
Third, the terms of reference only go up to events up to September 2008. I would prefer to see the date extended at least up to early 2009 as there are serious questions to be asked about the Regulator and Department of Finance’s understanding of the scale of the problem facing our banks and the advice they received from outside sources such as PWC (see here and here).
The troubles of developer Bernard McNamara are receiving a lot of coverage: Stories about it in today’s Irish Times are here, here and here, while McNamara’s interview on RTE yesterday is available here (starts 40 minutes in – hearing him blame professional valuers for him paying too much for the Glass Bottle site was priceless).
It is worth noting that, as with Liam Carroll, the fact that Bernard McNamara borrowed some money from outside the network of NAMA-bound banks (in this case, €62.5 million from clients of Davy’s clients) is the only reason that we are able to see the true state of his finances.
And, of course, these stories raise the following question: Since Carroll and McNamara are hopelessly insolvent, who exactly is going to account for the eighty percent of NAMA’s loans that its business plan tells us will be paying back in full?
One of the themes stressed by the BarCap research is that the funding problems of weak banks are likely to see stronger, better-funded, European banks growing bigger at their expense, thus exacerbating the Too Big to Fail problem.
This isn’t a theoretical issue. Former IMF Chief Economist Simon Johnson has been flagging for some time that the crisis has seen the biggest six banks in the US substantially increase their overall share of bank assets. Johnson’s recent AEA presentation is well worth reading. It paints a depressing picture in which the rescue of the financial sector has boosted and emboldened the leading banks and, with a timid and perhaps compromised US Treasury unwilling to act, Johnson seems to be predicting an even larger crisis down the road.
It’s hard to know how much to agree with this diagnosis. Johnson is hardly the only person discussing this as a serious issue. For instance, Mervyn King has spoken in very strong terms about this issue, for instance in this speech which has many choice quotes including:
Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.
Andy Haldane’s “doom loop” speech is further evidence of how seriously the Bank of England takes this issue.
In the US, while the Treasury has clearly whiffed so far on this issue, influential voices such as Paul Volker and St. Louis Fed President Thomas Hoenig have also emphasised the importance of dealing with TBTF. Even more officially, the Basle Committee is apparently now looking in to special treatment of global banks that are deemed to big to fail. So perhaps there are reasons to think that, um, this time might be different.
Still, with leading international banks making money again and huge bonuses back, it’s hard not to get the sinking feeling that the bankers will be able to water down proposals for tighter regulation and that we could heading down the same path yet again.