Category: Banking Crisis

Maarten van Eden: Applying same analysis to all Ireland’s debt makes no sense

Maarten van Eden, outgoing CFO at Anglo, has an interesting article in today’s Irish Times (see here).    One useful feature of the second half of the article in particular is that he focuses on what is needed to allow the banks to play their normal lending function in the economy.  

In order for lending to the private sector to resume, the good banks need to be delevered [through debt-funded buybacks of NAMA bonds and promissory notes, with the cash used to pay back the ECB], recapitalised and their funding put on a firm footing.

I am not convinced by his specific solution, but this focus is important given that the debate sometimes seems to have lost sight of the ultimate objective of fixing the banking system.   

As an aside, one of the best papers produced on the Irish crisis is Gregory Connor’s “The Irish Risky Lending Gap”, written back in 2009 (see here).   Greg focuses on the lending decisions of a risk-averse bank holding a distressed asset portfolio with a value that is correlated with the value of potential new lending opportunities.   He shows how the level of lending can be socially sub-optimal, and how various balance-sheet restructuring policies can change the size of the lending gap.  It might be useful to re-read along with the van Eden piece.

Bank Credit Flows and Eurozone Stability: Conference Panel QA Session

The excessive flows of bank credit during the bubble, and the shortage of bank credit after the crisis, are key elements in Ireland’s current economic distress. Prior to the crisis, economists thought they understood the behaviour of bank credit flows, but we were sadly wrong.  The talks at the conference next week explore the new research frontiers regarding bank credit flows and stability. The conference website now includes a google talk link where participants can pre-submit questions for the panel session, and links to some research papers associated with the presentations. There will also be an opportunity to pose questions during the conference panel session. The panel session will be chaired by Professor Karl Whelan of UCD.

There will also be opportunities for discussion/interaction during conference breaks. If you are a (quote) “faintly dim former rugby player” or a faintly dim rugby dad like me, there will be a corner of the coffee room where we can converse in whispers about the sport and its undeserved bad publicity.  

O’Callaghan: ECB Must Share Blame

Gary O’Callaghan has an interesting article in today’s Irish Independent on the ECB’s role in the Irish crisis.

Excess Bank Capital

 

After the planned new €24 billion equity capital injections are completed, the surviving domestic Irish banks will be highly capitalized, with equity-to-assets ratios[1] peaking at extremely high levels (above 20% except for BOI at 16%)  and then declining (after projected losses) to still high levels (baseline 10.5%). For details, see this Irish Central Bank report.  This puts Ireland in the vanguard of a new regulatory movement, across many countries, to impose substantially higher equity ratios on banks. There is strong and reasonably widespread support for this movement among academic economists and in financial regulatory bodies around the world. 

Is Ireland an appropriate test case for this new regime of much higher equity ratios? Higher equity ratios provide a safety buffer for bank depositors and bondholders, but they also provide a safety buffer for bank management. Troubled banks can fall into the “zombie bank” trap in which management squanders new funds endlessly, in order to preserve established banking relationships with failing clients and/or to hide their pre-existing losses. Around the world, state-owned corporations are legendary for their ability to waste shareholder (taxpayer) funds. Will the presence of unusually large equity buffers tempt the managers of state-owned Irish banks toward wasteful and/or politically expedient behaviour?

I have two main points to make in this blog entry:

1.      The enforced “over-capitalization” of Irish banks was the correct thing to do in the circumstances, but this new policy requires continuous monitoring.  There will be numerous pressures to waste the “excess” capital — these pressures need to be resisted.

2.     Ireland is now an important test case in the new international experiment with higher bank equity ratios.  No one can predict all the effects.

 

Continue reading “Excess Bank Capital”

Lending between National Central Banks

See the following contribution here from Hans-Werner Sinn.  It is certainly original but frankly alarmist.  It focuses on the fact that National Central Banks within the euro system are lending bilaterally to each other though without changing the monetary base as a whole.  Sinn jumps from there to draw apparently worrying conclusions:  that these are “forced capital exports”; that they are the counterparty to current account deficits and that “the PIGS would have had a hard time finding the money to pay for their net imports”.

There is not a scintilla of evidence that the private non-bank sector in the PIGS has lost access to normal European financial markets.  If the Bundesbank lends to the Central Bank of Ireland, it does not, in any sense, expand the availability of credit to the private non-bank sector in Ireland.  Similarly, German households and firms do not suffer a credit contraction.  This is, of course, because there is free movement of capital within the single currency area.

The second non-sequitur in Sinn’s article is the association of accumulated current account deficits in the PIGS with these bilateral loans.  Ireland has, of course, a current account surplus so the point is completely irrelevant to at least one of the PIGS.  Sinn notes that Italy has not availed of these inter NCB loans, despite its current account deficit, but mistakenly attributes this to virtuous policy on the part of the Italian authorities!  It is of course because Italy so far has not yet suffered from a banking or sovereign debt crisis.  And for no other reason.

My suspicion is that Target 2 credit is ultimately guaranteed by the ECB: that the Bundesbank loans to the Central Bank of Ireland should be considered as contingent items on the ECB balance sheet.  In short, that Target 2 credit is simply a mechanism for implementing ECB policy.  But I remain to be corrected on this.