Category: Banking Crisis

Funding Versus Capital

The debate about the banks has gone off the boil.   But, as John Ihle argues in yesterday’s Sunday Tribune, the next six months will be a very active period in the restructuring of the Irish banking system (article here).    

Fixing the credit system and minimising the cost of the rescue to the State have been the focus of the debate.    The first has strangely faded from view.   The second has acquired an ominous twist: tension between the ECB (which bears increasing risk as funder of last resort of the banking system) and the State (which is effectively on the hook for bank losses given limits on creditor loss imposition).  The ECB wants to shrink the balance sheets of Irish banks to minimise its exposure, even at the cost of “fire sales”; the State wants to minimise bank losses to give it a fighting chance of regaining its creditworthiness.    Like the ECB, the Central Bank of Ireland is increasingly on the hook for funding the banks through its Emergency Liquidity Assistance, although things are complicated by the fact that first on hook for losses on this assistance will be the State itself.  

This basic funding versus capital tension is most likely behind the conflict pointed to by John Ihle between the Central Bank/Financial Regulator on one side and the NTMA/Department of Finance on the other.   How this conflict plays out will have a significant impact on how the restructuring unfolds. 

Citoyen Sarkozy et ses amis irlandais

Colm McCarthy has some trenchant remarks on Mr Sarkozy’s recent populist speech:

Cowen and Advice Relating to the Guarantee

As Fianna Fail deputies and the media debate the performance of Brian Cowen as Taoiseach over the next few days, the question of the September 2008 guarantee will come up time and again. The Taoiseach has defended himself strongly against accusations that any relationships he had with bankers led to his government’s decision to offer a near-blanket guarantee to the liabilities of the Irish banks. He has repeatedly argued that this decision was taken in the national interest.

This still leaves open the question of why it was considered in the national interest to offer such an extensive guarantee. On this subject, Mister Cowen has tended to answer that they took this decision based on the best advice available. The next few days would be a good time to provide evidence for this statement. As it stands, there is a lot of evidence that plenty of contrary advice was given. For example, as has been noted here on a number of occasions, the government’s expensively-hired outside advisers, Merrill Lynch, were not enthusiastic about such a guarantee.

In relation to the Department of Finance’s policy advice on this issue, a useful example of the Department’s stance is document 36 from the PAC collection. The document is a slide presentation from February 2008 titled “Overview of Financial Stability Resolution Issues”.  Page 11 states in bold:

As a matter of public policy to protect the interests of taxpayers any requirement to provide open-ended/legally binding State guarantees which would expose the Exchequer to the risk of very significant costs are not regarded as part of the toolkit for successful crisis management and resolution.

In bold and with “not” underlined. It certainly seems as though the Department officials were on the record as being against the form of guarantee provided. Evidence on who exactly proposed the form of guarantee that was provided would be welcome.

I also think it’s worth keeping in mind when government politicians condemn those who opposed the guarantee (i.e. the Labour Party) as having been irresponsible, as Peter Power did on the The Week in Politics last night, that this opposition was shared by the government’s own advisers.

Michael Noonan in the Sunday Independent

Michael Noonan puts forward some ideas for amending the bailout deal in an opinion piece for the Sunday Independent.   His focus is on ways to reduce the expected cost/risk to the State of cleaning up the banking mess.  

He suggests four main options: (i) have the EFSF put capital directly into systemically important European banks; (ii) have the EU provide insurance against bank losses beyond some specified level (an idea already suggested by Patrick Honohan); (iii) the fast-tracking of an EU-wide of a bank resolution regime (that presumably would not be limited to future bank creditors); and (iv) an ECB-funded special purpose vehicle for bank assets to avoid the alternative of firesales with losses rebounding on the State.

Something for the walk to work

If you are already fed up with the albums you got for Christmas, I did an interview for Vox about the Irish situation which you can download here.