FG, Bank Shareholders and Nationalisation

Last night on The Week in Politics, Fine Gael’s Leo Varadkar criticised proposals for nationalisation of the banks on a couple of grounds, one of which was that it “wipes out 300,000 small shareholders.” Later, in describing FG’s plan he said that the new banks created as part of this plan “would buy the good loans off the banks, take the good loans off the banks and set up a clean bank and, by doing that, you then create capital for the old banks and give them some chance of survival.”

Those watching would probably interpret these comments to imply that Fine Gael’s plan does not involve nationalisation and that it would be better for bank shareholders than what has been proposed under nationalisation. In my opinion, neither of these positions are correct.

Thoughts on Fine Gael’s Bank Plan

As Patrick Honohan has noted often in his recent contributions, despite the confusion prevailing in Ireland today about our banking problems, there is wide agreement among banking experts about what constitutes best practice when dealing with banks that are either insolvent or failing to comply with capital adequacy regulations. Regulators seize the bank, place it into administration and the bank’s assets are used to pay off depositors first with bondholders getting paid off if there is anything left.

In our current circumstances, the almost-blanket guarantee on liabilities agreed on September 30 prevents such a solution from being imposed now on the covered Irish banks. I interpret Fine Gael’s new plan as an attempt to achieve an FDIC-style resolution while sticking within the restrictions imposed by the guarantee.