Why we can't let the banks go bust

[Bronte]

As it stands we are setting ourselves up for this situation to happen all over again - the banks now know that they can take any kind of risk and rely on the taxpayer to provide a safety net. In the good years, an Irish bank will make a couple of billion euro in profit, in a bad year the taxpayer can pick up the tab.

I think this [broken link removed] says it all.

This is what has me hopping mad. I can't believe the Irish people are going to mortgage themselves and their children's futures to save some banks without a peep out of the electorate. This whole thing is a con job to keep the bankers, developers and politicians at the top of the pile. A preservation of the status quo. It's more like a dictatorship than a democracy.

 

[steviel]

If we want banks with unlimited depositor protection then we should constitute them in this way and force them to insure these schemes on the open market. Or it could be an option for depositors to have an insured account or a higher interest uninsured account.

Another option would be to force irish banks in future to be constituted as unlimited liability companies. As such the shareholders might take a more conservative approach to risk.

As it stands we are setting ourselves up for this situation to happen all over again - the banks now know that they can take any kind of risk and rely on the taxpayer to provide a safety net. In the good years, an Irish bank will make a couple of billion euro in profit, in a bad year the taxpayer can pick up the tab.

I think this [broken link removed] says it all.

Or we could just get a decent regulator, get representatives of the regulator permanently inside the banks and on the committees and audit teams, and pay the regulator's staff well enough that working for the regulator is an attractive career choice (make it worthwhile to be the policeman).

people are still moaning that Anglo is still a going concern, and if this were the case, they have every right to be angry. But i have a little familiarity with what is happening inside Anglo, and meet seanior staff regaularly for a coffee. Despite the guff spouted by the current chairman, rest assured Anglo is not being run as a going concern. It will be wound down. NAMA will take some of the loans (30%?, 50%? who knows), and the remainder will be dealt with somehow. Bank will be wound down or maybe used as a vehicle to mop up the remnants of Nationwide and Permanent.

 

[kaplan]

Most people cannot seperate the global liquidity crisis (now abating) from a domestic banking system solvency crisis caused by the collapse in the property bubble or to put it another way the demise of an economic policy that promoted, facilitated and funded a construction led consumption boom. Irish banks continuing problems are directly related to solvency - or going concern risks which will not be fully dealt with until banks balance sheets are cleansed of boom time bad debts. Furthermore as the economy enters into a deflationary spiral there is little chance the so called international green shoots will sprout global growth at levels required to stave off what will become yet another lost Irish decade. Worse still if, as some are predicting, a double dip occurs fuelled by commodity, food and oil inflation. Letting the banks go bust is not an option - funding their survival, and consolidation will require fresh government investment or a PPP scheme of joint government and private ownership. Few people realise how important Irish banking is and why preserving the existing banks has a wider national interest dimension. One of the dilemmas faced by Government is how to ensure the national banking system does not become dominated by foreign banks when it cannot afford to opt for the temporary nationalisation route. The costs of bailing out banking will be dwarfed by the final costs of economic recovery - whenever this occurs.

 

[PaulHoughton]

Letting the banks go bust is not an option

Why not? it's looking like the best option to me.

Few people realise how important Irish banking is and why preserving the existing banks has a wider national interest dimension.

Why is it important to prevent the main Irish banks from closing?

One of the dilemmas faced by Government is how to ensure the national banking system does not become dominated by foreign banks

What is wrong with having foreign banks?

I see no reason in this thread to require the Irish taxpayers to save the Irish banks from liquidation. The main reasons for saving the banks that have been put forward are to maintain a supply of credit in the economy and to avoid a risk of losses for depositors. I don't believe either of these things would happen - the market will provide credit and the assets of the banks are sufficient to meet deposit liabilities even after mark-to-market write-down.

I have read the history of the Swedish bank crisis and there is no comparison with their approach and ours.

As a Green Party member I will be voting to leave government next month if NAMA is not dropped as I consider that it will cripple the country economically for decades in a vain attempt to maintain high residential and commercial property prices.

 

[theresa1]

The Green Party are heading the same way as the P.D.'s - they will never recover even after pulling out of Government which they will eventually do. Green Party will go bust hopefully.

 

[DerKaiser]

The main reasons for saving the banks that have been put forward are to maintain a supply of credit in the economy and to avoid a risk of losses for depositors. I don't believe either of these things would happen

That's a very naive attitude. In practice there would be disastrous short to medium term impacts on enterprise.

Just think about it, do you really believe that there wouldn't be serious disruption if most of the businesses in the country were forced to immediately find alternative lines of credit?

You might have a view on the way business should work but that's not how it does work

Also, the implications of people not being able to trust banks to return their deposits is not a road we want to go down

 

[Theo]

I don't think anybody really knows what might happen if we let some or all of the banks fail. But I do know one thing - I have no desire to take on the risk of bad and good loans alike from these people and effectively relieve them of the burden of their mistakes. I'll take my chances and live with them. In the same way I took on risk when I got a mortgage to buy my house. Nobody will offer to take on my mortgage if I can't pay it - that's a risk I was happy to take on and I'm happy to take responsibility for it. Same for the banks. At least when all our banks go to the wall, someone else will come in who knows what they're doing and do a far better job.

Secondly, does anyone else not find it astonishing that the entire former board of Anglo and Irish Nationwide are not in prison pending charges? Wouldn't that send a clear signal to international investors that maybe we are not a nation of crooks and corruption after all?

When I returned to Ireland from abroad in 2001, I really thought the country had turned a corner and turned its back on crookedness and corruption of the past. But now I see that we are still a nation of crooks and corruption and it saddens me deeply. If I lose my job, I will be considering leaving the country again, but this time, I probably will not return.
I am disgusted to the core with us - we deserve what's coming

 

[Shawady]

Instead of NAMA buying these assets at inflated prices, why can't the government just loan the banks the money?
For example if the assets are worth 40 billion and the government is going to buy them for 60 billion, why can't they just lend the banks 20 billion which can be paid back to the government over 15-20 years. That way the risk of selling these assets is with the banks not the taxpayer.
I'm sure it would be more complicated than my example but there must be some way that the risk is with the banks ans not the taxpayer.

 

[Guest116]

I
Secondly, does anyone else not find it astonishing that the entire former board of Anglo and Irish Nationwide are not in prison pending charges? Wouldn't that send a clear signal to international investors that maybe we are not a nation of crooks and corruption after all?

You cant put people in prision "pending charges"!

 

[Carolina]

Just think about it, do you really believe that there wouldn't be serious disruption if most of the businesses in the country were forced to immediately find alternative lines of credit?

Yes, but would that disruption not be better than the state borrowing an additional 70 or 80 billion at a time when we least afford it to plug a hole in the balance sheets of some privately owned companies?

Also, the implications of people not being able to trust banks to return their deposits is not a road we want to go down

What is the implication? People have to put their money somewhere.

We have lived through oil crises in the 1970s and several periods for months at a time when all the Irish banks simply shut down due to strikes.

Instead of NAMA buying these assets at inflated prices, why can't the government just loan the banks the money?
For example if the assets are worth 40 billion and the government is going to buy them for 60 billion, why can't they just lend the banks 20 billion which can be paid back to the government over 15-20 years. That way the risk of selling these assets is with the banks not the taxpayer.
I'm sure it would be more complicated than my example but there must be some way that the risk is with the banks ans not the taxpayer.

They have a solvency problem not a liquidity problem. Lending money to them will make their balance sheets look even worse.

The profits of the Irish banks in non-bubble times are about 2bn a year. The IMF estimates they need 35bn. Why would you lend someone 17 times their annual income? Somebody has to pay this 35bn and it should be the people who lent money to the banks.

Nobody forces you to keep money in a particular dodgy bank. There are plenty of solvent banks operating in Ireland.

You cant put people in prision "pending charges"!

Indeed you can be imprisoned without charge - for up to 7 days in Ireland - but only under suspicion of serious violent crimes.

 

[DerKaiser]

Yes, but would that disruption not be better than the state borrowing an additional 70 or 80 billion at a time when we least afford it to plug a hole in the balance sheets of some privately owned companies?

I agree that we can't write blank cheques to the banks. There's a serious need for a cost benefit analysis here as to how we best limit the long term taxpayer cost

What is the implication? People have to put their money somewhere

And better they put it in banks in the knowledge that they'll get it back rather than stuff it under their mattress for two reasons
1) Peace of mind
2) If the banks lose depositors then the credit supply will cease up completely driving businesses to the wall

 

[Purple]

Most people cannot seperate the global liquidity crisis (now abating) from a domestic banking system solvency crisis caused by the collapse in the property bubble or to put it another way the demise of an economic policy that promoted, facilitated and funded a construction led consumption boom. Irish banks continuing problems are directly related to solvency - or going concern risks which will not be fully dealt with until banks balance sheets are cleansed of boom time bad debts. Furthermore as the economy enters into a deflationary spiral there is little chance the so called international green shoots will sprout global growth at levels required to stave off what will become yet another lost Irish decade. Worse still if, as some are predicting, a double dip occurs fuelled by commodity, food and oil inflation. Letting the banks go bust is not an option - funding their survival, and consolidation will require fresh government investment or a PPP scheme of joint government and private ownership. Few people realise how important Irish banking is and why preserving the existing banks has a wider national interest dimension. One of the dilemmas faced by Government is how to ensure the national banking system does not become dominated by foreign banks when it cannot afford to opt for the temporary nationalisation route. The costs of bailing out banking will be dwarfed by the final costs of economic recovery - whenever this occurs.

Excellent post kaplan. If anyone thinks that it doesn't matter if me are dominated by foreign banks just take a look at what ACC are doing and what the knock-on domino effects will be for the country if they succeed.
We need Irish banks that are Irish owned (or at least depend on the Irish economy for most of their turnover).
By the way, NAMA is not bailing out the developers; they will have to repay NAMA instead of the banks. It is bailing out the banks so the beneficiaries are shareholders (pension funds) and depositors.

 

[DerKaiser]

By the way, NAMA is not bailing out the developers; they will have to repay NAMA instead of the banks. It is bailing out the banks so the beneficiaries are shareholders (pension funds) and depositors.

....and the debtholders.

 

[kaplan]

Purple : ACCBank is doing what all other banks should be doing – it has done the nation some favour in outing the scale of collusion when banks no longer engage in the business of banking but revert to collective survival. My point on risks of future domination by foreign owned banks relates to the way in which they allocate capital and funding to their overseas subsidiaries. Example the insistence now by the FSA that foreign banks establish subsidiaries in the UK regulated by the FSA (rather than branches regulated by home country regulators) to prevent their repatriation of capital when faced with a crisis back home – this smacks of back door banking nationalism. At the same time Ulster Bank is being required to repatriate billions to its part UK Gov owned parent. Is it such a bad thing to insist that banking capital so necessary to underpin credit creation is protected by nation states? Many states ensure they maintain a strategic shareholding in vital national assets including banks.

NAMA is designed to bail out banking – which is a necessary and inevitable consequence of the crisis as they are insolvent. But it also looks as if it will rescue shareholders and bond investors from total wipe out as writing down the value of core equity below legal regulatory thresholds would require further state capitalisation and increasing ownership up to full nationalisation. What’s right for banking versus what’s right for shareholders & bond holders is a distinction many miss. Its right to stabilise banking as the economy needs working banks. It’s wrong to leave shareholders and sub-ordinated bond holders off the hook of the risks knowingly taken. But forcing them to take a bath carries some risks – inherent within nationalisation such as political interference and lack of support from international investors etc. The compromise suggested by Professor Honohan’s Nama 2.0 is to provide for some upside for shareholders/bond investors via NAMA and deal with banks requirement for recapitalisation through a combination of state and private investment – if it can be attracted. Thus inevitable losses incurred by NAMA will be partially offset against future profits from banking as the state sells down its shareholding.
One of the problems is even if Nama leans towards the banks and their shareholders/bondholders the will be at the bare minimum of regulatory capital, require more as bad debts deepen and will not achieve anything close to the emerging higher levels required. Nama does not prevent the japanification of banking or by extension the economy.

 

[Shawady]

NAMA is designed to bail out banking – which is a necessary and inevitable consequence of the crisis as they are insolvent.

The government may have to save the banking system but I cannot understand why all banks have to be saved. I have not heard a good reason yet why Anglo was nationalised. My understanding was that this bank's primary business was with large property devlopers.

Why can't NAMA take on the bad loans for jsuta couple of the better performing banks?

 

[steviel]

Shawady, the answer to that was on the ACC thread. If Anglo failed, receivers would likely have sought repayment of loans through the courts, forcing big developers into receivership like ACC was trying to do with Carroll. And those same loans are cross collateralised with loans at BOI and AIB. So you could end up with a liquidiation of properties on a massive scale which would hammer AIB and BOI. Anglo was nationalised so the government could keep some kind of control and try to effect an orderly exit from this mess (ie. NAMA, whether we like it or not), rather than end up with a messy and potentially catastrophic firesale when there is no market, and commercial real estate valuations are close to zero. That would have hit our pockets a hell of a lot harder by AIB and BOI requiring many more billions in immediate cash than is necessary through the NAMA structure. We dont have that kind of cash, so an IMF intervention would have been inevitable I think should Anglo have been let go.

And that doesnt even address the issue of international investors losing money - we need them on side, whether we like it or not, to fund whatever banks are left standing after all this.

I think it will be have a state owned bank which can be used to mop up whatever is left of Nationwide and Permo after all this, and possibly in the longer term be used to execute government policy - eg, lending to renewable energy firms - kind of like a development bank.

 

[Shawady]

Stevie, thanks for the explantion. It just seems amazing that the collapse of one bank (not even one of the bigger ones) could have such a catastrophic impact on the country.

 

[steviel]

The problem is that Ireland is not a big country, but we have big banks, massively exposed to one asset class, that share the same customers and security, with huge exposures relative to their capital base to individual developer groups, and over-reliance on the international markets for funding because they outgrew the domestic deposit base to such a degree by chasing asset growth. So everything is more interlinked than any other Western banking system (a reason why comparisons to what other countries are doing to fix their banking situation are meaningless). The regulator is at fault for allowing such systemic risk to build up like this

 

[csirl]

rather than end up with a messy and potentially catastrophic firesale when there is no market, and commercial real estate valuations are close to zero. That would have hit our pockets a hell of a lot harder

Who's pockets? Wont hit the taxpayer. Wont hit the ordinary citizen - in fact a lot could benefit from being able to buy a house very cheap.

 

[steviel]

it will hurt when you have to stump a few more tens of billions out of your taxpayer pocket to cover the increased losses at the 2 big banks due to liquidations, rather than a managed workout of the situation. That would be immediate cash needed in the short term to keep the banks afloat. And we couldnt afford it. The country would need IMF help (and we all know what that would mean in terms of minimum wage, social welfare, cost cutting on a scale not even envisaged in An Bord Snip). NAMA costs a lot but it is not immediate cash out the door, and keeps out the IMF (for now at least)