# Willful ignorance and the Irish banking crisis.



## darag (12 Sep 2009)

Why does the discussion of the Irish banking crisis always seem to deliberately ignore the experience and knowledge available globally?

There is no attempt to argue for particular policies (NAMA, nationalisation, the blanket guarantee, regulatory reform) with reference to how such policies worked in similar situations in the past internationally.

There seems to be an axiomatic belief that Ireland's case is different, unique or unusual.  The reality is that nothing could be further from the truth if you care to read a little about the history of banking crises.

For example, a few years ago the World Bank published a comprehensive study on 113 systemic banking crises which have occurred since the 70s.  In it they examine the cost and outcomes for the various policies that governments have tried.  Nothing in the current situation in Ireland and the surrounding debate is unusual or unprecedented.

The discussion here is becoming repetitive and unproductive because it is impossible to properly debate the merits of a particular policy when the claimed outcome is based on conjecture and opinion rather than reference to history or empirics.

For example, in another post, I asked for evidence to support the belief that the creation of NAMA will increase credit supply to the wider economy but there was no responses at all.  (I asked this prompted from what I've understood from reading that section of the World Bank study which suggests that the bad bank approach is not effective in this regard.)  I would have thought that without strong evidence that such an approach delivers benefits to the wider economy, that debating micro aspects of NAMA would be pointless.  Also those who suggest "letting banks go the wall" are generally dismissed as not having thought about things even though this has been identified as being an important part of any successful resolution to a banking crises.  The discussion which involves any sort of international dimension seems to die pretty quickly - for example the thread on what could be learned from the Swedish response.  In the Swedish case, everything I read from commentators and the parties involved named the the previous cases of banking crises they had looked at to guide policy.

I've come to the conclusion that I don't see much point in debating the crisis on this goldfish bowl basis even though the decisions being made are some of the most important nationally for decades.


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## mercman (12 Sep 2009)

In answer to your question the reason as to why you are unable to get a decent debate going about the points you have referred to is that people generally do not have the information and ability to input into such a heavy discussion.

There are those who just want to blame the Politicians, beat them with a stick and simply bad mouth all and sundry to matters that do not suit them. Sure a change in National Government might help short term. But long term do the opposition have the ability to direct the country in the right direction for a long term fix.

Then there are those who just want to blame the Banks. They may be and are probably correct. But allowing the main forces of Banking in this country to go bust and bang will do no good both nationally and internationally. And to blame Government for allowing the Banks to overlend is unjust. No Government can or should get involved with Private Enterprise. The Banks made the mistakes and the Banks will have to pay. With their greed, greed and more greed and lies, lies and more lies, heads will have to roll.

Unless and Until heads roll in quantities in the Main Banks, the attitude of the public will not change. We have a problem the same as most other Western Countries. The others are making in roads to deal with their problems. Little old Ireland is just headstrung into beating themselves up.

And in the main the people are unwilling to blame themselves. For spending to much money. For borrowing to much and for investing in Financial and Property projects and products which they knew sweet FA about.

And as for the Private Bankers that lied and continued to lie they should be jailed. A heap of overpaid no brainers that were brainwashed to feel like Gods and tried to make people their disciples. Fire them all and get down to what we do best - revert to being a nation of entrepreneurs and not just a nation of go getters pretending to be worried but in the main spend their time wondering what is in it for me.


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## Brendan Burgess (12 Sep 2009)

Hi dara

You raise some very interesting points. A lot of the discussion on NAMA has been ranting and raving. We have tried to keep Askaboutmoney to analysis rather than shouting. 

I certainly don't have the time to read, interpret and understand all the comparative studies. Bacon presumably looked at the success of this model in other countries. 

While it is right to learn from what happened in practice, it is also dangerous to say "The Swedish system worked, so we should do that here". I have heard many of the anti-Nama people saying that it is a good thing to let banks fail. And I certainly was of the opinion that Irish Nationwide and Anglo Irish should have been allowed to fail and let the depositors lose their money which was not guaranteed. 

But has any other country just let all their banks fail? 

Has any other country _which is itself totally dependent on exchequer borrowing from the international markets_ allowed all its banks to fail? 

Has any other country which is itself totally dependent on exchequer borrowing from the international markets allowed all its banks to fail _during a severe international credit crunch_? 

If the circumstances are very close to Ireland's present case, then I would certainly read about it and learn from the outcome.

Brendan


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## kaplan (13 Sep 2009)

Banks can’t work as their balance sheets are full of non-performing assets. So much so that that if they accounted for losses they would be insolvent. And they are wholly dependent on the Gov guarantee without which they wouldn’t be able to raise a cent in funding from the markets. 

Solution is to replenish the balance sheet with new money. Enter the AMC to buy distressed assets and fund balance sheets with fresh untainted cash. Two things happen. The first is the capital subsidy as bonds swopped for loans release capital thus improving solvency ratios (freeing up capital) and the second is providing liquidity. (The NAMA haircut will probably  trigger additional state equity support for some)

But banks must also deleverage – reduce the loan/deposit ratio and de-risk – bolster capital effectively shrinking their balance sheets. 

What incentives do they have to lend in a higher risk environment where default risk is rising? 

The international evidence of previous credit crunches is banks both de-lever and de-risk which leads to credit starvation example Finland and Mexico….Irish banks are no different. 

So how can the Gov ensure banks lend?


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## DerKaiser (13 Sep 2009)

darag said:


> For example, in another post, I asked for evidence to support the belief that the creation of NAMA will increase credit supply to the wider economy but there was no responses at all.  (I asked this prompted from what I've understood from reading that section of the World Bank study which suggests that the bad bank approach is not effective in this regard.)  I would have thought that without strong evidence that such an approach delivers benefits to the wider economy, that debating micro aspects of NAMA would be pointless.



There's a difference between researching empirical evidence and actually understanding the dynamics behind it.  It's another step again to interpret such information and applying the lessons from it in the correct manner in our given situation.

I think the best you can hope for in a discussion here is a good debate amongst people with a decent understanding of basic economic drivers.  You simply won't have the volume of people required to sustain a debate on world bank studies.  I wouldn't assume this means people can't have an opinion.

The one point I will make in response to your post is this.  The uncertainty around the true level of bad debts is not helping the supply of credit.  Anything that will address this uncertainty can only help the situation i.e. we ideally would have active banks that can cover their deposits and repayments to debtholders with a high degree of certainty.  

Taking the most uncertain of debts off bank balance sheets can achieve this as can recapitalisation of banks.

My view is that we have no idea how much damage letting banks go bust will do.  We also have no well thought through idea of how nationalisation would work.  Compared to NAMA or recapitalisation these are far bigger gambles as there is a greater degree of uncertainty around their outcomes.

That said it may be all academic at this stage as the level of bad debts may mean there will ultimately be no difference in the end.


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## goosebump (14 Sep 2009)

DerKaiser said:


> That said it may be all academic at this stage as the level of bad debts may mean there will ultimately be no difference in the end.



+1

All roads lead to Rome on this one I fear. We should just get on with it and draw a line under the naval gazing.


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## kaplan (14 Sep 2009)

Whatever the pros and cons of NAMA it is at least a reasonably defined process. And it is clear the state will take a majority shareholding if required as part of the process. What's less clear is what happens if a majority shareholding isn't enough - and what of second wave bad debt losses from the wider economy. The mortgage book at e110bn includes e 40bn in underwater loans. Most residential investment lending occurred at peak prices.   

I am sceptical that private investors will be attracted to invest in a cleansed BoI or AIB as they will be aware of loan losses yet to be incurred across all domestic lending sectors. Also what are the new performance benchmarks - capital adequacy, loans/deposits, liquidity/funding profile required by investors? It seems to me that talk of investors being attracted is framed within a pre-crisis world and not the post-crisis one which is now evolving.


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## Bronte (14 Sep 2009)

I think if someone came out and said we are going to do this and that and the other under Nama or whatever and explained why they were doing it and confirmed that bankers would be fired for their idiotic loan practices and those that failed to regulate would be held to account and that the sharehholders and the property developers would not gain from NAMA then we could all get behind it.  

So far as I can tell no one understands NAMA not even the Minister.  Personally I see the Swedish model worked and I don't see why we can't just copy that, why should the Irish create some new system that is untried.  

I'm against NAMA as no one has explained it in any meaningful way and it just seems to be another stitch up of the Irish taxpayer.  Most people recognise something has to be done to sort out the banking crisis, but we don't trust those who are in charge.  

Kaplan, how do you explain the recent share gain in BofI and AIB?


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## DerKaiser (14 Sep 2009)

Bronte said:


> Kaplan, how do you explain the recent share gain in BofI and AIB?


 
Any current share price movements are quite spurious compared to

1) The level of bad debts they will ultimately suffer
2) The price NAMA will pay


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## Brendan Burgess (14 Sep 2009)

Bronte said:


> So far as I can tell no one understands NAMA not even the Minister.  ...
> 
> I'm against NAMA as no one has explained it in any meaningful way and it just seems to be another stitch up of the Irish taxpayer.  Most people recognise something has to be done to sort out the banking crisis, but we don't trust those who are in charge.



Hi Bronte

I have tried to explain it in this thread. 

What I cannot do, is predict what will happen with any accuracy. 

NAMA is complex, as are the alternatives. But the fact that it is complex is not a good reason for opposing it.

Brendan


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## Brendan Burgess (15 Sep 2009)

I have moved the discussion of the Swedish model to a separate thread.


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## Bronte (15 Sep 2009)

Brendan said:


> Hi Bronte
> 
> I have tried to explain it in this thread.
> 
> ...


 
Yes I read that thread and it was great for someone like me because it tried to explain it simply but it's you that's explaining it and that is the problem. The minister should explain it. I don't mind that something is complex but I only see smoke and mirrors and probably I cannot trust those that led us into this mess to get us out of it. If the people who managed to screw up the best economic period Ireland ever had why on earth should we trust them to get us out of it. Nothing is transparent as far as I can tell and we get fobbed off by secrecy and commercial interests etc.


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## Bronte (15 Sep 2009)

DerKaiser said:


> Any current share price movements are quite spurious compared to
> 
> 1) The level of bad debts they will ultimately suffer
> 2) The price NAMA will pay


 
Why have the share prices increased if these banks are basically bankrupt?  Why would one buy shares in such an entitly.  What do the people/institutions buying shares know that we don't know about NAMA?


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## DerKaiser (15 Sep 2009)

Bronte said:


> Why have the share prices increased if these banks are basically bankrupt? Why would one buy shares in such an entitly. What do the people/institutions buying shares know that we don't know about NAMA?


 
Well they must think that these institutions are not bankrupt or at least won't be bankrupt after NAMA.  

Also, just because _someone_ is buying them doesn't mean they will make a profit.  Could be like when you see someone putting €500 on a horse and thinking they must know something, more often than not they know no more than you and are just taking a punt


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## Brendan Burgess (15 Sep 2009)

Bronte said



> Yes I read that thread and it was great for someone like me because it tried to explain it simply but it's you that's explaining it and that is the problem. The minister should explain it.



That is a very good question. It is difficult for the Minister to give a balanced summary of NAMA.  Anything he says will be attacked and politicized. 

I suppose I have spent a lot of time over the years on Askaboutmoney trying to summarise complex issues in a balanced way. I am not as committed to NAMA as the Minister is, so it's easier for me to see the downsides as well.


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## Kine (15 Sep 2009)

DerKaiser said:


> Well they must think that these institutions are not bankrupt or at least won't be bankrupt after NAMA.
> 
> Also, just because _someone_ is buying them doesn't mean they will make a profit. Could be like when you see someone putting €500 on a horse and thinking they must know something, more often than not they know no more than you and are just taking a punt


 
While this may be true, I have several trader friends in London, and the general view of Irish banks is a "no-go" area. However, neither trade financials so perhaps financial traders have a better insight into the area.


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