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Government to “Safeguard Irish Banking System”
Read more about: Economy, Fianna Fail, Fine Gael, Irish Election
In a statment released this morning, the Government signalled that it will “safeguard the Irish Banking system”. The world fell apart yesterday and surely some of our most famous banks are hanging on by a thread. Their stock pummelled and - in private at least - their reputation is now in tatters, they need security anywhere they can get it.
Opposition want to see further what this means but there is one major question - is this a signal that one was about to go? Or a pre-emptive strike to offer a floor to the interminable falls in market values? Either way - are you willing to cover the cost should the worst befall a bank here?
The Government has decided to put in place with immediate effect a guarantee arrangement to safeguard all deposits (retail, commercial, institutional and interbank), covered bonds, senior debt and dated subordinated debt (lower tier II), with the following banks: Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society and such specific subsidiaries as may be approved by Government following consultation with the Central Bank and the Financial Regulator. It has done so following advice from the Governor of the Central Bank and the Financial Regulator about the impact of the recent international market turmoil on the Irish Banking system. The guarantee is being provided at a charge to the institutions concerned and will be subject to specific terms and conditions so that the taxpayers’ interest can be protected. The guarantee will cover all existing aforementioned facilities with these institutions and any new such facilities issued from midnight on 29 September 2008, and will expire at midnight on 28 September 2010.
I think the government intervention is welcome to attempt to inject no liquidity, but confidence back into the system.
I imagine this scenario as being in a city surrounded by levéés. An unprecedented storm is raging, tearing the skies apart, and the flood water is splashing over the levée. Now the mayor has decided that the city will back up the levée by promising to add another two or three bricks where necessary. It is a welcome move, it may stop panic from setting in. But the trouble is, the government doesn’t have enough bricks to put on an extra layer all the way around. If the surge is sufficient, therefore, the levée will be breached everywhere, and the entire city is destroyed.
The Irish government is standing over all deposits and loans to Irish banks. But the value of all of this is 400 billion Euro. Irish GDP is less than 200 billion Euro. And of that the government taxes are about 60 Billion. What this means of course is that there is no way we could possibly pay for defaults if the levée were breached in a big way. That is, if the system crashes entirely all bets are off. Ireland’s debt is somewhere around 100 billion. There is no way it could take on another 400 billion.
Basically the government is saying we are on our last line of defence. We guarantee that we will add a few bricks here and there. But that’s it guys!
one of the ideas behind this is that it will encourage foreign companies to move their deposits here. as if a foreign bank goes they might not be gaurteened. If this increases banks deposit rates and shores them up could be a master stroke
To prevent this crisis happening again, something similar to factoring/accounts receivable financing is needed so that financial institutions can insure against the risk of loan-defaults just as businesses can currently sell their debts to financial institutions for 98% of the cost, with the financial institutions having recourse to the bad-debtors. Currently factoring is not available for loan defaults owed to financial institutions. Regulations are needed to require such insurance to be taken out. If necessary it should - at least at first - be a State-owned insurance-scheme. That way the taxpayer will be in better shape to payout in the future if this happens again. As a moderate liberal, I dislike the spectacle of State-bailouts of financial instutions, and hope one day that the insurance-companies can bail them out instead, but we are not presently in a position where that is feasible. In that context I support what govts around the world are doing in guaranteeing deposits, though I am uncomfortable with nationalisations of banks, and believe they should be sold off again when they are viable as going concerns.
well, in france, bank deposit accounts for retail bank have a guarantee from the state of max 70k€ each… even if I’m not sure the sate will be able to pay!
To me the crucial thing is that it’s a guarantee not just for deposits but the interbank borrowings of these banks. A lot of banks everywhere have grown reliant on wholesale borrowing to fund their lending (see e.g. Northern Rock) and it was this platform that was looking especially endangered in the last few months. This is the “borrow short, lend long” model that was hugely profitable as long as interest rates stayed low and the long part of the deal — the mortgages — stayed high quality. But in effect the government has now become the residual claimant to every loan made by an Irish-based bank, since they have guaranteed the deposits and borrowings that funded these loans.
hopefully the number of dodgy defaulting loans will be small but unfortunately it was these loans that were the final straw in the property bubble—they should never ,never have been allowed and whoever was asleep at the wheel(minister for finance, central bank, financial regulator)should be requested to clear his desk and shut the door on the way out. Also, if we have this gaurantee outstanding how are we going to borrow the €10billion required for the budget????
The problem is that this doesn’t necessarily bring the debt lurking in the water to the surface. The Japanese banking system had to have over a decade with quite high annual bad debt provision and actual write offs due to their property bubble.
One point that the government keeps making is about the ECB and how this gives us access to greater support than otherwise would be the case. I don’t think this is true. Let’s face it if there is a systemic collapse underway the ECB will seek to protect the largest players in the European market first not the regional powers. If it comes to a choice between saving 1/2 big German/French players and bailing out our banks then our lads are toast. I don’t think it will come to that but the fact that Hanafin and others are pedaling that line either means they don’t know what they are talking about or they do and it’s pure bull.
You’re right Dan, I’ve heard Lenihan say several times that people should have confidence in Irish banks because of the ECB but it’s just not true — the ECB has no role in ensuring banking solvency. It’s never mentioned in its basic list of functions. Its only mandate is in monetary policy for the eurozone — everything else must be done in tandem with the national central banks and regulatory authorities, and it has no giant pot of money to keep all creditors of any particular bank whole.