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Separating the banks’ from the fiscal crisis: first stage of banking inquiry due to be published
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Tuesday, 8 June 8, 2010: As the Cabinet sits down to deliberate on the contents of reports by Patrick Honohan, Governor of the Central Bank, and international financial consultants, Klaus Regling and Max Hastings, media speculation began in earnest about what the experts have to say about why our entire banking system reached the brink of collapse in September 2008 and why the regulatory system failed to prevent it.
Despite criticism and some frankly silly opposition claims that the process would be drawn out until after the next election, the two scoping reports have come in on time – the end of May – and following their publication, most likely by the end of this week, the stage will be set for the appointment of an independent overseer for the second part of the process, an independent commission, which is expected to present its report by the end of the year.
The Sunday Business Post seems to have had a heads-up on the Honohan authored report, speculating that the Central Bank governor will be severely critical both of his own institution and the Financial Regulator. He will not stop there, the paper suggested, as his report will include a critical appraisal of the government decision on September 30th 2008 to extend a blanket guarantee to all bank liabilities.
“He will say that a widespread guarantee was needed, but will question whether it should have been extended to all classes of bond investors in the bank,” according to the SBP.
“This part of the report looks set to reignite the debate about the government and regulator’s role in the run-up to the crisis, and when the guarantee was granted in September 2008.”
No doubt it will.
So we can, with reasonable confidence, expect the government to claim that the guarantee hasn’t cost the taxpayer a penny, since it’s never been called upon, that the banks are paying for it anyway, and that it created time and space to work out a viable strategy to fix the banks. Fine Gael, presumably, will once again demand the orderly wind-down of Anglo and reiterate its favoured ‘good bank’ solution as the recipe that should have been followed. Labour, no doubt, will remind us all that it was the only party in Leinster House that opposed the guarantee in the first place and yet again seek to portray its cynical populist posturing on the banks crisis as some sort of far-sighted wisdom. Most of all, there’s the opportunity for the opposition to light another fire under Brian Cowen’s tenure as Minister for Finance.
In other words, the politicians will throw insults and verbal missiles at one another for their own narrow political purposes, but then one could hardly expect them to do otherwise. It’s their best learned form of behaviour, and at times seems to be their only learned form of behaviour.
What may be more important to Irish society than politicians seeking to gut one another is if the inquiry ultimately ensures that the regulatory, political and policy failures that contributed to the cause of the initial crisis are not repeated.
Contrary to what one expects from the Governor of the Central Bank, though, it sppears that Mr. Honohan is optimistic about the future of our banking system. Over the past month, the Governor has made it clear that he believes the banking problem – with the exceptions of Anglo and Irish Nationwide – is largely fixed. He expects both Bank of Ireland and AIB to be free of dependence on the State by the end of this year, he recently told Bloomberg.
“The two big banks can achieve the capital targets with no significant further injection of state funds, depending on exactly how much they realize on disposals they are making,” he said
“ For Bank of Ireland, it is unambiguous. They have been able to get a rights issue underwritten and so they are raising the additional capital they need from the market.
….. In the case of AIB, a similar story, but not quite as clear cut.”
“That’s the two big banks, fixed by the end of the year. I think it’s quite good news,” Mr Honohan said “People may not fully internalize and appreciate that we’ve fixed the banks until they suck it and see. It may be some months before the [international] market fully realizes that this is working out.”
In a speech on May 11th last to the Small Firms Association, the Governor addressed the domestic implications of a recovery in the banks’ position, suggesting: “The recapitalization and restructuring of the banks will be accomplished by end year. They will be stable and secure, capable of resuming their role in providing financial services to the economy.”
Mr Honohan further told the SFA he would not waste purple prose on the likes of Anglo or Irish Nationwide, whose business conduct is likely to cost the Irish taxpayer in the region of €25bn. The only consolation, from his perspective, is that we know how much it’s going to cost us in the longterm.
“So that cloud over the State’s finances should be dispelled,” he later remarked to Bloomberg.
“It’s a heavy price to pay,” he added. “It’s a heavy burden. But I’m sure it’s a manageable burden in terms of the large-scale management of the state’s finances.”
Even if the long term costs of resolving the banks’ problem is, to borrow Mr. Honohan’s phrase, “a manageable burden”, that’s still not quite how it appears to the average taxpaying citizen.
The government and its advisors, including the Central Bank Governor, may be hoping that getting the banks somewhat back on track, plus a no-holds inquiry into how they came off the rails in the first place, will dampen public outrage and redirect our focus onto the potentially more lethal, and painful, problem of plugging the hole in the public finances including the necessity for a further €3bn in cuts and tax rises in December’s budget. In particular, they seem to want to separate the fiscal crisis from the banks’ crisis in the public mind. They will have to work hard on their lines to achieve that.
To prospective readers:
An earlier comment by ‘EWI’ has been deleted because it amounted to nothing more than a bizarre personal attack on myself. EWI can occassionally make some interesting points, i.e. when he chooses to engage with the subject matter of an article. It is unfortunate that all too often he adopts a ‘shoot the messenger’ approach instead. Gratuitous displays of bad manners are contrary to the rules of engagement on this site and will not be tolerated on any posts that I write. Whether directed against me personally, or indeed anyone else giving their opinion or seeking to add to the discussion, all such abusive comments will be deleted.
Veronica: I see where the veteran correspondent in Washington Helen Thomas was sacked over remarks about Israel. I had a letter published in the SBP recently but half of it was missing. I also contribute to another website where individuals insist on deleting contributions they do not like.
I had hoped the internet would be free of this curse. Beware of the slippery slope.
Eddie,
There is no ‘slippery slope’ here. All comments are welcome, but any comments that directly attack other people, are denigratory, deliberately misleading or defamatory in any way are not acceptable. Remember that internet blogs are subject to the same rules of libel as any other medium, as some blog sites have found out to their cost.
Far more important in my view, there is the normal human courtesy and respect that should be extended to any person however fundamentally one may be opposed to their views. That doesn’t rule out robust challenges, but to their views only, not seeking to personally denigrate them. For instance, I frequently disagree with your views on a range of issues and I am forthright in expressing that disagreement, but I have enough respect for myself to treat you with respect in any discussion. I think you would admit as much yourself.
I think Honohan’s report is cleverly written. At 160 pages he can say a lot and everyone can pluck their quotes — with the government having the “first mover” advantage (this appears to be the new buzz phrase from DoF).
Anyway, I find this section interesting (p135) –
Although it was not underpinned by specific analysis, the decision early on not to countenance the “failure” of any bank simplified subsequent decisions. This decision was not initiated by the CBFSAI, but was consistent with its view. However, it was an oversimplification which short-circuited decisions that deserved closer scrutiny. Under
the circumstances of the extraordinary international financial market environment of those weeks, it was an understandable position. But it could not be a permanent policy if severe moral hazard was to be avoided. And it was also conducive to downplaying the importance of developing an appropriate legal framework for a special bank resolution regime scheme.
“The “no failure” policy also took the question of optimal loss-sharing off the table. In contrast to most of the interventions by other countries, in which more or less complicated risk-sharing mechanisms of one sort or another were introduced, the blanket cover offered by the Irish guarantee pre-judged that all losses in any bank becoming insolvent during the guarantee period – beyond those absorbed by some of
the providers of capital – would fall on the State. Given the “no failure” policy, a guarantee with its costs were inevitable.
The inclusion of subordinated debt in the guarantee is not easy to defend against criticism. The arguments that were made in favour of this coverage seem weak: And it lacked precedents in other countries (although subordinated debt holders of some other banks since rescued abroad have in effect been made whole by the rescue method employed). Inclusion of this debt limited the range of loss-sharing resolution options in
subsequent months, and likely increased the potential share of the total losses borne by the State.
He never says who took the “no failure” decision.
There are some other issues which I will take to a post above.
P,
Yes indeed, but as you read on, Honohan qualifies his comments to arrive at the conclusion that there really was no other option at that time. Like you say, people will cherry pick to suit whatever bit of the report fits with their political agenda. I have a feeling though, that Honohan will set out his own stall, which will make it more difficult for them to do that.
I also think there is something interesting about the whole process as he lays it out: the people who had to make decisions could only do so on the best information available to them at the time and within that their choices were limited. Secondly, his account of what happened infers that what matters is how a country decides it’s going to come out of this – in our case, our government decided that it would not default. Since it equated a bank default with a sovereign default, (and Honohan suggests they may have had a point in this, though it should be subject to further analysis) then all the banks had to be saved. Once that initial decision is made then what follows are a series of tactical decisions within its parameters. We can all argue about the merits of one tactic over another , for example NAMA vs. the FG ‘good bank’ approach to dealing with toxic liabilities, but the overall objective remains the ‘no default’ position.
For the moment, I guess most of the reaction will be on trivial political points. I think Honohan has shown himself, though, to be worthy of his hire and his report lays the foundations well for the next stage of the examination of what went wrong irrespective of infighting among the politicians.
Well, Veronica has now, I’ve been informed, had her wings clipped by TPTB so that there’ll be no more of that.
So, I’ll return the warm fuzzy feelings with a simple question, one that’s occurred to number of people reading your weekly pro-FF articles here: as clearly a PR professional (from your longtime employment by BNFL) have you been renumerated for services provided to the present Government, or parties/individual members thereof?