30 years: Treasury & banking
Michael completes the series by considering the lessons of the crisis and the responses that were made as a result. He also provides his opinion on the actions of the ECB.
Michael completes the series by considering the lessons of the crisis and the responses that were made as a result. He also provides his opinion on the actions of the ECB.
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20 mins 22 secs
Ireland’s financial system suffered due to severe, underlying structural weaknesses. This involves factors such as, defiant bank supervision mixed with ineffective and slow regulatory responses. However, lessons can be learnt as well as protections put in place to prevent a future crisis from occurring.
Key learning objectives:
Discuss the different methods in preventing a future financial crisis.
Describe the responses made at the time and interpret if they were successful or not.
Evaluate the stance taken by the European Central Bank.
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Banks and the State are now seen as too closely tied and the failure of a bank will also bring down the state financially. To combat this:
Given the position Ireland is in, in-regards-to the Eurozone, the role of the National Central Bank is important. At the ECB-wide level, credit aggregates are in line whereas locally there is a divergence. The NCB must overlay ECB-wide actions and appropriate to local needs.
The illiquidity problem caused banks to stop lending. This killed the market bid for land and development assets. The result was a sharp fall in prices.The dramatically-worsening position at Anglo Irish Bank should have triggered a regulatory response considerably sooner. This did not happen and may be partly to blame for the crisis that engulfed all of the Irish banks in September 2008.
By the Government:
In response to the liquidity crisis, the Irish Government introduced a blanket guarantee on virtually all debts of the Irish banking system. This perhaps was the wrong decision as it was not a contagion risk to the wider international banking system.
By NAMA:
Nama was successful in the sense they crystallised the true scale of the problem. By removing the loans at the centre of the problem from the balance sheets, it brought a degree of certainty or finality to much of the problem.
However, their take-on of loans (£5-20million) did not proceed. This is perhaps another mistake as it left too much of a weight of legacy loans on the banks’ balance sheets to be dealt with later.
A lesson can be learnt in that a scheme to remove problem assets at fair long-term value is helpful in restoring order and ultimately helps position banks for a resumption of normal lending business.
Not to blame:
It would be wrong to single out the ECB as the sole cause. The local central banking system may have had a greater role.
They were to blame:
The ECB heavily pressed for blanket protection for senior debt holders in the banks. By doing so, a huge cost would be pushed onto the Irish state. The ECB would rather the State bare the brunt and instead moved to a greater focus on the protection of its own balance sheet. Similarly, in 2011, they pressed strongly for a short window for capital-raising in the hope that the State provided the whole amount.
The priority of the ECB was to reduce as quickly as possible and by as much as possible its credit exposure to the land. They acted like a very large creditor, not an international body seeking to restore stability and order. Also, the ECB wanted to maximise the capital injected into banks at the expense of the Irish taxpayer to bring sufficient stability and enable a resumption of market funding of banks.
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