Banking Reports

June 16, 2010

Preliminary Report into Ireland’s Banking Crisis

Regling Watson Report available here

Some quotes:

“But also, at the heart of the crisis in some of the worst-affected countries lay problems of a quite different order. As noted above, some banks and other financial institutions, riding on the back of a generalised property boom, engaged in lending practices that were simply dangerous in an oldfashioned

“These were practices that did not require special supervisory imagination or moral courage to penalise. They were noted above in terms of serious failures of bank management and governance. The failure of supervisors to act strongly against such practices is much harder to understand, and is not much mitigated by the more broadly shared issues of supervisory culture cited above.”

“d. Financial stability analysis

Once a financial boom took off in any country, often triggered by genuinely positive local events, the combination of policy and market developments described above was something of an infernal machine in terms of financial stability vulnerabilities. The mutually-reinforcing nature of the risks was powerful.

First, the global macroeconomic and financial setting was easy for a deceptively long period.

Second, booming economies in the euro area also experienced monetary conditions that (by the very nature of monetary union) were not matched to their cyclical situation, and the liquidity available to them through cross-border funding possibilities expanded.

Third, fiscal revenues were boosted to an unusual (and temporary) degree by asset price and consumption booms, so the underlying stance of policy was mismeasured and was easier than intended – which in some cases compounded the problem of a fiscal policy that was lax even on conventional measures.

Fourth, many banks – unsurprisingly, from a historical perspective – responded to these euphoric conditions by expanding their assets, financed by cross-border borrowing from other less buoyant economies.  And in a search for yield amid very liquid markets they also plunged into riskier property assets and/or securitised claims that were hard to value and turned out to be very risky indeed.

Fifth, rating agencies, the custodians of security assessment, dropped their guard, at best.

Sixth, supervisors did not know what to make of the easy macro setting; and some were in the process of implementing less “intrusive” approaches to supervision.”

“A long period of high growth attracted a large number of immigrants for the first time in Irish history and resulted in the highest population growth – by far – of all EU member states with positive demand and supply effects.”

” Wages and competitiveness

Wage settlements accelerated markedly from the late 90s, in absolute and in relative terms. The “trilateral” wage agreements continued but became less relevant as workers negotiated supplementary wage increases against the background of full employment and an overheating economy. Compensation per employee, which had grown more or less in line with the euro area average until 1996, increased at two to three times the euro area average from 1997 to 2008. In nominal terms, annual gross wages in Ireland in 2007 were the highest in the euro area except Luxembourg. Ireland had also the highest price level in the euro area according to Eurostat statistics. Competitiveness deteriorated significantly. From 1999 to 2008, Ireland’s real effective exchange rate increased more than that of any other country in the euro area.”

“In Ireland, however, an imprudent expansion of bank lending, accompanied by an unwise policy on tax exemptions, resulted in this natural economic cycle becoming much more extreme than should have ever have been the case. The loss of competitiveness went much too far; and then the pro-cyclical swings in fiscal policy and the banking system, once the cycle turned, were bound to cause a sharp slowdown. This process was already underway when it was exacerbated by the savageness of the Lehman Bros shock.”

“Growth rates of public expenditures also accelerated to the highest pace among OECD countries (see below). The share of the construction sector in the economy became excessive; residential investment as a percentage of national output reached nearly 13 per cent in 2006, double its longtermaverage, and the share of employment in construction as percent of total employment also doubled from the 1990s to 2007. Analysis by the OECD indicates that Ireland was the most overheated of all advanced economies. Consequently, Ireland lost market shares in international trade (even compared to other advanced economies), the current account surpluses of the balance of payments shrank and turned negative from 2000 onward.”

Government spent too much and relied on procyclical taxation policies…..This combined with incompetent management of our banking system created the perfect bubble.

“The conclusion is that overall fiscal policies were pro-cyclical during most years up to, and including particularly, 2007 thus adding markedly to the overheating of the economy. This was the result of both public expenditure and revenue developments. The Irish public expenditure-to-GDP ratio increased during the years preceding the crisis although it remained low compared to the majority of EU countries. Expenditure increases were particularly marked in 2006 and 2007. Current expenditures, which had not kept pace with nominal GDP growth in the 1990s, grew faster than nominal GDP every year from 2001 to the crisis. In addition, from 2001 to 2007, ex-post growth in current expenditure was always higher than budgeted every year except one.”

Again, bad management of the economy………….

“Public sector pay and the growing size of the civil service contributed particularly strongly to the growth in current expenditure. The number of staff in the Irish public sector grew by 15.5 percent from 2001 to 2008 according to OECD statistics.”

In a normal business, given the losses involved including the imposition of possibly in excess of €22 bn losses to be poured into Anglo, given the glaring criticism of fiscal policy and mismanagement above, one would expect the MD to resign.


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