Post-2008 Irish banking crisis
The post-2008 Irish banking crisis led to a number of financial institutions being bailed out by the government, and subsequently led to a number of unexpected revelations about the private affairs of some banks.
- 1 Background
- 2 State responses
- 3 Anglo Irish Bank's irregularities
- 4 Resignation of the Financial Regulator
- 5 Warning signs ignored and suppressed
- 6 Recapitalisations of AIB and Bank of Ireland
- 7 Economic Adjustment Programme for Ireland
- 8 Oireachtas Banking Inquiry
- 9 See also
- 10 References
- 11 External links
In the 1995–2007Celtic Tiger period of growth, development capital was raised in the interbank market, typically on a three-month basis, but with repayment not expected until two or three years later. Inadequate and/or lax supervision of the Irish banking system had allowed excessive borrowing by the Irish Banks on the corporate and international money markets. Much of the capital invested in Irish banks was from abroad with 80% from the UK, 13% from the US, 5% from off-shore funding and only 2% of the total Irish bank funding came from the eurozone in 2008.
German banks are often claimed as the source of Irish bank funding, and in 2010, for example, the Bank for International Settlements recorded between US$186.4 Billion and $208.3 Billion in total exposure to Ireland with $57.8 billion in exposure to Irish banks These figures for the exposure of German banks to "Irish" banks, however, relate almost in their entirety to their exposure to their own large subsidiaries in Dublin's International Financial Services Centre, and are irrelevant to Ireland's domestic banks and banking crisis.
The heavy borrowing abroad by Irish banks reflected the enormous increase in their lending into the Irish property market, a lending area which since 1996 seemed to be able to provide an endless flow of profitable lending opportunities as the Irish public relentlessly bought and sold property from each other in Ireland (and eventually in many other countries). This, in turn, led to a massive increase in the price of Irish property assets. The freezing-up of the world's interbank market during the financial crisis of 2007–2008 caused two problems for Irish Banks. Firstly, with no new money available to borrow, withdrawal of deposits caused a liquidity problem. In other words, there was no cash available to honour withdrawal requests. A liquidity problem on its own is usually manageable through Central Bank funding. However, the second problem was solvency and this was much more serious. The lack of new money meant no new loans which meant no new property deals. No new property purchases both exposed fragile cash-flows of developers and highlighted the stratospheric valuations. With the value of most of their assets (loans) declining in line with the property market, the liabilities (deposits) of the six Irish domestic banks were now considerably greater than their assets. Insolvency loomed and Irish Banks would need a major cash injections (recapitalisation) to stay open.
On 29 September 2008 Minister for Finance Brian Lenihan agreed to issue a broad state guarantee of Irish banks for one year, with the intention of recapitalising them to enable them to continue to lend into the Irish economy. The decision was highly contentious and required a sharp recovery of the world economy that did not occur, but the guarantees were renewed in 2009, in 2010, and in 2011. Government interventions would cover liabilities existing from 30 September 2008 or at any time thereafter up to and including 29 September 2010. This guarantee was in respect of all retail and corporate deposits (to the extent not covered by existing deposit protection schemes in the State or any other jurisdiction), interbank deposits, senior unsecured debt, asset covered securities, and dated subordinated debt. On October 20, 2008, the Governing Council of the European Central Bank released their recommendations on government guarantees for bank debt which included the aim of "addressing the funding problems of liquidity-constrained solvent banks". Recapitalisation was carried out at Ireland's two largest banks, Allied Irish Bank (AIB) and Bank of Ireland (BoI), with" bailouts" (enforced loans) of €3.5 billion confirmed for each bank on 11 February 2009. On 15 February 2009 Fine Gael leader Enda Kenny, speaking in County Cork, asked the entire board of the Central Bank of Ireland's Financial Regulation section to resign.
In late 2009 the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 came into effect  Amidst the crisis, the ruling Fianna Fáil party fell to fourth place in an opinion poll conducted by The Irish Times, placing behind Fine Gael, Labour and Sinn Féin, putting Labour and Sinn Féin ahead of Fianna Fáil for the first time in Irish history. On the evening of 21 November 2010, the then Taoiseach Brian Cowen confirmed that Ireland had formally requested financial support from the European Union's European Financial Stability Facility and the International Monetary Fund (IMF), a request which was welcomed by the European Central Bank and EU finance ministers.
In November 2011 the Credit Institutions (Eligible Liabilities Guarantee) Scheme was extended by the Fine Gael - Labour coalition government to December 31, 2012, subject to European Union approval of state aid. This scheme guarantees specific issuances of short- and long-term eligible bank liabilities, including on-demand and term deposits, senior unsecured certificates of deposit, senior unsecured commercial paper, senior unsecured bonds and notes and certain other senior unsecured debt whose maturity could range from overnight to five years.
In March 2011, Central Bank Governor, Patrick Honohan described the crisis as "one of the most expensive banking crises in world history". In September 2011 he said that the banks were now financially sound.
Anglo Irish Bank's irregularities
The December 2008 hidden loans controversy within Anglo Irish Bank led to the resignations of three executives, including chief executive Seán FitzPatrick. A mysterious "Golden Circle" of ten businessmen are being investigated over shares they purchased in Anglo Irish Bank in 2008.
Anglo Irish was nationalised on January 20, 2009, when the Irish government determined that recapitalisation would not be enough to save the bank. Since then it has emerged that Anglo Irish falsified its accounts before it was nationalised, with circular transactions between it and another bank, Permanent TSB, being uncovered. Denis Casey, the chief executive of Irish Life and Permanent, the company that owns Permanent TSB, resigned in the aftermath of this revelation.
Emergency legislation to nationalise Anglo Irish Bank was voted through Dáil Éireann and passed through Seanad Éireann without a vote on 20 January 2009. President Mary McAleese then signed the bill at Áras an Uachtaráin the following day, confirming the bank's nationalisation.
Irish Life and Permanent interference
Following a revelation that Government appointed directors in Anglo Irish Bank and the Financial Regulator were investigating a deposit of billions of euros into the institution, Irish Life and Permanent admitted on 10 February 2009 that it had provided what it called "exceptional support" to Anglo during September 2008. Irish Life and Permanent confirmed it had made the deposit following the introduction of the Government Guarantee Scheme, which was set up to provide each bank under its jurisdiction with a limited supply of credit in the event of a collapse. However this volatility in deposits in Anglo Irish Bank has been stated as one of the reasons why the Government moved to nationalise it. The Financial Regulator has stated that the transactions which took place between the two banks are "unacceptable" and the chief executive of Irish Life and Permanent, Denis Casey, has resigned his position. However, in a press release dated 13 February 2009, the Financial Regulator revealed that "it encouraged Irish banks to work together where necessary so as to continue to use normal inter-bank funding arrangements for liquidity purposes."
Irish Nationwide involvement
Resignation of the Financial Regulator
Following reports of a communication breakdown at the office of the Financial Services Regulatory Authority, the Chief Executive of the Financial Regulator Patrick Neary on 9 January 2009 announced his decision to retire as of 31 January that year. Neary's perceived weakness in dealing with Anglo Irish Bank received heavy criticism, with Green Party Senator Dan Boyle calling for a strengthening of powers within the organisation and saying that confidence in Irish financial services had been eroded by events of the previous six months. Financial observers indicated that a replacement for Neary might have to be sought in the United States or United Kingdom. Following the announcement, reports emerged which indicated that the Financial Regulator may have known of the Anglo loans for eight years prior to their revelation.
Warning signs ignored and suppressed
The crisis began through a failure by banks, the government, news organisations and the corporate sector to heed signs that the economy was overheating. In June 2005 The Economist mentioned Ireland on a list of countries with recent property price inflation; Ireland's price inflation of 192% in 1997–2005 was the highest on its list. In December 2005 Professor Brian Lucey felt that prices would continue at a "modest but still significant pace".
Morgan Kelly, a professor of economics at University College Dublin, was particularly concerned about the real estate bubble which was reaching its climax in the summer of 2006. He noted that a fifth of Irish workers were in the construction industry and that the average price of a home in Dublin had increased 1200% from 1994 to 2006. He published a news article in the Irish Times, asserting that Irish real estate prices could possibly fall 40 – 50%. His second article was rejected by the Irish Independent and lingered unpublished at The Sunday Business Post until the Irish Times agreed to run it in September 2007. Kelly predicted the collapse of Irish banks, which had fuelled the rapid rise of real estate by increasingly lowering their lending standards and relying more on 3-month interbank loans than on their deposit base..
Kelly's prognostications caused a minor controversy but mostly went unnoticed until March 2008, when Philip Ingram, an analyst at Merrill Lynch, wrote a scathing report about the real estate bubble, focusing on the three major Irish banks most responsible for the crisis, Anglo Irish, Bank of Ireland, and AIB. Merrill Lynch had major, lucrative underwriting relationships with those banks, and a senior executive at Anglo Irish, Matt Moran, who had registered displeasure with Kelly over his articles, among others, did the same to Merrill. Merrill in turn retracted the report within hours, and fired Ingram by yearend.
From May 2007 the banks' share prices on the Irish stock market declined markedly, and they had halved by May 2008. This had an inevitable effect on their capital adequacy ratios and therefore their ability to lend ever-higher amounts that were necessary to support property prices. In April 2008 Professor Cormac Ó Gráda noted that: "property prices [are] suffering a meltdown likely to last for some years", yet the bulk of new bank lending since 2000 was based on mortgages secured on property.
On 7 May 2008 Brian Lenihan, Jnr was appointed Minister for Finance. Formerly a lawyer and minister, he had no experience of finance, and opponents deplored that he would have to "learn on the job". On 14 May 2008 he remarked that: ".. the risks that we identified in the last Budget have materialised, risks such as recent developments in the international financial markets, further appreciation of the euro against the dollar and sterling, lower international growth and domestically a sharper slowdown in housing". Ignoring the property bubble, he concluded that: ".. we are well placed to absorb the housing adjustments and external ‘shocks’ so that our medium-term prospects will continue to be favourable. Our public finances are sound, with one of the lowest levels of debt in the euro area. Our markets are flexible allowing us to respond efficiently to adverse developments. We have a dynamic and well-educated labour force. We have a pro-business outward looking society. The tax burden on both labour and capital is low. Not many countries anywhere in the world are facing the present global economic difficulties with such advantages."
Recapitalisations of AIB and Bank of Ireland
Having guaranteed the six main Irish banks in September 2008, the Minister for Finance, Brian Lenihan announced on 21 December 2008 that he would seek to recapitalise Ireland's three main banks, Allied Irish Bank (AIB), Bank of Ireland (BoI) and Anglo Irish Bank. Under the plan the Government would take €2 billion in preference shares in each of Bank of Ireland and Allied Irish Bank and €1.5 billion in preference shares in Anglo Irish Bank, giving it a 75% control of the latter.
On 11 February 2009, Lenihan announced the provision of two €3.5 billion bailouts to AIB and BoI as part of his government's recapitalisation scheme. The plan would also see the Minister appoint 25% of the directors at each bank, whilst the banks had agreed to provide a 30% increase in mortgages for first time buyers and a 10% increase in loans to small and medium businesses as well as to hold-off on repossessions of mortgage holders for twelve months after they fall into arrears. The salaries of senior bank executives will be frozen and they will not receive performance bonuses. However, it was found in 2013 that payrates at Irish banks increased between 2008 and 2012. Richard Bruton of the then opposition party Fine Gael, responded by calling the recapitalisation plan a "€7 billion gamble on the wrong horse".
Bank of Ireland chief executive Brian Goggin announced his retirement in January 2009, confessing to RTÉ that his bank has made bad lending decisions. Asked about his expected salary for 2009, Goggin admitted that it would be “less than €2 million”. Goggin had earned approximately €3 million in the year to 31 March 2008. He was replaced as CEO by Richie Boucher whose appointment was announced on 25 February.
Economic Adjustment Programme for Ireland
||It has been suggested that portions of this section be moved into Economic Adjustment Programme for Ireland. (Discuss)|
At the end of September 2010 the 2008 guarantee covering the six bailed out banks expired. Contrary to popular belief, it was never renewed - what was renewed at the end of the year was the more limited Eligible Liabilities Guarantee. Just before the expiry of the guarantee, the covered banks faced a huge set of bond repayments - a result of most lenders only lending to the covered banks within the period of the original blanket guarantee - which resulted in a rapid and massive resort to ECB financing. Government ownership, and thus responsibility, for the Irish domestic bank sector reached a high under the guarantee, with Anglo nationalised early in 2009, and AIB nationalised at the end of the guarantee. These proved in the long run to be the two most expensive banks to recapitalise, with Anglo accounting for €34.7 billion and AIB €20.7 billion of the bank bailout total of €62.8 billion (55% and 33% respectively). Much (€46.3 billion, or 74%) of the bank bailout was in fact completed by October 2010, but at the time the extent of any further recapitalisations were not known, and the nationalisations committed the government either to go on to cover whatever was needed or face the failure of the banks despite the amount already committed.
By October Irish sovereign bond yields were above 7%, making further market borrowing unrealistic at a time when the government deficit was running at €16.7 billion. Although the government initially denied that there were any problems, and cited themselves as "fully funded well into 2011", in November 2010 the government had to seek a €67.5 billion "bailout" from the EU, other European countries (via the European Financial Stability Facility fund  and bilateral loans) and the IMF as part of an €85 billion 'programme'. The Irish State assigned €17.5 billion to this 'bailout' an amount that was equal to the Total Discretionary Portfolio of the National Pensions Reserve Fund. The initial interest rates stipulated for the bailout loans were onerous, coming in at around 6% over all the lenders - although these were rapidly adjusted to well below market rates (averaging somewhere around 3% across all lenders). The severity of these initially proposed rates left a lingering shock.
While it is generally assumed that EU/IMF bailout was mainly for the banks, this was not ever the intention, and not reflected in the facts. The original bailout agreement marked a portion of the loaned money for any bank recapitalisations - again, this reflects the uncertainty over whether the PCAR stress tests in early 2011 would reveal further large funding needs. However, the Irish government used none of the borrowed money for bank recapitalisation, at least directly. The close match between the amount of the EU/IMF loans (€67.5 billion) and the bank bailouts (€62.8 billion, but often cited as €64.5 billion) may foster this assumption. In fact, the bank bailout was funded through a combination of NPRF cash and promissory notes - the former required no borrowing, being cash to hand, while the latter was a promise to pay at a later date, which required no immediate borrowing. While the promissory notes were recorded on the national debt - because they would eventually require payment, and were thus a liability - they did not involve any expenditure at the time. The further recapitalisations undertaken following the PCAR stress tests in early 2011, amounting to €16.5 billion or 27% of the total bank costs, were met from a combination of Exchequer cash and NPRF cash, with the cost of the recapitalisations defrayed by some €16 billion in haircuts on junior bondholders.
While the government deficit was financed by the EU/IMF loans during the period of high market rates, the Irish banks also continued to be largely locked out of debt markets, and their liquidity was provided by the ECB and Central bank of Ireland. By August 2011 total liquidity funding for the six banks by the ECB and the Irish Central Bank came to about €150 billion; the largest and healthiest of the six, Bank of Ireland, then had a market capitalisation of just €2.86 billion.
On 15 December 2013, Ireland successfully exited the bailout programme, with market bond rates at a historic low. In August 2014 Ireland was considering early repayment of some of the outstanding €22.5 billion in IMF programme loans which would save it several hundred million euro in surcharges. In December 2014, Ireland's debt management body, the NTMA, repaid €9 billion in IMF loans, by borrowing that €9 billion at cheaper rates.
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