September 9, 2013
Watching the bank bosses during the week reminds us all that the Irish banking crisis is still with us. The banking crisis started in 2000, not 2008 as is often stated, and is still crippling us. The Irish banking crisis began when the banks began to blow their own balance sheets on wild property lending. Every time they lent money for some developer or other to build a new shopping centre or a new development, they were destroying wealth, not creating it. But in the effervescence of the boom, this process of gradual bankruptcy was recognised by only a few people.
The destruction of wealth and the banking crisis began tentatively, but ultimately turned into frenzy as the banking herd copied each other. While much attention focuses rightly on the behaviour of Anglo Irish Bank, it did not act alone. If you want to get a handle on just how reckless the lending was, AIB and Bank of Ireland doubled their total loan books in three years. Bank of Ireland took more than a century to build a loan book of €63 billion and then, in three years from 2003 to 2006, it doubled it.
By 2008, it was all over. The damage had been done.
Back in 2003, when it was neither popular nor profitable, this column argued that, without dramatic remedial action, the coming property crash would impoverish us all and pointed out that the banks and bank lending, not supply and demand or a rising population or all the other nonsense spewed out, were the epicentre of the problem.
Fast-forward nearly a decade to this week and we listened to the bank bosses being evasive, indignant and, in some cases, haranguing politicians, despite the fact that none of the banks would be open if it weren’t for taxpayers’ money.
And it looks like they have once again shown that damning combination of arrogance and incompetence because, reading between the lines, it’s obvious they need more cash. Once again, they have underestimated the extent of their losses and, once again, they will expect someone else to cough up the cash.
Looking back over a ten-year history, the behaviour of the banks in Ireland has been nothing short of extraordinary.
In the period of 2000-2008, they behaved like pyromaniacs in a forest, playing with fire and laughing at anyone who warned of the dangers of a contagious inferno. Once the market peaked and reversed, the banking system’s implosion would be a financial forest fire that would engulf all around it – deposits, good businesses and people’s livelihoods would all be incinerated.
Once the fire caught hold and spread, the government – who should have been on top of this via the regulator and the central bank – had a choice, either to put it out using everything it could or to let the fire burn (let the banks go) and see what happened.
Anyone witnessing the evisceration today of Cypriot deposits, or the total collapse of economies in the 1930s, or during the Asian crisis, as a result of just letting banks go bust in an uncontrolled fashion, knows the authorities have to act to prevent a contagious bank run. There are many who argue we should have let them all go under, or that we could have isolated the bad banks and let others go. But they were all bad; every single Irish bank was bankrupt in 2008.
Those who started the fire continued to lie about the extent of the damage, and the firefighters – the regulators and central bankers – who were supposed to be in control sided with the pyromaniacs until it was far too late.
We know that the banks lied to the government about the extent of their losses in the panic of 2008 and only began to ‘fess up after they had Nama in place by 2009.
The bank guarantee and Nama were the consequences, not the causes, of the Irish banking crisis because, without a banking crisis caused by reckless bank lending, it’s clear no action would have been necessary.
The guarantee ought to have been in place only for two years at the most in order to prevent the bank run that was well under way. However, it was extended, apparently because, having lied about their true losses, the banks couldn’t keep going without an extended State insurance policy. As the losses mounted, the insurance policy itself bankrupted the insurer even though, by the time the troika walked in (November 2010), the original terms of the insurance policy had expired.
Once the IMF was here, the banks incompetently calculated how much fresh money they would need in the worst-case scenario. They emphasised that only in the worst-case scenario – if the economy continued to contract, and if defaults continued at a certain rate – would they need more capital. You may remember the line “the best capitalised banks in Europe” which was doing the rounds in 2011.
It transpires that not only were they not the best capitalised banks in Europe, but that they mightn’t have enough capital to deal with today’s mounting mortgage arrears. We can see that the ten years’ sorry history of the banks and the Irish state has been one of mendacity, incompetence, deceit and entitlement. Now, I realise that banker-baiting has become a type of national pastime, but I write as someone who was pointing this out when many of today’s most aggressive banker-baiters were actually cheerleading. What interests me is not vengeance or political point-scoring. What interests me is how has all this affected the Irish economy and our ability to compete in the world.
Last week, we received evidence of the deleterious impact the banking crisis is having on the Irish economy. Each year, the World Economic Forum publishes its global competitiveness index. Ireland was ranked 28th in the world. On most metrics, Ireland does well enough. For example, in primary education, where we have been making cuts in both general expenditure and in the conditions of younger teachers, Ireland ranks eighth in the world, just above the Netherlands. In contrast, when you examine banking, where no expense has been spared to keep the banks afloat, you see that under the indicator of “the soundness of the bank” out of 144 countries, Ireland ranks 141st out of 144.
This is the legacy of all that corporate high-fiving in the boom and it affects all parts of the economy because, when you look at the problems Irish businesses face as they try to grow, by far the biggest problem is access to financing.
No proper funding is a function of dysfunctional banks that are still broken, haven’t enough capital, and continue to operate as if they are part of the solution when they are still very much the problem – and the roots of this problem go back well over a decade.