Thursday 11 February 2010

Basel III, pensions and the recapitalisation of Irish banks

An Saoi: Wednesday’s Financial Times had a very interesting article on proposed changes in banking rules under Basel III. Sensibly, the Bank of International Settlements is proposing that pension deficits should be deducted when calculating net Tier One capital. The pension obligations are long-term liabilities and should of course be deducted from core assets, as they are a core liability.

British Banks are up in arms over the proposal as many have huge deficits. What is the position of the Irish banks?

Bank of Ireland had a deficit of €1,478M at 31st March 2009 and Allied Irish Banks admitted to a deficit €1,263M at 30th June 2009. It appears that these two banks will require perhaps a further €3,000M, on top of current estimates, which the Government and the Governor of the Central Bank has glossed over to date. Certainly the failure of Dr. Honohan to bring the BIS’s proposal to the attention of the Irish public in his utterances about recapitalisation raises many questions in relation to his impartiality.

This additional cost to ensure that the pensions of the fat cats who got us into this trouble are secured is surely one step too far?

5 comments:

Joseph said...

bybye pension schemes then

Joseph Morgan said...

Sorry - I should have said "Bybye pension schemes for anyone but directors and senior management then."

Rory O'Farrell said...

I think such proposals are mere tinkering and that we need a total overhaul of the banking system.

To prevent banks being 'too big to fail' and prevent risky banks being of 'systemic importance' I would like a total segregation.

In the past we had building societies for mortgages, retail banks for day to day purposes, and banks like ACC and ICC that were directed at specific sectors. I would like a formalised situation such as this.

As an example, suppose banks for property development were not involved in retail banking. Then there would have been no question that Anglo was not of systemic importance. Anglo could then have been allowed to fail, just as companies like Waterford Crystal were (even though Waterford Crystal probably had far more potential than Anglo). People who deposit money with a property development bank would not be insured by the government, so such deposits would in practice be similar to putting your money in a property investment fund, with all the risks and rewards that go with it.

However, the government will never act on regulation unless forced to by the EU.

Anonymous said...

@An Saoi
"Certainly the failure of Dr. Honohan to bring the BIS’s proposal to the attention of the Irish public in his utterances about recapitalisation raises many questions in relation to his impartiality."
The important thing to remember about Professor Honohan is that he is working in the middle of a failed Irish establishment. With the best will in the world he could do, in Irish establishment terms, a superb, top quality job.
But Irish establishment standards are so low that this will be an utter failure of the public. He could produce a report on the Irish banking failure, utterly failing to hold members of the government personally to account, and not dealing with their role in the bank guarantee, as their terms of reference say. However, it will be hailed by government, media and most of the opposition as "hard hitting". The establishment will hail him, so long as his report pulls no punches on the failures of "systems", "structures", the regulators "culture" and the regulators themselves, but stays away from politicians (especially serving ones), the cabinet and serving civil servants.

"This additional cost to ensure that the pensions of the fat cats who got us into this trouble are secured is surely one step too far?"

Honohan did advise a close confidante of Minister Lenihan, FG's Garret Fitzgerald. I would say he has no intention of tackling senior politicians, past or former, of our governments since 1997. But to be fair to him I think he will hit out at senior bankers. As I say he is establishment but unlike the current government I believe he has a sense of fairness. Also, and unlike our current government, he still has a reputation for competence worth protecting.

An Saoi said...

The role of the Bank of International Settlements in this case is to set internationally acceptable standards. These rules are on their way. The ECB will happily support the new rules because it will ensure better regulation.

The existing holes in pension schemes will have to be filled without delay - there is no way to walk away from these historical liabilities. The only way this is going to happen in Ireland is by way of the State subscribing for shares.

Dr. Honohan will be seen in due course as part of the problem. He is just one more right wing economist, who perhaps favours a higher level of regulation than many of his fellows, but will blindly follow the same policies. Any one who doubts this should read his speech earlier this week in Trinity College, available on http://www.centralbank.ie