Thursday 27 May 2010

The Honohan and Regling reports

Jim Stewart: There is considerable media coverage and speculation about the contents of the forthcoming Honohan Report on the role of the Central Bank, and the report by the Financial Regulator on the financial and economic crisis (See Simon Carswell, Irish Times 26/5/2010, Emmet Oliver, Irish Independent 25/5/2010, Ian Kehoe, Sunday Business Post 23/5/2010) David Clerkin and Cliff Taylor Sunday Business Post 23/5/2010).

In addition some of the key people involved in financial decision making have also expressed considerable interest in the findings - for example, Michael Somers (interview in the Sunday Independent (23/5/2010). Of the two reports, the Honohan Report is likely to be the more interesting, for example in understanding policy mistakes made by the Central Bank and the Financial Regulator.

It is also of interest that Michael Somers, in giving evidence to the Central Bank Governor (rather than the inquiry team), stated that he was not in any way involved in the decisions to give guarantees to the six covered institutions on 29th September 2008. Michael Somers is quoted as stating :- Patrick Honohan asked me to meet with his team of inquirers and I said I would meet with him, which I duly did. I think his main interest really was what was happening at the time of the guarantee. I said: 'I can't help you because I wasn't here'." (He does not appear to have had a Blackberry!) This statement appears to contradict the view of Eamon Gilmore (Dail Debate April 1) that the terms of reference of the inquiry excluded the government’s decision in respect of the guarantee.

Whether the guarantee is included or excluded from the scope of the inquiry is of great interest, because it is seen by some (for example, Morgan Kelly Irish Times 22/5/2010) as being disastrous for the stability of exchequer finances and any possible recovery. The guarantee helped the survival of all the covered institutions, but the issue is whether two of those institutions should not have been supported with a consequent reduction in the cost to the State. The ending of the guarantee gives an opportunity to revisit this decision. The guarantee also had a cost in terms of increasing the overall borrowing rate estimated at 0.15 -0.3% (Department of Finance Banking Statement Supplementary Documentation), recouped from the covered institutions via charges.

The decision to implement the guarantee may lie in an important Ecofin (Economic and Financial Affairs Council) decision one year earlier, that responsibility for managing any crisis effectively rested with national authorities (Ecofin meeting October 9, 2007). In late September 2008, following the Lehman collapse, a loss in confidence in banks raised the real possibility of bank runs. In response, individual countries competed for deposits via more and more generous insurance schemes. As Fonteyne et al state (available here) “Starting in early October 2008, EU member countries effectively raced one another to extend deposit and other bank guarantees”. Ireland was one of the first countries “out of the trap” to start this race, and this led to considerable criticism at the time (See for example, Charlie Weston, Irish Independent, October 1, 2008).

Fonteyne at al also note that bank failures “have been very rare in the EU and have usually been limited to small banks”. Restructuring via injections of public funds has been common, and exit via arranged mergers. This was attempted in the case of Anglo Irish and Irish Nationwide. The rarity of decisions to allow banks to fail within the EU is also likely to have influenced decision-making in implementing the guarantee.

The ending of the bank guarantee provides* an opportunity to ‘close’ both Anglo Irish and Irish Nationwide by withdrawing State support, which is very likely to cause them to move into liquidation. Alternative options between liquidation and continuing State support are also possible and deserve extensive analysis. In any event the liquidation of both institutions now, would not (unfortunately) remove all liabilities for the Irish State, central bank deposits would have to be repaid, ordinary depositors and perhaps commercial bank depositors (should there be any) are likely to be repaid in full.

Given the international nature of Anglo Irish’s assets and liabilities, allowing this bank to fail in view of the absence of an EU-wide special resolution regime is likely to be resisted by EU bodies such as the ECB.

The forthcoming reports are important. Given the public interest nature of the issues involved, including as much detail as possible would add enormously to their value.


* The guarantee has been extended for certain debt instruments and the main scheme may be extended until December according to Cliff Taylor, Sunday Business post 23/5/2010).

3 comments:

Anonymous said...

Given the cacophony of trenchant stridency that one has come to associate with utterances from the ivory tower, it is refreshing to read this reasoned and informed ivory tower contribution.

Jim Stewart makes some very useful points in relation to the bank guarantee and in particular his highlighting of some external factors that may have influenced the guarantee decision is very welcome. One notable feature of the bombastic style critique of the guarantee decision has been the essentially parochial context in which such critiques have been positioned.

If Irish commentators could for a moment elevate themselves from their narrow closed parochial mindsets and place the guarantee in the context of the state of the global financial system in late September, 2008, then they might be able to appreciate that at the time, the guarantee was not only necessary to save the Irish banking system but also the global financial system. At that time the global financial system was tottering at the precipice. There can be no doubt that if the bank guarantee had not been instituted not only would the Irish banking system have collapsed but that collapse would have been coup de grace for the global financial system.

So in effect that decision by Cowen and Lenihan at the end of September 2008 had supremely beneficial global as well as local implications. On the other hand a decision to close down some of the Irish financial institutions at that time would have had not only dire local but also dire global consequences. Thankfully from the perspective of Irish taxpayers, the government of the day chose not to nationalize any of the financial institutions or Irish taxpayers would have been burdened with an enormous cost as they are now discovering with the belated nationalization of Anglo Irish Bank. Further the wisdom of not nationalizing any of the financial institutions at the time of the guarantee decision has been amply demonstrated by the complete failure of the subsequent nationalization of Anglo Irish Bank to resolve the banking crisis.

It is to be hoped that in the forthcoming Honohan Report and the report by the Financial Regulator on the financial and economic crisis that the authors will eschew a narrow parochial approach and consider the crisis and the respomse to it within the appropriate international and global context.

Mick said...

'...the guarantee was not only necessary to save the Irish banking system but also the global financial system.'

I am afraid I am not entirely convinced of this. Compare, say, a bank of the importance of RBS with a balance sheet of £1900bn to a bank such as Anglo-Irish with a balance sheet of €100bn.

RBS has a very large international capital wing with large positions taken in global financial markets. On the other hand Anglo-Irish merely loaned into the Irish, British and American property markets. Nothing systemic there as far as I can see.

Many of the academic commentators have questioned the inclusion of Irish Nationwide and Anglo-Irish bank in the guarantee. Is it possible that a run on the commercial deposits held in Anglo-Irish could negatively impacted the global financial system?

I would surmise it would have no more effect on the global financial system than the multiple state banks that FDIC have closed up in the US.

http://www.fdic.gov/bank/individual/failed/banklist.html

Unknown said...

By letting Lehman Brothers collapse the USA was able to offload a sovereign banking crisis onto the global community. The geniuses of Ireland's political elite did the opposite. We would have done better to weather the collapse of Anglo. This would have forced us to face up to the inevitable; the need to replace our current political economy with one that is based on equitable and sustainable social relations. This would have almost certainly precipitated us abandoning the Euro-No bad thing-its about time we grew up and discarded the TINA myth and threw out this increasingly poisoned Linus blanket. http://marxisthumanistinitiative.org/2010/05/17/appearance-and-essence-neoliberalism-financialization-and-the-underlying-crisis-of-capitalist-production/