Question

What were causes, costs, resolution methods and regulatory lessons learnt from 2008 Irish Banking Crisis

Answer 1

Causes of crash:

1. The Irish economy was mainly supported with real estate and construction since 2000. So Irish bank provided more loan to construction companies and for development.

2. The bank loan interest rates were low and government provided corporate tax rates at low margin.

3. Construction made 25% of the county's GDP. Also this was the largest employment providing sector in the country.

4. When recession hit in 2008, the developers and individuals couldn't repay their loan amount and bank got collapsed.

Costs:

The government was advised in 2008 it would cost €16.4 billion at most to rescue the State’s banks, a quarter of the eventual €64 billion bill for bailing out the financial system

Methods of resolution.

The government has taken a wide range of measures to tackle the crisis over the past 3 years. Larger bad property loans have been transferred to a government controlled “bad bank”, NAMA, and the associated heavy losses fully recognised by the banks. NAMA needs to focus on maximising tax payer returns from disposing of this asset portfolio. The banking system was recapitalised in mid 2011 following stringent bank “stress tests”, which proved to be a crucial turning point in the crisis by helping to draw a line under losses. Restructuring of the domestic banking system around two core pillar banks is underway but the domestic banking system is still too large. Selling down the banks’ large portfolio of foreign assets will help to downsize the banks. It will assist in reducing reliance on Eurosystem liquidity while minimising the squeeze on domestic credit. As confidence in the financial system is regained, the authorities should further restrict the government guarantee of bank liabilities. Revamped bank regulation and supervision should utilise a wider set of indicators and rules beyond standard capital ratios and pay greater attention to macro-financial linkage