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Post-2008 Irish banking crisis

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Title: Post-2008 Irish banking crisis  
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Post-2008 Irish banking crisis

Sticker on van window in Dublin reacts to banking crisis

The 2008–14 Irish banking crisis is a crisis in Ireland which led to a number of financial institutions requiring government assistance, and subsequently led to a number of unexpected revelations about the private affairs of some banks.

Build-up to the crisis

In the 1995–2006 Celtic 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.[1] 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.[2] 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 euro zone in 2008. At the end of the third quarter of 2010, German banks had between US$186.4 Billion[3] and $208.3 Billion in total exposure to Ireland with $57.8 billion in exposure to Irish banks[4][5] Most of this borrowing was re-cycled by the banks into property loans. This, in turn, led to a massive increase in the price of Irish property assets.[6] 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.[7]

State responses

Government interventions started with a guarantee in late September 2008[7] that covered 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.[8] 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".[9] Recapitalisation was carried out at Ireland's two largest banks, Allied Irish Bank (AIB) and Bank of Ireland (BoI), with bailouts of €3.5 billion confirmed for each bank on 11 February 2009.[10] 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.[11]

In late 2009 the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 came into effect [12] Amidst the crisis, the ruling Fianna Fáil party fell to fourth place in an opinion poll conducted by The Irish Times,[13] placing behind Fine Gael, Labour and Sinn Féin, putting Labour and Sinn Féin ahead of Fianna Fáil for the first time in Irish history.[14] 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),[15] a request which was welcomed by the European Central Bank and EU finance ministers.[16]

In November 2011 the Credit Institutions (Eligible Liabilities Guarantee) Scheme was extended by the Fine Gael - Labour coalition government to December 31, 2012,[17] 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".[18] In September 2011 he said that the banks were now financially sound.[19]

Anglo Irish Bank's irregularities

Joe Higgins, MEP speaking outside Anglo Irish Bank during a protest against the bank bailout in 2010

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.[20] 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.[21] President Mary McAleese then signed the bill at Áras an Uachtaráin the following day, confirming the bank's nationalisation.[22]

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 euro 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.[23] 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.[23] The Financial Regulator has stated that the transactions which took place between the two banks are "unacceptable"[24] and the chief executive of Irish Life and Permanent, Denis Casey, has resigned his position.[25] 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."[26]

Irish Nationwide involvement

On the evening of 17 February 2009, the Chairman of the building society Irish Nationwide, Dr Michael Walsh, resigned his position.[27]

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 United States or United Kingdom.[29] 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.[30]

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.[31] 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.[32]

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.[33]

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".[34] 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."[35]

Recapitalisations of AIB and Bank of Ireland

Protestors outside Anglo Irish Bank during protests against the bank bailout in April 2010

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.[36] 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.[37][38]

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.[39] The salaries of senior bank executives will be frozen and they will not receive performance bonuses.[39] However, it was found in 2013 that payrates at Irish banks increased between 2008 and 2012.[40] Richard Bruton of the then opposition party Fine Gael, responded by calling the recapitalisation plan a "€7 billion gamble on the wrong horse".[39]

Bank of Ireland chief executive Brian Goggin announced his retirement in January 2009,[41] confessing to RTÉ that his bank has made bad lending decisions.[42] Asked about his expected salary for 2009, Goggin admitted that it would be “less than €2 million”.[43] Goggin had earned approximately €3 million in the year to 31 March 2008.[43] He was replaced as CEO by Richie Boucher whose appointment was announced on 25 February.[41]

EU-IMF bailout

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.[44] 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.[45] By October Irish sovereign bond yields were above 7%, making further market borrowing unrealistic.[46] 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 [47] 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.[48] 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.[49]

By August 2011 total funding for the six banks by the ECB and the Irish Central Bank came to about €150 billion; the largest of the six, Bank of Ireland, then had a market capitalisation of just €2.86 billion.[50]

In April 2012, it was reported that the Irish government had paid one and a half billion euro to unsecured bank bondholders.[51] An additional €1 billion payment was made in October of the same year.[52]

On 15 December 2013, Ireland successfully exited the bailout programme. The country itself however maintained a loan of €22.5 billion to the IMF. In August 2014 Ireland was considering repaying €15 billion early which would save it €375 million in surcharges.

See also


  1. ^ 09 March 2012 (2012-03-09). "Dr Alan Ahearne, article in Irish Independent, 12 March 2012". Retrieved 2013-08-16. 
  2. ^ "'"Europe ‘had a role in bank crisis. The Irish Examiner. 9 March 2013. 
  3. ^ "Bank for International Settlements Quarterly Review December 2010. International banking and financial market developments".  
  4. ^ "Dublin's debt burden reflects bad policy at the euro-zone level too.".  
  5. ^ "'"How much European, particularly German, money was in the Irish economy when the music stopped?. The Irish Times. 27 March 2013. 
  6. ^ "Financial Statistics Summary Chart Pack" (PDF). Central Bank of Ireland. 12 March 2013. 
  7. ^ a b Credit Institutions (Financial Support) Act 2008 Act of the Irish Parliament.
  8. ^ Credit Institutions (Financial Support) Scheme 2008 (S.I. No. 411/2008). Statutory Instrument of the Government of Ireland.
  9. ^ "Recommendations of the Governing Council of the European Central Bank on government guarantees for bank debt". European Central Bank. 20 October 2008. 
  10. ^ "Recapitalisation of failed banks – some lessons from the Irish experience". Bank for International Settlements. 7 September 2012. 
  11. ^ "Kenny wants Regulator board to resign". Raidió Teilifís Éireann. 15 February 2009. Archived from the original on 17 February 2009. Retrieved 2009-02-15. 
  12. ^ Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (S.I. No. 490/2009). Statutory Instrument of the Government of Ireland.
  13. ^ "Labour surge past FF in latest poll". Raidió Teilifís Éireann. 12 February 2009. Archived from the original on 15 February 2009. Retrieved 2009-02-13. 
  14. ^ "Fianna Fáil support collapses as Labour overtakes it for first time". The Irish Times. 13 February 2009. Retrieved 2009-02-13. 
  15. ^ Ireland confirms EU financial rescue deal, BBC News, 21 November 2010, archived from the original on 22 November 2010, retrieved 21 November 2010 
  16. ^ "Plan will have policy conditions - ECB". Raidió Teilifís Éireann. 21 November 2010. Retrieved 21 November 2010. 
  17. ^ "Extension of the Eligible Liabilities Guarantee (ELG) Scheme and introduction of the option to make unguaranteed deposits". Minister for Finance. 11 November 2011. 
  18. ^ Browne, Vincent (6 April 2011). "Lets own up to our part in the burst bubble". The Irish Times. Retrieved 2011-04-06. 
  19. ^ Keena, Colm (2 September 2011). "Banks' could take stake in homes2". The Irish Times. Retrieved 2011-09-16. 
  20. ^ "IL&P transactions unacceptable – FR". Raidió Teilifís Éireann. 13 February 2009. Retrieved 2010-03-06. 
  21. ^ "Dáil votes to nationalise Anglo Irish". Raidió Teilifís Éireann. 20 January 2009. Archived from the original on 3 February 2009. Retrieved 2009-01-21. 
  22. ^ "McAleese signs Anglo Irish Bank Bill". Raidió Teilifís Éireann. 21 January 2009. Archived from the original on 24 January 2009. Retrieved 2009-01-21. 
  23. ^ a b "Irish Life confirms deposit in Anglo". Raidió Teilifís Éireann. 10 February 2009. Archived from the original on 13 February 2009. Retrieved 2009-02-13. 
  24. ^ "Statement by the Financial Regulator". Raidió Teilifís Éireann. 13 February 2009. Archived from the original on 17 February 2009. Retrieved 2009-02-13. 
  25. ^ "IL&P chief Casey resigns over €7bn Anglo deposit". The Irish Times. 13 February 2009. Retrieved 2009-02-13. 
  26. ^ "IL&P transactions unacceptable – FR". Raidió Teilifís Éireann. 13 February 2009. Retrieved 2 November 2009. 
  27. ^ "Irish Nationwide Chairman resigns". Raidió Teilifís Éireann. 17 February 2009. Archived from the original on 19 February 2009. Retrieved 2009-02-17. 
  28. ^ "Neary to retire as Financial Regulator". Raidió Teilifís Éireann. 9 January 2009. Archived from the original on 11 January 2009. Retrieved 2009-01-10. 
  29. ^ "Greens call for stronger finance regulator". Raidió Teilifís Éireann. 10 January 2009. Archived from the original on 10 January 2009. Retrieved 2009-01-10. 
  30. ^ "Regulator may have known of loans to FitzPatrick for eight years". The Irish Times. 24 January 2009. Retrieved 2009-01-24. 
  31. ^ "In come the waves". The Economist, 16 June 2005
  32. ^ Lewis, Michael, "When Irish Eyes Are Crying: First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country—from one another. After which their banks and government really screwed them. So where’s the rage?", Vanity Fair, March 2011. Retrieved 2011-02-03.
  33. ^ 'Éirvana'' essay on-line, page 1"'" (PDF). Retrieved 2013-08-16. 
  34. ^ 10/09/2008 - 14:34:54. "Gilmore: Finance Minister out of his depth". Retrieved 2013-08-16. 
  35. ^ "Speech to Seanad Eireann, 14 May 2008". Retrieved 2013-08-16. 
  36. ^ "Statement on bank recapitalisation plan". Raidió Teilifís Éireann. 11 February 2009. Retrieved 2009-02-13. 
  37. ^ "€5.5bn bank recapitalisation plan announced". Raidió Teilifís Éireann. 21 December 2008. Archived from the original on 1 February 2009. Retrieved 2009-02-13. 
  38. ^ "Bank recapitalisation plan". Raidió Teilifís Éireann. 21 December 2008. Archived from the original on 3 February 2009. Retrieved 2009-02-13. 
  39. ^ a b c "Govt to provide €3.5bn each for AIB, BoI". Raidió Teilifís Éireann. 11 February 2009. Archived from the original on 13 February 2009. Retrieved 2009-02-13. 
  40. ^ "Govt wants 10% reduction in bank staff's pay". 13 March 2013. Retrieved 2013-03-13. 
  41. ^ a b "Boucher appointed new Bank of Ireland CEO". The Irish Times. 25 February 2009. Retrieved 2009-02-25. 
  42. ^ "BoI chief admits lending mistakes made". Raidió Teilifís Éireann. 12 February 2009. Retrieved 2009-02-21. 
  43. ^ a b "Goggin admits Bank of Ireland made mistakes". The Irish Times. 12 February 2009. Retrieved 2009-02-21. 
  44. ^ "Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009". National Treasury Management Agency. 11 December 2009. 
  45. ^ "Table A.4.2 Credit Institutions (Covered Group) - Aggregate Balance Sheet". 
  46. ^ Irish Times, 28 October 2010 Irish bond yields hit new high
  47. ^ "Financial Assistance Facility Agreement". 
  48. ^ "National Pensions Reserve Fund Quarterly Performance Statement". National Pensions Reserve Fund. 30 September 2010. Retrieved 13 March 2013. 
  49. ^ Barbieri, Rich (28 November 2010). "EU unveils Irish bailout". CNN. Retrieved 14 August 2011. 
  50. ^ "Banks borrowed more from Central Bank", RTÉ news, 12 August 2011
  51. ^ "AIB repays €1.5bn to unsecured bondholders". The Irish Times. 12 April 2012. Retrieved 31 March 2013. 
  52. ^ "AIB repays €1 billion to unsecured bondholders today". 1 October 2012. 

External links

  • Irish Government's recapitalisation plan
  • Brian Lenihan explains his recapitalisation plan
  • Statement on transactions with Anglo Irish Bank by Irish Life and Permanent
  • Statement on Irish Life and Permanent transactions by the Financial Regulator
  • BoI CEO Brian Goggin tells Christopher McKevitt of his expected reduction in wages
  • AIB repays €1.5bn to unsecured bondholders without parliamentary discusstion
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