Post-2008 Irish banking crisis
The post-2008 Irish banking crisis was when a number of Irish financial institutions faced almost imminent collapse due to insolvency during the Great Recession. In response, the Irish government instigated a €64 billion bank bailout. This then led to a number of unexpected revelations about the business affairs of some banks and business people. Ultimately, added onto the deepening recession in the country, the banks' bailout was the primary reason for the Irish government requiring IMF assistance and a total restructuring of the government occurred as result.
Background[edit]
During the second half of the 1995–2007 'Celtic Tiger' period of growth, the international bond borrowings of the six main Irish banks—Bank of Ireland, Allied Irish Banks, Anglo Irish Bank, Irish Life & Permanent, Irish Nationwide Building Society and Educational Building Society—grew from less than €16 billion in 2003 to approximately €100 billion (well over half of Ireland's GDP) by 2007.[1][2]
This growth in bond funding was quite exceptional relative to the aggregate euro area and the focus of the Central Bank and most external observers was on the apparently strong capital adequacy ratios of the banks or Pillar One of the Basel framework.[2] For example, the 2007 International Monetary Fund Article IV Consultation—Staff Report on Ireland has a heading summarizing the position of the banking sector as "Banks Have Large Exposures to Property, But Big Cushions Too.".[3] However, this appears to have come at the expense of a lack of emphasis on the second pillar, which relates to the supervisory process. In particular, the Basel II guidelines contain an extensive section on the importance of dealing with "credit concentration risk", i.e. banks having too much exposure to one source of risk.[2][4] 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.[5][6]
By October 2009 it was German and French banks that were most exposed in the periphery of the eurozone, with more than 40 per cent of the foreign claims on Greece, Ireland, Portugal, Italy and Spain being French and German.[7] In 2010 the Bank for International Settlements recorded between US$186.4 billion[8] and $208.3 billion in total exposure to Ireland, with $57.8 billion in exposure to Irish banks.[9] The German monetary financial institution sector was the largest investor in Irish bank bonds during the pre-crisis period[10] and according to the Bundesbank's consolidated figures German banks had, by September 2008, the month of the bank guarantee, €135 billion invested in Ireland.[11] These figures for the exposure of German banks to "Irish" banks, however, relate almost in their entirety to their exposure to their own large subsidiaries based in Dublin's International Financial Services Centre, for example Depfa, which reportedly had an external focus and external ownership.[12]
The rising rate of foreign borrowing by local Irish banks in the years before 2008 reflected the enormous increase in their lending into the Irish property market,[13][14][15] a lending area which since 1996 seemed to be able to provide an endless flow of profitable lending opportunities as the Irish public relentlessly bought and sold property.[16]
The total stock of mortgage loans in Ireland exploded from €16 billion in the first quarter of 2003 to a peak of €106 billion by the third quarter of 2008, about 60 percent of Ireland's GDP for that year.[17] This, in turn, led to a massive increase in the price of Irish property assets.[18][19] 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 the fragile cash-flows of developers and highlighted the stratospheric valuations of property. 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 major cash injections (recapitalisation) to stay open.[20]
State responses[edit]
On 29 September 2008, Minister for Finance Brian Lenihan agreed to issue a broad state guarantee of Irish domestic banks under the Credit Institutions (Financial Support) Act 2008 for two years, with the intention of recapitalising them to enable them to continue to lend into the Irish economy.[20]
Government interventions[20] would cover 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.[21] On 20 October 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".[22]
Recapitalisation was carried out at Ireland's two largest banks, Allied Irish Bank (AIB) and Bank of Ireland (BoI), with" bailouts" (enforced loans) of €3.5 billion confirmed for each bank on 11 February 2009.[23][24] 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.[25]
In late 2009, the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 came into effect[26] Amidst the crisis, the ruling Fianna Fáil party fell to fourth place in an opinion poll conducted by The Irish Times,[27] placing behind Fine Gael, Labour and Sinn Féin, putting Labour and Sinn Féin ahead of Fianna Fáil for the first time in Irish history.[28] On the evening of 21 November 2010, 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),[29] a request which was welcomed by the European Central Bank and EU finance ministers.[30]
In November 2011, the Credit Institutions (Eligible Liabilities Guarantee) Scheme was extended by the Fine Gael - Labour coalition government to 31 December 2012,[31] 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".[32] In September 2011 he said that the banks were now financially sound.[33]
Resignation of the Financial Regulator[edit]
Following reports of a communication breakdown at the office of the Financial Services Regulatory Authority, the Chief Executive of the Financial Regulator Patrick Neary on 9 January 2009 announced his decision to retire as of 31 January that year.[44] Neary's perceived weakness in dealing with Anglo Irish Bank received heavy criticism, with Green Party Senator Dan Boyle calling for a strengthening of powers within the organisation and saying that confidence in Irish financial services had been eroded by events of the previous six months. Financial observers indicated that a replacement for Neary might have to be sought in the United States or United Kingdom.[45] 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.[46]
Warning signs ignored and suppressed[edit]
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.[47] 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. In an article published by the Irish Times, Kelly noted that the raise in house prices relative to income and rents is a strong indicator of their subsequent decrease, and that Ireland's house prices had risen 30% more than income since the year 2000. He then asserted that Irish real estate prices could possibly fall 40 – 50% when the bubble burst.[48] 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.[49]
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.[49]
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.[50]
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".[51] 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."[52]
Committee of Inquiry into the Banking Crisis[edit]
The Committee of Inquiry into the Banking Crisis met for the first time on 19 June 2014 (in private).[82] Public hearings began in 2015.[83]
It was a joint committee of the Houses of the Oireachtas. It was formally established in November 2014 under the Houses of the Oireachtas (Inquiries, Privileges and Procedures) Act 2013. It published its final report on 27 January 2016.[84]
Denis O'Brien controversy[edit]
Background[edit]
In 2015, billionaire Denis O'Brien successfully applied for an injunction against RTÉ preventing the state broadcaster from airing a report on how O'Brien was receiving, with the direct permission of former CEO of the Irish Bank Resolution Corporation (IBRC)—the former Anglo Irish Bank, a rate of approximately 1.25% when IBRC should have been charging 7.5%. This in turn led to outstanding sums of upwards of €500 million. O'Brien then wrote to special liquidator Kieran Wallace to demand that these same favourable terms that were granted him by way of verbal agreement be continued. The Irish government later appointed Kieran Wallace to conduct an investigation into these same dealings. Wallace then cooperated with IBRC and Denis O'Brien to seek an injunction in Ireland's High Court to hide this information from the public.[85] High Court judge Donald Binchy granted O'Brien the injunction and told the court that certain elements of the judgment would have to be redacted. The Irish media therefore could not report on details of the injunction.[86]
Catherine Murphy's involvement[edit]
Catherine Murphy, TD, attempted to raise the issue in the Dáil on 27 May 2015. Seán Barrett ruled her contributions "out of order".[87] Murphy attempted to raise the matter again the following day, this time with more success.[88] Lawyers acting for O'Brien immediately forced the country's media to censor its own coverage, with some media outlets confirming they had received warnings from O'Brien's lawyers.[89] RTÉ reporter Philip Boucher-Hayes tweeted that Drivetime would play Murphy's speech; in the event, Murphy's speech was not broadcast and his tweet was later deleted.[85] Tonight with Vincent Browne (with Browne absent and instead moderated by Ger Colleran, editor of INM's Irish Daily Star) featured Colleran reading a statement from TV3 management asserting that no discussion about Murphy's comments would be allowed following letters from O'Brien's lawyers.[85] Foreign commentators covering these events for the international media suggested Irish democracy had been "wiped away at a stroke".[90]
IBRC Commission of Investigation[edit]
In June 2015, the government announced the launch of a Commission of Investigation into IBRC's business dealings, to be headed by a High Court judge. This was to take place instead of a previously announced inquiry which was to be conducted by KPMG, IBRC's own auditors. The commission is due to report before the end of 2015. The commission will investigate transactions, activities and management decisions which resulted in a loss of €10 million or more for the taxpayer. It will also cover "internal IBRC governance procedures and controls" and whether these "were fit for purpose", and will also examine the controversial sale of Siteserv to Denis O'Brien following a debt writedown of €119 million.[91][92]