Possibility of banks collapsing in Ireland?

pjbrady1

The risk in any system is related to
1. The current number of parameters at play that are known about
2. The potential number of future events that can be foreseen
3. The potential number of future events that are unforeseen.
In banking I would define that there is four current factors at play.
-There is cash (however acquired) on deposit (invested in whatever form)/held in reserve.
-There is cash invested in whatever form that takes
-There is cash loaned out to third parties (fully loaned out or possibly not fully drawn down but cash is partially drawndown/loan approved).
-There are assets which the banks own or have a legal entitlement to ownership of in the case of a default on loan payment

With my limited knowledge of banking, I know that there are rules whereby a % of a loans value must be held in cash reserve. The highest it extends to is 4% I stand to be corrected on that. On average banks generally only have 2-3% in reserve.

If we look at the next two years there are a number of factors that could hurt the ability of the banks debtors to pay. A rise in interest rates by 1%+ will be enough to stretch people severely, combined with resulting job losses in construction and construction services. If tallied with job losses in manufacturing and IT/Telecoms/Electronics. Suddenly you have loans being defaulted on and the savings level of the country plummeting due to people drawing down savings to pay mortgages and people no longer being able to save.
The banks sell off houses in a depressed housing market (we'll say average house drops of 15% in the previous scenario). As the banks start to flood the market with properties (they have no option as their reserves are low) prices could lose another 3-4% quite quickly. News headlines of banks seizing properties panic housing investors. Foreign investors refuse to go near Irish properties.
Deposit/Cash reserves would start to vanish at an enormous rate week on week in the above scenario.
So how do the banks pay out cash deposits in the above scenario? Foreign assets for most banks are still quite small compared to their loan liabilities and deposit responsibilites in Ireland.

To sum up in the next two years if there is
- interest rate rises of 1%+
- house price drop of 10%+
- job losses in construction of 15%+
- Job losses in Manufacturing and IT/Telecoms/Electronics combined of 5%+
then in my opinion Irish banks would start to struggle to operate loans and deposits on a monthly basis.

The Bull

Very interesting?

Blackjack

The banks have more than Mortgages and Deposit accounts as a source of their revenues, although they will be under a lot of financial pressure if the doomsday scenario (I expect that it would take more than a 1% rise in interest rates and a 10% drop in property prices) you outline. Also, Banks employ a raft of Economists, Auditors and Risk analysts to protect themselves against the damages these very scenarios, and would be a lot more aware of it's impending occurence before the average punter.

If and when the see this on the Horizon they will begin to be a lot more selective in their Loan offerings that they may be now, to prevent on defaults.

I don't think there is a real danger of Banks collapsing - there are too many financial regulations in place to prevent such an occurence (and the catastrophic effect on an Economy were this to happen). However the events you are indicating (interest rise, property price dropping) are certainly very possible.

is_that_so

pjbrady1 wrote:

- interest rate rises of 1%+
- house price drop of 10%+

That is going to happen anyway IMO. We'll just stop going out and the housing market will slow down by 10%. For anyone in the market more than a couple of years it just brings them back to where they started.

pjbrady1 wrote:

- job losses in construction of 15%+

Construction is struggling to find people and there are a good number of non-nationals working there. Some of them would go home in your scenario. It also might be good for the rest of us so we could get our home improvements done.

pjbrady1 wrote:

- Job losses in Manufacturing and IT/Telecoms/Electronics combined of 5%+

IT Companies employ 90,000 people 5% of that is about 5,000 people which really will have little effect. Based on the current 150,000 or so unemployed that's an increase of less than 1% to 5%.
An awful lot of IT is embedded within companies.

Manufacturing is slowly easing down due to cheaper cost bases elsewhere.


Banks are regulated by the Central Bank and are required to have a Minimum reserve. The Central Bank will not allow that scenario to occur and based on the annual profits of €1 billion for the the two big banks extremely unlikely. Banking crises tend to come at times of great crisis, as happened in Argentina a few years ago. Also the Irish housing stock is worth hundreds of billions and thus provides some degree of security for banks.

Afuera

I think the OP has raised some good points here. The banks are certainly in a vulnerable position should the events they describe materialize.

The regulations covering the banks in Ireland have been well watered down over the previous years with the introduction of the ECB and the euro. Currently the central bank of ireland only seems to have the power to publish recommendations, which are frequently ignored by the banks (the crazy multiples of a persons salary being lent out by banks is an example of this). Regardless, I don't think any amount of regulation can provide full safety against stupidity and greed; banks and business still go bust no matter what kind of saftey nets and rules they have governing them.

I'd suspect that should mortgagees run into financial difficulty the banks will make it as easy as possible for them to go on a payment holiday, go interest only etc. and try and avoid an all out default. The question stands though on whether defaulting mortgagees would be comfortable to avail of these options, as effectively they would be paying an inflated rent to the bank. Many have talked about handing the keys back the the banks and disappearing oversees should it all go pear-shaped. If that materialized then the banks could be left holding a lot of very weak assets and would be effectively black-listed by foreign banks (which they would need to deal with the obtain more cash reserves to stay afloat).

If there was a slowdown in construction and should foreign nationals decide to head back in mass, as one poster mentioned, this would only serve and raise vacancy rates and weaken the property market further. It's quite worrying how much of the economy relies on this single sector and any slowdown (whether soft or hard) will be guaranteed to have negative knock on effects.

I feel that a collapse of certain Irish banks is a very real possibility but maybe not due to the specific factors outlined by the OP. For me, I think confidence is key. If people suspect that rates are going to have to continue rising for a while longer to combat rising inflation then there will be a marked drop off in the amount of loan applications. This will have the double effect of hitting banks profits and knocking down the amount of money being pumped into assets (i.e. property) and the economy in general. Falling profits and a weaking asset base would not do the Irish banks any favours on the international markets and their shares would obviously take quite a hit. If they got hit badly enough they could possibly collapse or might end up as being takeover bait for some of the larger international banks.

Afuera

is_that_so wrote:

Banks are regulated by the Central Bank and are required to have a Minimum reserve. The Central Bank will not allow that scenario to occur and based on the annual profits of €1 billion for the the two big banks extremely unlikely. Banking crises tend to come at times of great crisis, as happened in Argentina a few years ago. Also the Irish housing stock is worth hundreds of billions and thus provides some degree of security for banks.

I don't think the CB will be in any position to prevent bad debts in Ireland. Can you think of anything they could do to safely prevent them at this stage?

The Argentine crisis happened because of bad debts. If it hadn't been in so much debt, the scenario they found themselves (which resulted in a currency crisis), could never have happened.

The Irish housing stock is not worth hundreds of billions; it is only valued at that figure.

chump

http://www.rte.ie/business/2006/1215/iseq.html

Why did the ISEQ finish this week at a record high?
Why did already beefy looking prices on our banks rise?

Banks were among the star performers today, with AIB jumping 75 cent to €22.70 and Bank of Ireland adding 59 to €17.34.

Is it just madness?

I reckon maybe it is.

pjbrady1

I think what you might see is banks offering extended terms to customers. However, in the event of a further rise in interest rates, the customer would find themselves stretched again if 1% gets added on after their mortgage term gets extended.
As regards the national income from industries, their is only one industry I have major confidence to deliver money into the country over the next ten years and that is agriculture. The most fertile country in the world, with one of the most secure food supplies, in an era when food shortages are a strong possibility due to the use of cropland for biofuels and extensive droughts.

As regards Ireland having a valuable property stock, that figure is only based on confidence, a 10% drop in prices would ruin that confidence internationally. There is no international confidence in Irish property as no one from abroad invests here. There would be very little internal finance to buy property either in the above scenarios. So, the banks could end up extremely stretched in the next four years.

P.J.

sofireland

Here's my 2c.
Current ECB is 3.5, its very close to the 4% it was before 9/11, so the ECB will more than likely bring it up to 4% again, which it classes as average, the low rates we've had over the past couple of years have really spoilt us.

With relation to property decreasing by 10%? I don't know, a lot of the property economists are expecting growth to moderate to 5/6% pa, not a decrease in value, but price growth to slow down. Property in general will increase in value if there isn't enough supply to meet demand.

Re the banks collapsing, anything is possible but as one poster said, they pay auditors, economists and things so they won't find themselves in that position. Currently Ireland has a very low repo rate on houses, its always the last resort for a bank, something they don't like to do