Why is Anglo considered "systemic"

boardswalker

I keep hearing the Anglo Irish Bank has to be supported because it is systemic.
This sounds like one of those phrases that nobody really understands but they don't want to tell anyone else they don't understand it.
I have been asking myself what it means.
It could mean that if we let Anglo go under then international lenders will lose faith in anything irish and we'll lose borrowing capability.
Or it could mean that Anglo is so intertwined with other Irish banks/financial institutions that if Anglo goes under it would bring lots of others down with it.
Or, for the paranoid, it could mean that we are not going to let our friends fail so we'll come up with a meaningless phrase that sounds like its loaded with significance.
Or it could mean that "my officials are convinced it should be saved but I can't understand it myself and they told me to use this phrase when I'm asked about it."
Or it could be a combination of all of the above.
Does anyone actually know what it means or its a just a get-off-the-hook phrase.
Thanks

the_dark_side

Your second point: "Or it could mean that Anglo is so intertwined with other Irish banks/financial institutions that if Anglo goes under it would bring lots of others down with it."

Unfortunately, I think that this is what it means. Funnily enough, yesterday when I read the headline about Anglo, I noticed Brian Lenihanuse the word 'systemic'... and I immediately went and googled it... The clearest descriptive answer I found was in an online medical encyclopedia:

" Systemic means "affecting the entire body," rather than a single organ or body part.
For example, systemic disorders such as high blood pressure or systemic diseases such as influenza affect the entire body.
An infection that is in the bloodstream is called a systemic infection. An infection that affects only one body part or organ is called a localized infection."

The reson I was so curious about the word is because the government are now, so much in a corner that they have to choose their words very carefully... this was an important statement yesterday by Mr. Lenihan

Systemic is a pretty standard and well understood term in this context. As dark side said, your second point captures the gist of the idea. Anglo is too big and connected to fail. Many instances of this were obvious before the meltdown, but little was done about it here or elsewhere.

eamonnm79

Anglo is not of systemic importance. It should have been let go to the wall on sept 29th last. If it had then some of their losses would have been losses of the investors. Now all the losses are socialised.

nesf

eamonnm79 wrote: »

Anglo is not of systemic importance.

I wouldn't go that far, Anglo collapsing would affect the other Irish banks, particularly in the markets. Personally I don't think it should have been nationalised as it wasn't a major clearing bank, but to argue it is not of systematic importance is false, the argument should be that the systematic effects of Anglo collapsing are bearable/worth it.

nesf

boardswalker wrote: »

It could mean that if we let Anglo go under then international lenders will lose faith in anything irish and we'll lose borrowing capability.
Or it could mean that Anglo is so intertwined with other Irish banks/financial institutions that if Anglo goes under it would bring lots of others down with it.

These two points capture separately the major legitimate problems with leaving Anglo collapse. It would have some knock on effect in the markets and some knock on effect with the other banks who have some degree of intertwining with it.

Lenihan and Cowen presumably nationalised Anglo because they believed (or were advised) that the above two effects would seriously compromise the other major Irish banks at the time of the crisis. I personally feel that Anglo could have been left go but there is some merit in the point that leaving Anglo collapse could have made things worse with regard to the other banks (i.e. it would be the Government drawing a line saying that they would pick and choose which banks to save and let some fail which would undoubtedly have strong knock-on effects in the markets at a time when Irish bank shares were already being savaged).

eamonnm79

nesf wrote: »

I wouldn't go that far, Anglo collapsing would affect the other Irish banks, particularly in the markets. Personally I don't think it should have been nationalised as it wasn't a major clearing bank, but to argue it is not of systematic importance is false, the argument should be that the systematic effects of Anglo collapsing are bearable/worth it.

Does systemic not mean that if a systemic element goes, the whole system goes?

eamonnm79

My big question on Anglo is how come ther have not been large scale redundancies?
I mean what are their employees doing now? (please no public sector jokes)
Surely there is no way that all of them could have work to do?
I mean I know a large chunk of them would be doing debt collection but surely thre is not as great a need for development loans?

nesf

eamonnm79 wrote: »

Does systemic not mean that if a systemic element goes, the whole system goes?

Not necessarily. It's one of those words defined by context, i.e. looking at the systematic risks of Anglo collapsing would looking at what might happen to the rest of the banking system if Anglo collapsed, it wouldn't necessarily mean that Anglo collapsing would bring down the system.

boardswalker

nesf wrote: »

Not necessarily. It's one of those words defined by context, i.e. looking at the systematic risks of Anglo collapsing would looking at what might happen to the rest of the banking system if Anglo collapsed, it wouldn't necessarily mean that Anglo collapsing would bring down the system.

Are you confusing systemic with systematic. They're different.
Systemic seems to mean affecting the whole system.
Systematic means characterized by order and planning.

From looking at this thread and other threads on sites such as politics.ie, the word systemic does not appear to be "a pretty standard and well understood term in this context".

nesf

boardswalker wrote: »

Are you confusing systemic with systematic. They're different.
Systemic seems to mean affecting the whole system.
Systematic means characterized by order and planning.

From looking at this thread and other threads on sites such as politics.ie, the word systemic does not appear to be "a pretty standard and well understood term in this context".

I misread the title

Systematic in economics doesn't mean characterised by order and planning, it means some risk (generally insurance) affecting the whole class of insured (or a group of similar entities, i.e. all households in a given city or all banks within a system).

Systemic in economics means:

A system-wide failure because of the interconnectedness of economic agents. Shocks are communicated through a chain, especially in a banking system which is highly interconnected by nature... ... A local event or shock is transmitted rapidly to affect a whole market.


Both definitions above from the Routledge Dictionary of Economics.

boardswalker

nesf wrote: »

I misread the title

Systematic in economics doesn't mean characterised by order and planning, it means some risk (generally insurance) affecting the whole class of insured (or a group of similar entities, i.e. all households in a given city or all banks within a system).

Systemic in economics means:

A system-wide failure because of the interconnectedness of economic agents. Shocks are communicated through a chain, especially in a banking system which is highly interconnected by nature... ... A local event or shock is transmitted rapidly to affect a whole market.


Both definitions above from the Routledge Dictionary of Economics.

Systematic is an adjective. The definition you gave looks like the definition of systematic risk not the defintion of systematic alone. The Business Dictionary gives the definition of systematic as "Marked by a methodical plan or procedure and repeatability. Not to be confused with 'systemic' which means 'system wide.'

nesf

boardswalker wrote: »

Systematic is an adjective. The definition you gave looks like the definition of systematic risk not the defintion of systematic alone. The Business Dictionary gives the definition of systematic as "Marked by a methodical plan or procedure and repeatability. Not to be confused with 'systemic' which means 'system wide.'

Indeed, sorry I was talking about systematic risk which is what we'd be discussing here with respect to Anglo.

Apologies for dragging your thread off-topic.

eamonnm79

Guys when discussing wheather banks should be let go to into liquidation or not, the only word that has been used in the media, government or anywhere else is systemic.
Lets not confuse a fairly simple concept.
In this regard I would agree with Mary Lou on Primetime last night when she said the only two systemic banks were Bank of Ireland and AIB.
Anglo is not systemic and Irish Nationwide certainly is not as argued by Brian Cowan recently.

boardswalker

eamonnm79 wrote: »

Guys when discussing wheather banks should be let go to into liquidation or not, the only word that has been used in the media, government or anywhere else is systemic.
Lets not confuse a fairly simple concept.
In this regard I would agree with Mary Lou on Primetime last night when she said the only two systemic banks were Bank of Ireland and AIB.
Anglo is not systemic and Irish Nationwide certainly is not as argued by Brian Cowan recently.

Would you care to give reasons why you consider Anglo not to be systemic?

Diarmuid

eamonnm79 wrote: »

In this regard I would agree with Mary Lou on Primetime last night when she said the only two systemic banks were Bank of Ireland and AIB.

Taking economic advice from Mary Lou would be like taking sex advice from the Pope.

boardswalker

Diarmuid wrote: »

Taking economic advice from Mary Lou would be like taking sex advice from the Pope.

I know what you meant. After last week, a different analogy might have been more suitable.

SLUSK

Bailing out banks will only cause bigger problems in the future. They know they can take to big risks because they will always be bailed out. I think they call this concept "moral hazard".

Let the incompetent banks fail and after the bankruptcy the competent can buy up their assets. This is how the system should work. What we are doing now is increasing taxes, taking money from the competent and giving it to the incompetent.

Is only me who thinks this is stupid?

thebman

I think that is an argument for heavy handed regulation being required on banks because otherwise they will go wild.

It doesn't take a genius to work out that if when they misbehave they get away with it then they will most likely continue to misbehave.

Its basically how most pets behave if they get away with doing something you don't want them to do but they want to do it then they will continue to do it.

The banks now need to be controlled by regulation and stopped behaving stupidly or we will end up back in this position sooner or later.

silverharp

thebman wrote: »

I think that is an argument for heavy handed regulation being required on banks because otherwise they will go wild.

It doesn't take a genius to work out that if when they misbehave they get away with it then they will most likely continue to misbehave.

Its basically how most pets behave if they get away with doing something you don't want them to do but they want to do it then they will continue to do it.

The banks now need to be controlled by regulation and stopped behaving stupidly or we will end up back in this position sooner or later.

one thing though , are depositors /bond investors allowed to remain "badly trained" with positive reinforment that it doesnt matter where they put/invest their money? Anglo would never have happened if depositors and bond holders knew that there would be no compensation for lost deposits.

nesf

silverharp wrote: »

one thing though , are depositors /bond investors allowed to remain "badly trained" with positive reinforment that it doesnt matter where they put/invest their money? Anglo would never have happened if depositors and bond holders knew that there would be no compensation for lost deposits.

A core problem is that for many of said bond holders if the Government pulls the plug they will lose non-trivial sums of money. They can then very easily turn around and "punish" the Government when the State looks to sell bonds. Not very rational but entirely human unfortunately.

eamonnm79

silverharp wrote: »

one thing though , are depositors /bond investors allowed to remain "badly trained" with positive reinforment that it doesnt matter where they put/invest their money? Anglo would never have happened if depositors and bond holders knew that there would be no compensation for lost deposits.

There is an arguement that systemic elements of the financial industry should be nationalised, and remain nationalised.
It would be possible, perhaps even helpfull if even in in a capitalistic society that the systemic elements of the financial industry should be privatised.
The reason?
Because unlike any other industry, the financial industry failing means the whole rest of society fails with it.

Would this mean that we would never have such large growth rates as the last 10 years? Yes! but it would also limit potential losses if banks were instructed to stick to their knitting. ie making loans to people with proper levels of equity, deposits, experience and business plans.

If others want to invest in riskier stuff they can. Its called venture capitalism or share purchase, But we should ensure by law that systemic banks stick to simply looking after deposits and loaning in a conservitive way.
Thats my two cents but no doubt I will be accused of advocating looney left ideals.
Genuinely I see this as a conservitive idea.

silverharp

nesf wrote: »

A core problem is that for many of said bond holders if the Government pulls the plug they will lose non-trivial sums of money. They can then very easily turn around and "punish" the Government when the State looks to sell bonds. Not very rational but entirely human unfortunately.

I just think that after all the flapping , the market would see that lending to the gov. was safer then lending to a gov. that was backing up the banks. It will be no fun financing a triple digit deficit in a rising interest rate environment.
There is the question of the effect on the other banks but same logic holds. if the bond holders made bad bets , they should carry the can.
I'll always wonder did the EU lean on the Irish go. to follow through with this?

eamonnm79 wrote:

Genuinely I see this as a conservitive idea.

I wouldnt like wholly owned state banks as lending criteria would be too open to corruption but there is a role for dumbed down banks. No doubt like the 1930's there will be rafts of new regulation like Glass-Steagall so you can take it as read that banking will be more conservative in the future.
Looking at the EBS for example, they only got into developer loans because they couldnt keep up with Anglo's interest rates and were losing depositors. Clearily there was no ratings system that meant anything to the public.

eamonnm79

nesf wrote: »

A core problem is that for many of said bond holders if the Government pulls the plug they will lose non-trivial sums of money. They can then very easily turn around and "punish" the Government when the State looks to sell bonds. Not very rational but entirely human unfortunately.

The only institutions or people buying government bonds at the moment is the Irish banks through intermediaries using finance from the european central bank.
Claims that individuals are buying them in any quantity is not realising the current reality. There is no danger of anyone punishing the government by not buying their bonds.

eamonnm79

silverharp wrote: »

I wouldnt like wholly owned state banks as lending criteria would be too open to corruption but there is a role for dumbed down banks. No doubt like the 1930's there will be rafts of new regulation like Glass-Steagall so you can take it as read that banking will be more conservative in the future.
Looking at the EBS for example, they only got into developer loans because they couldnt keep up with Anglo's interest rates and were losing depositors. Clearily there was no ratings system that meant anything to the public.

The EBS shouldnt have been trying to compete with anglo in the first place.
But I agree the whole thing went mad. As regards the introduction of a raft of glass stiegal type regulation I dont see evidence of it.
Bloomberg recently held think tank discussions on the way forward after the crash. many CEO's were essentially arguing 'lets not throw the baby out with the bath water' When one of them actually said it with a straight face I nearly fainted!
BTW I think Glass stiegal was simply a law preventing investment banks and commercial banks being one and the same. They couldnt even live with that!
The reaction of CEO's is predictable. In the last 30 years their salaries have catapulted in real terms v the average wage in their companies.

silverharp

eamonnm79 wrote: »

The EBS shouldnt have been trying to compete with anglo in the first place.
But I agree the whole thing went mad. As regards the introduction of a raft of glass stiegal type regulation I dont see evidence of it.
Bloomberg recently held think tank discussions on the way forward after the crash. many CEO's were essentially arguing 'lets not throw the baby out with the bath water' When one of them actually said it with a straight face I nearly fainted!
BTW I think Glass stiegal was simply a law preventing investment banks and commercial banks being one and the same. They couldnt even live with that!
The reaction of CEO's is predictable. In the last 30 years their salaries have catapulted in real terms v the average wage in their companies.

you are right , but give it time , there is years more downside left. Lets see who's left standing by 2012 and believe me, if its going to be as bad as I think it will the banks will get religion. There is no way the financial system will be the same in 10 years time.

Carawaystick

So, back last Sept, if the Govt had said we will guarantee the deposits of BOI/AIB and left the rest or even left Anglo and Irish Nationwide out of the guarantee scheme, how would a run on Anglo cause damage to the rest of the banks?

Also if the Guarantee scheme hadn't included bondholders, but only depositors, how would that crash the banks? If you hold junior debt, are you stuck holding it to redemption or trying to sell it for cents in the euro?
Is senior debt the same?
can bondholders call in their debt?

ixus

One way I could see Anglo being of systemic importance is if the big borrowers used the same collateral to get loans from other banks.

So, if Anglo went belly up, bondholders would have laid claim to these assets. That would then have left the other banks with less collateral and they would then have to look at calling in their loans, thus, realising losses. The government/banks are afraid of a fire sale of assets.

This is the systemic that the government/media/whoever means but won't say it in black & white. Why? Panic!

International investors already know the gig is up here.

eamonnm79

ixus wrote: »

One way I could see Anglo being of systemic importance is if the big borrowers used the same collateral to get loans from other banks.

So, if Anglo went belly up, bondholders would have laid claim to these assets. That would then have left the other banks with less collateral and they would then have to look at calling in their loans, thus, realising losses. The government/banks are afraid of a fire sale of assets.

This is the systemic that the government/media/whoever means but won't say it in black & white. Why? Panic!

International investors already know the gig is up here.

That sounds like an excellent reason to make it illegal to allow cross collateralisation from one bank to another.
It might be a good idea to start a thread on ideas for new regulation?
It all sound a lot like the Michael Lynn case getting multiple mortgages on the back of one house.
Surely banks should not have been doing this in the first place but, as i am sure you will point out, we are where we are.

eamonnm79

silverharp wrote: »

you are right , but give it time , there is years more downside left. Lets see who's left standing by 2012 and believe me, if its going to be as bad as I think it will the banks will get religion. There is no way the financial system will be the same in 10 years time.

I agree with you that a deep depression is on the cards. The banks still havent written down the vast majority of their losses, and will not until NAMA takes them.
However with regard to this giving the bankers left standing "religion" as you put it, I am not so sure.
I Think they will stay true to form until they are either taken away in a paddy wagon or by men in white coats. Dont underestimate the power of cognative dissonance, or to put it like my mam would say "a leopard doesnt change their spots"
The behaviour of these people and the way they do their jobs is not that likely to change unless there is huge social disquiet. A bit like the stuff Brendan Landers was talking about yesterday in the times and given the level of dossility in the average irish person I am not sure that will happen.

DublinWriter

As much as I hate Anglo, they owe money to the same international banks that the Irish Government will be approaching this year for loans.

That aside, Sean Fitzpatrick and the like should have been made to take the 'perp-walk'.

AFAIK there's still a garda investigation on-going regarding Anglo, so it's very much early days yet. Considering how complex forensic investigations into alleged corporate wrongdoing can be (remember Enron?), it could be a very long time before we see anyone in the 'joy for this.

eamonnm79

DublinWriter wrote: »

As much as I hate Anglo, they owe money to the same international banks that the Irish Government will be approaching this year for loans.

That aside, Sean Fitzpatrick and the like should have been made to take the 'perp-walk'.

AFAIK there's still a garda investigation on-going regarding Anglo, so it's very much early days yet. Considering how complex forensic investigations into alleged corporate wrongdoing can be (remember Enron?), it could be a very long time before we see anyone in the 'joy for this.

The irish government are not getting the money they are borrowing from international banks. Well technically they are but it is the Irish banks who are the ones behind/backing the international financial institutions and the Irish banks who get the funding from the ECB. The Irish banks can borrow from the ECB due to the cash injections from the government which give them the required capital requirements. The ECB are getting the Money from Quantitive easing.
Basicly the government and the financials are proping each other up with the help of the ECB. You wont see this written in Broadsheets, but take a look on Irisheconomy.ie

Économiste Monétaire

Do you have a source for the information on all purchasers of primary and secondary Irish sovereign debt?

eamonnm79

Économiste Monétaire wrote: »

Do you have a source for the information on all purchasers of primary and secondary Irish sovereign debt?

Hi EM
The below is a post by Joe Looby on irish economy.ie from May 27th

Sarah,

No need to leave it to another journalist:

1) Go to: http://www.centralbank.ie/

2) Statistics

3) Credit Money and Banking Statistics

4) Latest Monthly Statistics

5) Table C3: Credit Institutions: Aggregate Balance Sheet

6) Holdings of securities - Section 6.2 - Issued by general government - Euro 5.389 bln

Repeat the exercise in the ‘Archive’ from step 3 above, and you’ll see the same figure for October 2008 is just Euro 530 mln.

In plainer english, since the government effectively rescued the Irish ‘covered’ banks with the bank guarantee, they have (miraculously?)seen fit to increase their holdings of Irish Sovereign Bonds/loans to that government by a multiple of 10.

They are likely being enabled to do this/pay for the bonds by accessing the Euro cash from the ECB using said bonds as collateral (as confirmed by the good Doctor from the NTMA in both his recent testimony to the PAC and recent letter to your esteemed employer).

To me, at least the following crucial and to my mind insufficiently aired questions arise from this ’situation’:

1) Having access to such a facility, why should any government deal decisively with its fiscal deficit, and not just leave the ‘tab’ to the taxpayer of the future?

2) Why is Frankfurt (Berlin) allowing Dublin this facility?

3) Has this facility any relevance to the NAMA vs. Nationalisation debate?

Are our leaders learning anything about the dangers of supressing ‘the truth’ in its dealings with the Irish Public?

To have to ask this question in this week, of all weeks, is beyond ‘funny’.

Économiste Monétaire

Thanks, that's pretty interesting, but, sparse on details of recent primary issuance participants. The last numbers I saw for an NTMA primary auction were about 70% banks and 55% of all purchasers operating in Ireland. I just don't see any real evidence to support a claim of Irish banks being the only institutions buying Irish debt; €5bn out of something like €60bn in marketable securities. Also, it's not the policy of the ECB to direct where the monies from EuroSystem MROs and LTROs go, so they're not 'allowing' them to do anything. Sovereign debt isn't the the only eligible collateral for refinancing operations, banks can borrow with legacy ABS as collateral. "Such a facility": Refinancing operations existed before the crisis.

One situation you might like, Eamonn, is what happens when the ECB moves from un-rationed fixed-rate refinancing operations (i.e. they won't be given all the money they want at a fixed-rate) and Irish banks will have to up mortgage rates even before the official ECB rate begins to rise. Check table C2 on this document, it will tell you how much Irish banks have increased their borrowing from the ECB (banks don't actually borrow from the ECB, really, but from the CBFSAI as our constituent central bank) under columns 6 and 7.

eamonnm79

Économiste Monétaire wrote: »

One situation you might like, Eamonn, is what happens when the ECB moves from un-rationed fixed-rate refinancing operations (i.e. they won't be given all the money they want at a fixed-rate) and Irish banks will have to up mortgage rates even before the official ECB rate begins to rise. Check table C2 on this document, it will tell you how much Irish banks have increased their borrowing from the ECB (banks don't actually borrow from the ECB, really, but from the CBFSAI as our constituent central bank) under columns 6 and 7.

AIB have already started this on new mortgages. They raised their fixed rate interest rates during the week.

Économiste Monétaire

Interesting, I wasn't aware of that AIB increase. Existing variable-rate mortgages was my train of thought in that post, my bad on leaving that out; more money markets than long bond financing for fixed-rate customers. Just something else you might be interested in, here's the most recent ECB staff projections, that's a signal of an incoming rate increase next year with the projected increase in 3 month Euribor.

The methodology implies that short-term interest rates remain broadly stable at around 1.2% between the second and last quarter of this year. In 2010, they are expected to increase to 1.6% on average

It's at 1.22% as of Friday. Rising mortgage rates, rising commodity prices, and increasing taxes are a nice mix :pac:.