What would have happened if the banks were allowed to fail?

eoge

Hi there,

Most discussion about the reaction of the government to the banking crisis begins with the presupposition that the banks must not be allowed to fail.

But what would have happened if, like with any business, banks that took risks that didn't pay off were allowed to incur losses and fail?

If the reason for not allowing the banks to fail is to protect Irish personal and business deposits (i.e. the national economy), why could the State not have just guaranteed those ones (say, all Irish personal deposits up to €1M, all Irish business deposits up to €100M)? In other words, why not split the banks, allowing the parts with the international deposits to fail? I understand that this would make enemies for us around the world, but it would protect our own interests. Or maybe this is a very naive way to look at the situation?

Any help understanding this would be appreciated. I'm just trying to work out if there were any feasible alternatives to those chosen by our government.

cazzak79

would you like to see aib/bank of ireland to fail?
theres alot of employees and customers both personal and business involved

karlth

That is sort of what Iceland did.

In reality we (I'm Icelandic) had no choice, the banking sector was simply too large and debt ridden to be saved. IMF and UK offered to come in and loan us during the summer of 2008 but in the end the government decided that national interest outweighed international financial obligations of private banks, and they were flushed down the toilet.

The only problem came up (and it is ongoing) when UK and Dutch savers demanded their deposits from branches of one of the private banks in UK and the Netherlands. Repayment negotiations are ongoing still and are mostly about interest to be paid. The matter will probably be settled this year.

Do I think it was the correct choice? Yes.

Ireland is a part of the EU and with the Euro so the matter is lot more complex.

flutered

op you posted the wrong question, the post should have read, what would have happened if anglo was allowed to implode.

soden12

If the banks failed there would be a significant impact on the prestigious golf courses as they make a fortune from bank managers and their Ilk off out impressing the parasites.

Oasis_Dublin

Anyone, down to the dog in the street, who had savings in the bank would have been left without their savings. This would have caused mayhem

newmug

If the banks failed, peoples life savings would vanish. Business would close. Jobs would go. The country would have been like a scene from 28 days later for however long it took for the petty cash lying around to dry up. then it would be like the famine all over again.

No banks, no money to refill petrol stations with petrol. No banks, no money to pay Guards. No banks, no place to put your weeks wage. No banks, no business able to sell anything.

No businesses open, no food, shoes, diesel, TV, milk, fags, clothes, services of any kind etc.

The country would have descended into chaos. At least with things the way they are at present, none of the above will happen. Life will function with reasonable normality.

Bob_Latchford

karlth above has said there was relatively little disruption in Iceland and dometic savings where secured and separated from foreign.

SkepticOne

karlth wrote: »

That is sort of what Iceland did.

In reality we (I'm Icelandic) had no choice, the banking sector was simply too large and debt ridden to be saved. IMF and UK offered to come in and loan us during the summer of 2008 but in the end the government decided that national interest outweighed international financial obligations of private banks, and they were flushed down the toilet.

It is valuable to have someone posting on boards.ie from Iceland since we, in a sense, took the opposite course of action. In fact our finance minister, Brian Lenihan, defended the propping up of Irish banks on the basis that not doing so would have left Ireland in the state that Iceland is in now.

It would be great if you could answer some questions. Firstly, what sort of disruption did people experience to their use of the banking system? Did ATMs continue to function? If they did not, for how long were they unavailable? What was the impact on savings? Were businesses able to borrow for day to day expenses?

I suppose the real question is what was like for the ordinary Icelander? At what point did people think that the worst was over and things were going to get better? Thanks in advance.

Bob_Latchford

Karls input is great, he also mentioned Washington Mutual, I had never heard of them, but they went to the wall in the states in 2008. Assets sold overnight to JP Morgan and branches opened next day.

the remaining shell with the bond holders and debt went under and bond holders & shareholders took the hit. 6th biggest bank in the US

Cavehill Red

Oasis_Dublin wrote: »

Anyone, down to the dog in the street, who had savings in the bank would have been left without their savings. This would have caused mayhem

Total manure.

There was ALREADY a depositor protection scheme in place protecting deposits up to 100,000 euro per person per account.

Cavehill Red

newmug wrote: »

If the banks failed, peoples life savings would vanish. Business would close. Jobs would go. The country would have been like a scene from 28 days later for however long it took for the petty cash lying around to dry up. then it would be like the famine all over again.

No banks, no money to refill petrol stations with petrol. No banks, no money to pay Guards. No banks, no place to put your weeks wage. No banks, no business able to sell anything.

No businesses open, no food, shoes, diesel, TV, milk, fags, clothes, services of any kind etc.

The country would have descended into chaos. At least with things the way they are at present, none of the above will happen. Life will function with reasonable normality.

None of this is true.

None of this would have happened.

Deposits were already protected. The guarantee extended protection to the likes of Swiss banks and Roman Abramovich who are bondholders of the banks.

BeardyFunzo

Cavehill Red wrote: »

Total manure.

There was ALREADY a depositor protection scheme in place protecting deposits up to 100,000 euro per person per account.

and 100K is fine for the vast majority of people. there something like 60bn of irish deposits in irish banks. at the mo 60bn seems like a reasonable price to get out of this pile'o'sh***e.

Cavehill Red

BeardyFunzo wrote: »

and 100K is fine for the vast majority of people. there something like 60bn of irish deposits in irish banks. at the mo 60bn seems like a reasonable price to get out of this pile'o'sh***e.

It gets better.
Anglo had very few deposits in Ireland. In the UK, it was another story. But like Iceland, we could have cut a deal.
The exposure of Anglo and AIB in relation to deposits would have been nowhere near 60 billion. We could have got out of this mess for a fraction of what we're now paying, because now we're paying off Roman Abramovich and Swiss bank bondholders too.

newmug

Cavehill Red wrote: »

Total manure.

There was ALREADY a depositor protection scheme in place protecting deposits up to 100,000 euro per person per account.

Cavehill Red wrote: »

None of this is true.

None of this would have happened.

Deposits were already protected. The guarantee extended protection to the likes of Swiss banks and Roman Abramovich who are bondholders of the banks.

This fcukin guarantee:rolleyes: WHAT WOULD THE GOVERNMENT PAY YOU WITH? AIR? IF THE BANKS COLLAPSE THE GOVT HAS ZERO MONEY. NONE.

Cavehill Red

newmug wrote: »

This fcukin guarantee:rolleyes: WHAT WOULD THE GOVERNMENT PAY YOU WITH? AIR? IF THE BANKS COLLAPSE THE GOVT HAS ZERO MONEY. NONE.

What drugs are you on?

If the banks had been allowed to collapse, the depositors would have first claim on remaining assets. The government guarantee for deposits would have covered the rest - let's say (being pessimistic) 20 billion.

There were other banks, perfectly solvent, which abandoned Ireland because they couldn't compete with state-guaranteed banks. Halifax, etc. If we'd let AIB and Anglo go to the wall in 2008, people could be banking with those banks today.

The idea we need national banks is hubris, like the idea of having national car manufacturers or national airlines. Fact is, you just need someone providing the service.

Now, we're STILL on the hook for deposits if these banks go under. AND we're supposed to pay off the bondholders too (80 billion plus) - Roman Abramovich and the like.

You tell me how that's preferable, why doncha?

newmug

Cavehill Red wrote: »

What drugs are you on?

If the banks had been allowed to collapse, the depositors would have first claim on remaining assets. The government guarantee for deposits would have covered the rest - let's say (being pessimistic) 20 billion.

There were other banks, perfectly solvent, which abandoned Ireland because they couldn't compete with state-guaranteed banks. Halifax, etc. If we'd let AIB and Anglo go to the wall in 2008, people could be banking with those banks today.

The idea we need national banks is hubris, like the idea of having national car manufacturers or national airlines. Fact is, you just need someone providing the service.

Now, we're STILL on the hook for deposits if these banks go under. AND we're supposed to pay off the bondholders too (80 billion plus) - Roman Abramovich and the like.

You tell me how that's preferable, why doncha?

Nebilet, actually. For blood pressure.

You are wrong about depositors having first shout. When a liquidator moves in to any business, its the creditors who cast lots as it were. They get anything thats going to help clear what they're owed. And the people lose everything.

If that happened, even to just one bank, do you think anybody would leave their money in a bank for a minute longer than they had to? If the govt hadn't "guaranteed" deposits, everybody would be withdrawing their money. Just like what was beginning to happen right before the guarantee. (The guarantee is only a social construct BTW, we're borrowing 20BN per year as it is just to stay afloat, where would the govt come up with another 20BN to pay depositors? It was all a confidence trick.) No money in the banks, no profit in the banking system, and the whole house of cards comes down ala my first post in this thread.

Whereas now, its not perfect, but nobody's starving, nobody is barefoot everybodys savings are intact. We'll come out the other end eventually. And its nothing to do with roman abramovitch.

And apologies to Scofflaw and anyone else I may have offended with my previous post.

karlth

SkepticOne wrote: »

It would be great if you could answer some questions. Firstly, what sort of disruption did people experience to their use of the banking system? Did ATMs continue to function? If they did not, for how long were they unavailable? What was the impact on savings? Were businesses able to borrow for day to day expenses?

The government enacted an emergency law based on the Washington Mutual bank failure in the US. A new identical bank was created, deposits were declared to be priority debts and moved into the new bank, along with enough assets to cover the deposits.

ATMs never closed and all savings were safe. The government also injected some IOUs to prop up the new banks.

Those who lost out were the stock holders that lost everything and bond holders who only got a second bite out of the failed banks.

The negatives of this course of action was that our currency had to drop out of the international currency markets, but it had been almost dead there anyway some months previous.

Bond holders were frankly fairly understanding of the dilema. They understood that they had made some risky bets. Other governments in Europe were less understanding though

I suppose the real question is what was like for the ordinary Icelander? At what point did people think that the worst was over and things were going to get better? Thanks in advance.

When the banks went under in october 2008 there was a lot of dread in Iceland. Like now in Ireland there was a sense of humiliation and fear of what lay ahead. The news were constantly bad leaving a lot of people feeling like helpless and worried.

In reality not much changed, life goes on. Some people simply stopped following the news and it seemed to help them. What seemed to help others was understanding that the boom years were not the normal state of affairs and lifestyles would move back 6-10 years, or in effect to normality.

Monty Burnz

Oasis_Dublin wrote: »

Anyone, down to the dog in the street, who had savings in the bank would have been left without their savings. This would have caused mayhem

Wrong. Most people's savings (95% of people) would have been covered by the pre-existing bank guarantee.

Monty Burnz

Bob_Latchford wrote: »

karlth above has said there was relatively little disruption in Iceland and dometic savings where secured and separated from foreign.

Fiaana Failure buried us with the guarantee, so don't expect their spokesmen to acknowledge that it has happened elsewhere and they got on fine. They have to pretend it would have been the end of the world.

Monty Burnz

newmug wrote: »

This fcukin guarantee:rolleyes: WHAT WOULD THE GOVERNMENT PAY YOU WITH? AIR? IF THE BANKS COLLAPSE THE GOVT HAS ZERO MONEY. NONE.

With insurance. And if a few billion needed to be borrowed, it would have still saved us over a hundred billion euros.

Monty Burnz

newmug wrote: »

Nebilet, actually. For blood pressure.

You are wrong about depositors having first shout. When a liquidator moves in to any business, its the creditors who cast lots as it were. They get anything thats going to help clear what they're owed. And the people lose everything.

Nonsense. Depositors are creditors of the banks, same as bondholders. Where are you getting your 'information' from??

pH

The banks "failing" would have not necessarily meant that cheques, laser cards and current accounts would have stopped working. Going bust would have pretty much meant that shareholders lose everything, depositors get their money back from whatever assets are left, and whatever is left is divided between the bond holders.

The bank could have been continued to run in these circumstances, sold or nationalised without the bond holder debt - making it a much much cheaper option.

I believe we were lied to on the night of the universal guarantee, we were told it was a "liquidity problem" only, not one of solvency, the guarantee was just a means of settling down those silly markets who had gotten it all wrong about our well financed Irish banks.

The really annoying thing is that 2 years later we haven't moved on. The banks are getting a bad rap, yet it's hard to see what they did wrong (to us). We (and the media) are acting like it's intolerable that anyone should make bad business decisions, which for the most part is what the banks did. The amounts of money and exposure caused by the few instances of what look like fraud or malfeasance are dwarfed by the amounts which were simply dumb and stupid lending.

You cannot regulate businesses to do only good business, the problem was guaranteeing these businesses, that resulted in a huge problem, we have essentially sent someone to vegas with not just our money but carte blanche to borrow as much as they want while they're over there - we'll guarantee it. Even a dog could see that's a crazy idea - but could you really blame the gambler for accepting that offer?

2 years later we haven't addressed any of the huge problems caused by guaranteeing banks (who essentially make a large proportion of their income "gambling").

If they are "too important to the national interest to fail" then I just can't see how they can not be nationally owned. I don't see how they can have their cake and eat it.

We need (through legislation) to make the banks insure depositors funds themselves - where do people think that the government would get the money from to pay depositors their lost funds? Ourselves is where! through tax, so for the average tax payer with an average amount of savings the deposit guarantee is worthless to you, you'll end up giving yourself your money back (Yes some individuals will gain - those with savings and not paying tax for for every one of them another taxpayer with less savings ends up paying them).

Sir Oxman

I think it is vital people on here listen to our Icelandic friend, karlth.

The world would not have fallen in, if on that night in September 2008 the govt had have followed what happens in every other situation like this - for reasons that must be uncovered, they sold this country down the river.

The more I read about this the more I believe this country needs to tell the EU/IMF to take their loan/burden away and seperate the private bank debts from the sovereign debt - is it probably too late? - have the bondholders walked away with their risk investments plus interest already?

This loan will do nothing for the Irish people only burden and bogdown the country for a long time, Portugal is the next domino to fall and that is almost certain and Spain is waiting in the wings

SkepticOne

Many thanks to Karl from Iceland for answering those questions.

gollem_1975

Bob_Latchford wrote: »

karlth above has said there was relatively little disruption in Iceland and dometic savings where secured and separated from foreign.

but as we were told during the boom years.."Ireland is different!"

In short OP - no-one can tell you exactly what would have happened.

there are an infinite number of possible outcomes... one of them being the Iceland scenario another being the "ireland turns into iraq" scenario being outlined by another poster.

Consider also that we don't know what events would have been triggered by the bank failure, and what events they would have caused etc.

We really don't know.

but if your question is "should we have allowed the banks to fail" imo the answer is No we shouldn't have.

SkepticOne

gollem_1975 wrote: »

there are an infinite number of possible outcomes... one of them being the Iceland scenario another being the "ireland turns into iraq" scenario being outlined by another poster.

I don't mind Iraq like chaos being suggested as one possible outcome among many (although I think it is unlikely). What irritates me is people stating that an Iraq like meltdown is the only possible outcome.

However in the case of Ireland the thinking behind the guarantee was not to prevent Iraq like chaos. They thought there may be some unrest but nothing like Iraq. No, what the government were trying to prevent was what happened in Iceland with people banging on pots and pans to get the government out.

gollem_1975

SkepticOne wrote: »

I don't mind Iraq like chaos being suggested as one possible outcome among many (although I think it is unlikely). What irritates me is people stating that an Iraq like meltdown is the only possible outcome.

However in the case of Ireland the thinking behind the guarantee was not to prevent Iraq like chaos. They thought there may be some unrest but nothing like Iraq. No, what the government were trying to prevent was what happened in Iceland with people banging on pots and pans to get the government out.

But how do you know this ?

I'm not so sure we would have had as mild a reaction as Iceland.

I think its as likely that politicians here were more concerned with having their heads banged on with pots and pans if the banks were to fail here.

SkepticOne

gollem_1975 wrote: »

But how do you know this ?

I'm not so sure we would have had as mild a reaction as Iceland.

I think its as likely that politicians here were more concerned with having their heads banged on with pots and pans if the banks were to fail here.

Well you are entitled to your opinion. I do know that the Lenihan made a presentation a while back where the options of what could have been done with regards to the banks were run through. When it came to letting the banks fail, rather than go into the consequences in detail, a new slide came up simply with the word "Iceland!" complete with the exclamation mark the implication being that the consequences would be so bad, in the opinion of Lenihan, that it could be summed up with the word "Iceland!". I will try and find a link at some point.

irishh_bob

Cavehill Red wrote: »

None of this is true.

None of this would have happened.

Deposits were already protected. The guarantee extended protection to the likes of Swiss banks and Roman Abramovich who are bondholders of the banks.

worse case scenario they could have let sums of over 100 k go , would only effect a tiny minority of citizens and anyone with that kind of money in one bank is taking a huge risk

they saved anglo so as to save the likes of sean quinn , i was told that by a irish life and permanent employee two years ago and im not talking about people who work at the tills in a branch , fianna fail wanted to protect thier own kind but the whole thing got out of hand

gollem_1975

SkepticOne wrote: »

Well you are entitled to your opinion. I do know that the Lenihan made a presentation a while back where the options of what could have been done with regards to the banks were run through. When it came to letting the banks fail, rather than go into the consequences in detail, a new slide came up simply with the word "Iceland!" complete with the exclamation mark the implication being that the consequences would be so bad, in the opinion of Lenihan, that it could be summed up with the word "Iceland!". I will try and find a link at some point.

And the above is your evidence ! the fact that it was contained in a ... drumroll....."presentation"

with a user name like yours I would imagine you have some scepticism as to what you see, are told and read etc.

privately I suspect some of these politicians would hold more extreme views of possible outcomes of bank failure but publicly they would not be thanked for sharing them.

O'Coonassa

newmug wrote: »

If the banks failed, peoples life savings would vanish. Business would close. Jobs would go. The country would have been like a scene from 28 days later for however long it took for the petty cash lying around to dry up. then it would be like the famine all over again.

No banks, no money to refill petrol stations with petrol. No banks, no money to pay Guards. No banks, no place to put your weeks wage. No banks, no business able to sell anything.

No businesses open, no food, shoes, diesel, TV, milk, fags, clothes, services of any kind etc.

The country would have descended into chaos. At least with things the way they are at present, none of the above will happen. Life will function with reasonable normality.

Utter testicles. Is that you Brian?

All the small savers, the people in the street, were covered by a guarantee.

The reason the bailout went ahead was because the political class wished to assist the oligarchs who fund them in making the largest ever transfer of wealth from the poor to the rich. No other reason. Our political class are kleptocrats who have nothing but contempt for the common people.

Amazingly though, nobody really cares and instead of being enraged at this transfer going ahead, they're arguing about the best way to proceed with it.

Dumbest. Electorate. Ever.

http://www.youtube.com/watch?v=3pwAFohWBL4

karlth

SkepticOne wrote: »

Well you are entitled to your opinion. I do know that the Lenihan made a presentation a while back where the options of what could have been done with regards to the banks were run through. When it came to letting the banks fail, rather than go into the consequences in detail, a new slide came up simply with the word "Iceland!" complete with the exclamation mark the implication being that the consequences would be so bad, in the opinion of Lenihan, that it could be summed up with the word "Iceland!". I will try and find a link at some point.

http://www.irishtimes.com/newspaper/opinion/2010/0303/1224265498610.html

First paragraph.

dermo88

If the Banks were allowed to fail, it would have been fast and vicious. We will never know, for economics is a very subjective issue. Over the past three years, since the cracks first starting showing at Northern Rock in Britain, we have gone from:

- "This is a minor blip"
- "We will survive, our fundamentals are sound"
- "There will be a soft landing"
- "The Irish Banking sector is solvent"
- "We are where we are".

To the evening of 21st November 2010, when finally, the end of the beginning was announced. This after untold Billions was flung at a toxic heap of debt.

I have very little money in Irish Banks. Half my savings are in a local credit union, and because that is community based finance, I will take my chances and leave them there, because removing them undermines my neighbours and friends at home.

At no time in my life have I seen a leader who can stand up in front of the people and tell it as it is. You never will either, because politics is comprised of two words.....One greek, and the other insect.

Poly - many
Tics - Blood sucking creatures.

I think the scenario in Ireland would have caused a run on the Banks, certainly. There would then be an Argentine style "Corralito" imposed, which would restrict withdrawals from Bank accounts to a maximum of 100 Euro per day for an individual. As for businesses, it is impossible to say what kind of restriction would be imposed. Online Banking transactions in the UK for example, in the period 2008-2009 took 2 days to go through, rather than the 5 minutes I was accustomed to. Now they are back at 5 minutes, start to stop.

The worst of the storm would last 3 weeks, before the European Union would step in and intervene. They would have been in Ireland faster, but Ireland never asked, as it risked a premature loss of confidence and a wholesale contagion to all sectors of the economy. This would then affect Britain, Germany, and others exposed to Irish debts, and the Irish asset bubble. I understood economics when we were in the Irish Pound, but in the Euro, a crash of this nature will have more similarities towards the late 1980's economic crash in Massachusetts (United States), where the Federal Reserve intervened.

Ireland was regarded as the poorest of the rich in the 1980's. We will head back to living standards, and possibly overall costs at the 1996 level in European terms. Thats no bad thing in itself. But the problem is also with a lot of Irish people. After gorging on Steak and Lobster between 1998-2006, it will be difficult to go back to Potatoes and Buttermilk.

I would like to believe that Lenihan was the best of a bad lot, but the evidence proves otherwise. He was diagnosed with cancer, and the best option for him should have been to pass on the finance portfolio to another member of cabinet. Sadly, it is reflective of the quality of leadership in Ireland that he was left to carry the can so to speak.

On so many angles, the actions scream Party first, Cronies second, Nation last.

If this crisis leads to affordable housing, where someone on minimum wage can raise an average sized family, even in a 2 bedroom apartment, then it is one desirable outcome of the crash.

If this crisis leads to an electorate who hold their leaders accountable, and watch their actions, rather than apathy - stating "the next lot are no better", its a desirable outcome.

The IMF intervention is a blessing in disguise. It tends not to work for developing nations, but for first world countries, it can be effective. It worked for Britain in 1976. It worked for South Korea in 1998. I am glad that Ireland was in the Euro, it will actually prove to have saved the country, and in 10 years, I hope to revisit this post and say.....'told you so'

High land prices only serve to benefit an elite. Before it was English landlords. Next it was developers. Same sh1t, different t-shirt.