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Preventing future bailouts

  • 20-02-2011 10:55pm
    #1
    Closed Accounts Posts: 96 ✭✭


    Would it be possible to implement legislation(or perhaps a constitutional amendment) to prevent future bailouts of banks? I think the ship has already sailed on this current crisis, I'm thinking more about if there's a similar situation down the line. I believe it's immoral for the taxpayer to have to take the hit for a private institution which took stupid risks. The bank bailouts set a very bad precedent, but perhaps legislation like this would lead to banks becoming more prudent.

    I'm not sure if this is feasible however, perhaps someone could explain to me or explain why it's a silly idea? :)

    Thanks.


Comments

  • Registered Users, Registered Users 2 Posts: 12,895 ✭✭✭✭Sand


    If the government of the day wanted to find a way to bail out their mates, theyd have a team of lawyers hired at your expense finding a way to bailout the banks without legally breaching the bailout ban. And theyd find a way. Look at the EU - bailouts are forbidden under the EU treaties, and yet...bailouts are occurring.

    Theres two ways to ensure banks are better run:

    1 - An invasive regulatory regime that doesnt simply trust the banks to know what theyre doing.

    2 - Let the banks collapse and only intervene to relaunch the bank under new ownership and management with an eye to preserving the payments system.


  • Registered Users, Registered Users 2 Posts: 3,553 ✭✭✭lmimmfn


    the prevention of this in the future should be handled by ECB legislation, any eurozone bank going under should be taken charge of by the ECB, also tighter controls on ECB lending itself. We got too hot yet they kept pumpimg money into our economy

    Ignoring idiots who comment "far right" because they don't even know what it means



  • Registered Users, Registered Users 2 Posts: 7,157 ✭✭✭srsly78


    lmimmfn wrote: »
    We got too hot yet they kept pumpimg money into our economy

    Nope it was our own fault. Property incentives should have been done away with 10 years ago, but they (irish govt) added even more. Blaming europe for our woes is chicanery that even FF would be proud of.


  • Closed Accounts Posts: 6,718 ✭✭✭SkepticOne


    We have to continue to bail out our banks as a condition of the EU loan to us. If we decide we don't want to bail out our banks, we won't get money. It is unlikely therefore that the EU would legislate against banking bailouts while insisting we continue with ours.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    lmimmfn wrote: »
    the prevention of this in the future should be handled by ECB legislation, any eurozone bank going under should be taken charge of by the ECB, also tighter controls on ECB lending itself. We got too hot yet they kept pumpimg money into our economy

    Not really - the money the banks pumped into our economy was borrowed on the international markets, not from the ECB. And the ECB raised interest rates in 2006 and 2007 to try to control credit growth - see here, for example.

    cordially,
    Scofflaw


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  • Registered Users, Registered Users 2 Posts: 18,854 ✭✭✭✭silverharp


    blanket free deposits guarantees are also a bad idea. There should be a funded insurance scheme in place. You save/invest in an "Anglo" style bank and you pay a higher premium then a bank that just lends to safe commercial activities.

    A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer



  • Registered Users, Registered Users 2 Posts: 3,934 ✭✭✭RichardAnd


    silverharp wrote: »
    blanket free deposits guarantees are also a bad idea. There should be a funded insurance scheme in place. You save/invest in an "Anglo" style bank and you pay a higher premium then a bank that just lends to safe commercial activities.


    It's very easy with hindsight to say that Anglo is a dodgey bank (and it is) but how exactly can one know whether a bank is sound or not? Back in the boom, I believe Anglo was considered to be fairly astute in that they were partaking in the national passtime of pumping a fortune of money they didn't have into cardboard boxes on the side of a mountain.


  • Closed Accounts Posts: 836 ✭✭✭rumour


    Scofflaw wrote: »
    Not really - the money the banks pumped into our economy was borrowed on the international markets, not from the ECB. And the ECB raised interest rates in 2006 and 2007 to try to control credit growth - see here, for example.

    cordially,
    Scofflaw

    We could always reintroduce the glass steagall act at EU level which served adequately to prevent this nonsense until its erosion during the 80's.

    But then the EU banks may suffer quelle horreur!!!!


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    rumour wrote: »
    We could always reintroduce the glass steagall act at EU level which served adequately to prevent this nonsense until its erosion during the 80's.

    But then the EU banks may suffer quelle horreur!!!!

    Good Lord we wouldn't want that...but I'm not sure such a thing would have prevented the Irish banking crisis in any way, whether or not it has application to the US crisis. After all, our crisis was caused by the very simple expedient of banks lending too much and too unwisely into the commercial property sector, and an EU equivalent of Glass-Steagall wouldn't prevent that.

    I'd go for Sand's proposals:
    Sand wrote:
    1 - An invasive regulatory regime that doesnt simply trust the banks to know what they're doing.

    Absolutely required. I would add to that the ability to enforce prudential lending standards, the ability to require sectoral diversification in lending, higher capital standards and reduced reliance on short-term wholesale funding, regular open stress tests, and, if we can, some sort of public oversight to prevent regulatory capture.
    2 - Let the banks collapse and only intervene to relaunch the bank under new ownership and management with an eye to preserving the payments system.

    The problem with that, surely, is this:
    If the government of the day wanted to find a way to bail out their mates, theyd have a team of lawyers hired at your expense finding a way to bailout the banks without legally breaching the bailout ban. And theyd find a way. Look at the EU - bailouts are forbidden under the EU treaties, and yet...bailouts are occurring.

    I think you'd need to introduce a very programmatic wind-down regime for banks in the event of a failure of a stress test or two, with relatively little political leeway - and something with the kind of time-frame that doesn't leave the bank dying on the market for any length of time. Something along the lines of where a bank fails stress-test by x margin, they're given y long to sort things out. Where they fail by some larger margin, they instantly enter a resolution programme - at the same time as the announcement of the stress test result.

    Fundamentally, the problem is that banks are utilities in a modern economy, delivering money instead of electricity (it's all energy, in one sense), and therefore require the same sort of level of regulation as utilities - but they're so much more plugged into the economy at the coalface of lending that they can't simply become government monopolies. On top of that, the banks have effectively created a more or less global network at this stage - there's very little in the way of capital controls, so national boundaries are no longer really any kind of barrier - which argues for moving the regulatory framework upwards as well.

    I see the Commission have a public consultation on "technical details of a possible European crisis management framework" - I imagine the consultation document will cover these issues in rather more detail!

    cordially,
    Scofflaw


  • Closed Accounts Posts: 96 ✭✭Indigo Sunrise


    Do the stress tests have any credibility? Didn't the Irish banks pass them only a year ago?


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  • Registered Users, Registered Users 2 Posts: 18,854 ✭✭✭✭silverharp


    RichardAnd wrote: »
    It's very easy with hindsight to say that Anglo is a dodgey bank (and it is) but how exactly can one know whether a bank is sound or not? Back in the boom, I believe Anglo was considered to be fairly astute in that they were partaking in the national passtime of pumping a fortune of money they didn't have into cardboard boxes on the side of a mountain.


    there is the issue that rates compress in a bubble and junk debt gets rated like prime but there were runmblings about Anglo and why they were able to grow so fast. I wouldnt hold my breath as the ratings agencies were funded by debt issuers so again the supposed watchers were in the banks pockets. As a general point though savers and investors NEED to know they can lose money even if they deposit money in a bank. Telling a customer that it makes no difference between putting your money in the post office versus an agressive bank is wrong. It is also wrong that the the state had an unfunded contingent liability.

    A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer



  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    Do the stress tests have any credibility? Didn't the Irish banks pass them only a year ago?

    They passed a set which are widely regarded as not being very credible. There are more tests on the way, likely to be more credible.

    cordially,
    Scofflaw


  • Registered Users, Registered Users 2 Posts: 349 ✭✭Digitaljunkie


    silverharp wrote: »
    there is the issue that rates compress in a bubble and junk debt gets rated like prime but there were runmblings about Anglo and why they were able to grow so fast. I wouldnt hold my breath as the ratings agencies were funded by debt issuers so again the supposed watchers were in the banks pockets. As a general point though savers and investors NEED to know they can lose money even if they deposit money in a bank. Telling a customer that it makes no difference between putting your money in the post office versus an agressive bank is wrong. It is also wrong that the the state had an unfunded contingent liability.

    Anglo was able to grow to fast because on paper it was making money, they like most other international investment banks which were involved directly and in directly with the derivatives market especially credit defult swap's were copying the American / Alan Greenspan model with self regulation which didn't work because banks are in the business of making money for them selves so they didn't care if they sold off unsecured loans to other banks. What they didn't know was they were buying CFD's them selves as they were un-traceable.

    Their will be more bank crashes in the future as banks strive to make up new products its inevitable as banks are businesses and businesses rise and fall. As banks are now linked globally it will continue to be a global problem.


  • Registered Users, Registered Users 2 Posts: 12,895 ✭✭✭✭Sand


    @Scofflaw
    I think you'd need to introduce a very programmatic wind-down regime for banks in the event of a failure of a stress test or two, with relatively little political leeway - and something with the kind of time-frame that doesn't leave the bank dying on the market for any length of time. Something along the lines of where a bank fails stress-test by x margin, they're given y long to sort things out. Where they fail by some larger margin, they instantly enter a resolution programme - at the same time as the announcement of the stress test result.

    Youd need something that wouldnt be overly politically influenced, but I wouldnt want the system designed in such a fashion that it ties the hands of regulator so theres no room for discretion - the FR might see a problem that isnt specifically anticipated by the rules and find he cant legally intervene to limit the damage. I think Ireland needs a more disconnected FR who simply doesnt care too much about local political alliances or local big men: foreigners would give us that objectivity that perhaps Irish regulators lack.

    The trigger point is tricky. Stress tests could be gamed or conditions set in such a way that they cant be failed. Id think it would be better to have the test be triggered via real signals: significant share price declines, declining deposits (either leaving and/or increased interest rates to attract deposits required) etc.
    Fundamentally, the problem is that banks are utilities in a modern economy, delivering money instead of electricity (it's all energy, in one sense), and therefore require the same sort of level of regulation as utilities - but they're so much more plugged into the economy at the coalface of lending that they can't simply become government monopolies. On top of that, the banks have effectively created a more or less global network at this stage - there's very little in the way of capital controls, so national boundaries are no longer really any kind of barrier - which argues for moving the regulatory framework upwards as well.

    Well, in terms of capital controls youre right, the old barriers are gone. I think a lot of the problems with the banks ( in both an Irish sense, and the wider global sense) is that bank employees have moved away from investing deposits and shareholders funds, to massively leveraging their bets by borrowing vast sums on behalf of the depositors and the shareholders. If the bank employees win their bets, their bonus is leveraged by the amount they have borrowed. If they lose...well, they still get their bonus and the depositors and shareholders (and taxpayers) get to pick up the pieces.

    I believe reforms in general (especially Merkels plans for 2013) will lead to much higher costs of borrowing (no bad thing overall given the damage cheap credit has done to us) but also I think the government ought to begin heavily taxing the amount of debt an Irish bank is taking on relative to its deposit base
    They passed a set which are widely regarded as not being very credible. There are more tests on the way, likely to be more credible.

    Dunno about that - Axel Weber is apparently campaigning for any potentially damaging information (for the banks) to be witheld so it leaves investors with the knowledge that theres still unknown issues in the banking system which defeats the purpose of the tests.


  • Registered Users, Registered Users 2 Posts: 4,881 ✭✭✭PhatPiggins


    From an Irish point of view future bailouts could be avoided by selling all the nationalised Irish banks to foreign suitors and transferring the liability abroad. Anglo and Irish Nationwide are dead, EBS has 2 remaining candidates to buy it, Royal Bank of Australia are reportedly sniffing around AIB and HSB are similarly rumoured to be interested in BOI. That would leave us with Irish Life & Permanent which in fairness seems to be the least awfully run Irish bank so I wouldn't be that worried about its future. Whether EBS is sold to ILLP or the Cardinal consortium will tell a lot about future government policy on disposing of the banks. You'd hope that they get rid of them at any price.

    I'm open to correction on any of the above.


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