Bank Guarentee

Tim Robbins

When FF first guaranteed the banks, they claimed they had to because otherwise there would have been a money run.

FG backed this proposal.

Labour went against it.

During the election campaign Labour were blowing their trumpet telling us how great they were to not back it.

My understanding is the initial backing was a good decision because it stopped the money run. It was what happened afterwards which was really bad. Ergo FG were correct to initially back it and Labour incorrect and were just been against everything as usual.

Correct?

Since the initial banking, the full scale of the problem as become more apparent. and now Labour are trying to claim told you so.

However does completely proof that the initial backing was a madness.

Enlighten me...

Links from respected sources appreciated.

RichardAnd

My understanding of it is as follows.

There are two ways a bank can go to s**t. The first way is a liquidity problem which means that bank hasn't got money but it soon will once again. The second way is a solvency crisis which means the bank has no money and is also never going to have money, the bank is bankrupt.

The guarantee was granted on the premise that the problem was of the former case and if this were true then it would have been a good decision. What it would have meant was that the state would back up the bank if it went under and this would keep it alive until its liquidity problem was solved and all would be well and good.

Sadly, it seems many of the banks were insolvent and thus, as in the case of Anglo, that money is never going to be paid back. Backing up an insolvent bank was, almost literally, handing someone a blank cheque.

That's my understanding, correct me if I'm wrong.

Scofflaw

RichardAnd wrote: »

My understanding of it is as follows.

There are two ways a bank can go to s**t. The first way is a liquidity problem which means that bank hasn't got money but it soon will once again. The second way is a solvency crisis which means the bank has no money and is also never going to have money, the bank is bankrupt.

The guarantee was granted on the premise that the problem was of the latter case and if this were true then it would have been a good decision. What it would have meant was that the state would back up the bank if it went under and this would keep it alive until its liquidity problem was solved and all would be well and good.

Sadly, it seems many of the banks were insolvent and thus, as in the case of Anglo, that money is never going to be paid back. Backing up an insolvent bank was, almost literally, handing someone a blank cheque.

That's my understanding, correct me if I'm wrong.

That seems to be basically the size of it. It should have been a temporary measure until the 'credit crunch' was over, but it turned out that the banks were actually insolvent, because too many of their loans (assets) were concentrated in a falling and failing property and development sector. Part of the result of that is that they have remained illiquid, because nobody wants to lend to an insolvent bank. NAMA was supposed to resolve the doubt over the value of their assets by removing the failing loans, but, to date, the uncertainty over the banks persists.

cordially,
Scofflaw

cordially,
Scofflaw

gigino

In fairness to the FF government - and I am no supporter of FF - there was a bank run on the northern rock several years ago. Also, a few years ago when the government paniced + guaranteed the banks, the banks were not in as bad a state as the property market was not so bad then. The property market has got a lot worse, which means the banks are a lot worse off as more + more of their customers cannot pay back loans, + the security they offered is worth considerably less.
Still, maybe if Biffo had paid as much attention to the bubble as he did to 3am sing-songs in a Galway hotel.....we may not be in this situation....

hinault

Like others have said here there is a difference between a liquidity issue and a solvency issue.

It needs to be reiterated that FF and Brian Lenihan told the Irish people that the bank guarantee was being introduced to rectify a liquidity crisis.

It transpired that the banks had an insolvency crisis.

FF not only got the problem wrong they also managed to provide the wrong solution!

Scofflaw

hinault wrote: »

Like others have said here there is a difference between a liquidity issue and a solvency issue.

It needs to be reiterated that FF and Brian Lenihan told the Irish people that the bank guarantee was being introduced to rectify a liquidity crisis.

It transpired that the banks had an insolvency crisis.

FF not only got the problem wrong they also managed to provide the wrong solution!

To be fair on the one hand to Fianna Fáil, they only seem to have known what they were told by the banks.

To be fair on the other hand, they should have known more than that - their real failure was their dismantling of the regulatory regime over the previous decade.

cordially,
Scofflaw

hinault

Scofflaw wrote: »

To be fair on the one hand to Fianna Fáil, they only seem to have known what they were told by the banks.

To be fair on the other hand, they should have known more than that - their real failure was their dismantling of the regulatory regime over the previous decade.

cordially,
Scofflaw

I agree with both points.

The banks deliberately misled Lenihan as to the actual extent of the liabilities on their balance sheets.

Perhaps in time someone will come up with a measure to quantify how much wealth was generated here during the "Celtic Tiger" and compare it to how much wealth was lost during the subsequent crash.

SkepticOne

You have the same thinking underpinning a number of things:

1. The property bubble. Not recognising it as a bubble. Instead they provided help for people to get on the ladder with things like the affordable housing scheme but did not address the underlying bubble.
2. The banking crisis and the guarantee. Thinking the crisis was mainly due to the drying up of international credit after the Lehman collapse. Failed to understand the true extent of the problem. Thought that once international credit got flowing problem would be solved.
3. Rescue and nationalisation of Anglo. Failure to understand the extent of the building boom and the fact that loans would be repaid. Believed that once the housing market recovered things would be fine.
4. NAMA. Belief that the problems in the housing market and banking were due to temporary liquidity issues rather than the massive bubble bursting.
5. Most recently the deal with the EU/IMF. Belief that the problem is primarily budgetary and failure recognise the extent of banking problems in the country.

In all these cases, there's a recognition that a problem exists. Where the government got it wrong was dealing with symptoms rather than underlying causes which continued (and continue) to fester. Denial is the word psychologists might use to describe the thinking processes at work here.

ilovesleep

Scofflaw wrote: »

To be fair on the one hand to Fianna Fáil, they only seem to have known what they were told by the banks.

To be fair on the other hand, they should have known more than that - their real failure was their dismantling of the regulatory regime over the previous decade.

cordially,
Scofflaw

When it became clear that the bankers were lying through their arses that blanket bank guarantee should have been annulled and perhaps replaced with a guarantee to cover deposits up to a certain sum. FF continued with that bank guarantee.
When the blanket bank guarantee expired, they reintroduced it last summer.