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ECB, developers, bankers,..who else will we blame?
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07-11-2014 11:32pm#1
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So Sea Sharp's comment is valid. Irish banks lent unwisely, but in order to do this, others including eurosystem banks needed to lend unwisely to them. While this lending was profitable they didn't complain. Only when it became apparent to them that they made bad lending decisions did Merkel, Sarkozy and Trichet step in to make sure they didn't have to pay for their decisions.GCU Flexible Demeanour wrote:Indeed, and I think it has been pointed out elsewhere that the "80% of their funding was from the UK" line is allowing a statistical distortion to cloak the significance of the euro in all this. It would be very strange for Ireland to join the euro, and then find our banks raising the bulk of their funding denominated in Sterling. It would actually make no sense at all.
I don't really want to have to deal with the point again that the idea that the euro banks were heavily involved lacks two major pieces of evidence - first, evidence of a large amount of euro-area money recorded in the Irish banks, and second, evidence that what eurozone money there was came from eurozone banks.
Irish banks raising money in the UK and US is not even slightly surprising - it's where they have traditionally done business, and traditionally have overseas operations, including branch networks. They have never had any equivalent presence in eurozone countries.
The foreign claims and liabilities of Irish banks remain predominantly focused on the UK, which is generally the home of at least 50% of all foreign assets and liabilities in Irish banks, as you can see from the CBI's locational stats:
http://www.centralbank.ie/polstats/stats/locational/Pages/releases.aspx
The involvement of eurozone banks in our domestic banks remains a popular story - so popular, indeed, that people will cheerfully claim, on the basis of no evidence whatsoever, that if the CBI recorded foreign funding in the Irish banks as not being eurozone, it was "really" eurozone money coming in via non-eurozone countries. That's a pretty obvious piece of special pleading, given that nobody has put forward evidence for it.
The quote from Nyberg does not claim (let alone offer evidence for) that the foreign funding in Irish banks came from eurozone banks, or even the eurozone - it says only that on joining the eurozone, Irish banks had access to wholesale markets, without further qualification. I'm not sure how Icelandic banks apparently managed the same trick without joining the eurozone, so I'm not sure of the value of the comment generally.
Anyway, be all that as it may, and I've laid it out at length and repeatedly without anyone offering a better counter than "well, it was, so there", so I don't really want to do it again.I think it is probably fairly clear that if one bank can't lend without borrowing, then neither can two and by extension any number of banks. The exception of course being the central bank. But Ireland doesn't have a central bank in this sense.
Which implies that the only money being created in the world financial economy is created by central banks, which is apparently not the case.
It also implies that if there was an increase in the amount of money in Ireland over the course of the boom, that money must have come in from abroad. If an Irish bank must get money from somewhere to finance lending in Ireland, and the Irish banks between them cannot create net money in the Irish system, then we should expect to see a rough equivalence between foreign input and Irish money growth, no?
And I'm not sure about that. What the BoE model suggests is that what you should expect to see is growth that's primarily related to lending opportunities - they don't mention as a constraint on lending the need to borrow the money once it moves out of the lending bank. Nor is it impossible for a closed bank system to create net money without any recourse to external sources - what happens is only that loans as a proportion of assets increases:
Derived from the BoE Quarterly on Money Creation.
Here, AIB and BoI have lent out a total of €130bn, but because they're a closed system, each loses deposits only to the other. As such, all that happens is that the overall loan-to-deposit ratio increases, and the proportion of reserves to assets falls. But net money is definitely created, without any recourse to external sources.
What the BoE quarterly says is:So far this section has considered the case of an individual bank making additional loans by offering competitive interest rates — both on its loans and deposits. But if all banks simultaneously decide to try to do more lending, money growth may not be limited in quite the same way. Although an individual bank may lose deposits to other banks, it would itself be likely to gain some deposits as a result of the other banks making loans.
and:There are a number of reasons why many banks may choose to increase their lending markedly at the same time. For example, the profitability of lending at given interest rates could increase because of a general improvement in economic conditions. Alternatively, banks may decide to lend more if they perceive the risks associated with making loans to households and companies to have fallen. This sort of development is sometimes argued to be one of the reasons why bank lending expanded so much in the lead up to the financial crisis. But if that perception of a less risky environment were unwarranted, the result could be a more fragile financial system.
Those two points seem to me to address the Irish situation. Irish banks simultaneously decided to lend more into the Irish economy - in fact, they played follow my leader on it like sheep - and lost deposits primarily to each other, since the movement of deposits was primarily related to settlement of property purchases between Irish people banking with Irish banks. So the Irish domestic banking system was a largely closed system, in which the decision of all the Irish banks to increase lending together increased the money supply in Ireland by the creation of loans.
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Having said all that, Irish banks both borrowed and lent abroad just as they did in Ireland, and something interesting in the CBI aggregate stats is that the net Irish position of domestic banks is asset-heavy - there's an excess of Irish assets over Irish liabilities - while their foreign position is liability-heavy.
And, yes, the two are much more than roughly comparable - there's usually a difference of less than a million. The net asset situation in Ireland is exactly balanced by the net liability position abroad.
So while the explanation is not that Irish banks could only create money by borrowing from abroad, what they did do was balance off the net assets they were creating in Ireland through excessive lending by net borrowing from abroad. The size of that money import is, at height in January 2009, about €173bn, representing about 21% of the banks' balance sheets, compared to €28bn and 12.5% in January 2003.
If the Irish banks had to borrow from abroad to create net money in Ireland, they would have had to import, between 01/2003 and 01/2009, about €420bn, because Irish assets (lending into the Irish economy) increased by that much.
Instead, the increase in Irish assets seems to have been balanced by a mix of increased Irish liabilities (€278bn), and increased foreign liabilities (€173bn) - about 62% vs 38% respectively. As far as I can see that represents roughly the balance between domestic money creation through unanimous lending into the property bubble by all the Irish domestic banks, and the creation of foreign liabilities (import of foreign money) to balance the net asset position created in the Irish market.
The eurozone's role, though, is again small. In the early part of the bubble the EZ was a net asset location, only swapping over to being another source of balancing liabilities in about 2005, and reaching €18bn or 10.5% of the total net foreign liability in September 2008, before dropping to 4.3% the following month.
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TL;DR: the Irish banks created the bubble through net money creation within the Irish banking system, driven by the available lending opportunities, lost some of the deposits so created to non-Irish banks, and balanced their net asset position in Ireland against a net liability position abroad, primarily in the non-eurozone, and likely primarily in the UK, where they had active branch networks.
The current position of the Irish banks is now only net €10bn asset-heavy in Ireland, still balanced against a net €10bn liability position abroad. This represents a smaller amount of capital import than in January 2003.
cordially,
Scofflaw0 -
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Well here's where it gets a bit complicated. It depends on your definition of money. The example I gave involving Paddy and Joe in Leitrim was about base or narrow money. I was showing that base money did not increase when a bank lent money out. There are other measures that do increase when lending occurs. For example if I lend you 10 euros and you give me an IOU, then I can use that IOU as collateral to borrow money. In a sense the IOU is a form of money and so the money supply according to this broader definition has increased. We don't need multiple banks to illustrate this. A single lending institution is sufficient. When a bank lends money, as the BOE points out, an asset is created of a certain value which can be traded.
But there's no new narrow money in circulation. If a bank has lent out all the money its depositors have lent it, then it can't lend out any more without either
a) attracting more deposit money (i.e. increasing the amount it owes to depositors).
b) digging into its reserves (which may be at a minimum)
c) calling in loans from other areas.
or finally
d) borrowing money.
For the property bubble to occur to the extent it did, the banks had to borrow extensively from outside. Narrow money had to be brought in. Joe the Leitrim landowner doesn't want bank assets. He requires cash.
A bubble can't be inflated without narrow money. It can be diverted away from other areas in the initial stages but it can't be manufactured by the banks themselves. Beyond a certain point, it must be obtained from abroad.
I don't see that that's been shown at all. Narrow money - which includes bank deposits - is exactly what commercial banks create.Here's how the BOI explains the Paddy and Joe example:For example, suppose an individual bank lowers the rate it charges on its loans, and that attracts a household to take out a mortgage to buy a house. The moment the mortgage loan is made, the household’s account is credited with new deposits. And once they purchase the house, they pass their new deposits on to the house seller. This situation is shown in the first row of Figure 2. The buyer is left with a new asset in the form of a house and a new liability in the form of a new loan. The seller is left with money in the form of bank deposits instead of a house. It is more likely than not that the seller’s account will be with a different bank to the buyer’s. So when the transaction takes place, the new deposits will be transferred to the seller’s bank, as shown in the second row of Figure 2. The buyer’s bank would then have fewer deposits than assets. In the first instance, the buyer’s bank settles with the seller’s bank by transferring reserves. But that would leave the buyer’s bank with fewer reserves and more loans relative to its deposits than before. This is likely to be problematic for the bank since it would increase the risk that it would not be able to meet all of its likely outflows. And, in practice, banks make many such loans every day. So if a given bank financed all of its new loans in this way, it would soon run out of reserves.
Banks therefore try to attract or retain additional liabilities to accompany their new loans. In practice other banks would also be making new loans and creating new deposits, so one way they can do this is to try and attract some of those newly created deposits. In a competitive banking sector, that may involve increasing the rate they offer to households on their savings accounts. By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending. And the cost of that needs to be measured against the interest the bank expects to earn on the loans it is making, which in turn depends on the level of Bank Rate set by the Bank of England. For example, if a bank continued to attract new borrowers and increase lending by reducing mortgage rates, and sought to attract new deposits by increasing the rates it was paying on its customers’ deposits, it might soon find it unprofitable to keep expanding its lending. Competition for loans and deposits, and the desire to make a profit, therefore limit money creation by banks.
I've highlighted a number of point here. The individual bank can't lend without without either running down its reserves or seeking external funding.
A group of banks can't likewise collectively increase their lending excluding interbank lending without collectively seeking funds.
Again, I don't see that you've shown this - the collective case is quite different from the individual case, and that point is highlighted by the BoE just after the section you've quoted as a different situation.
Coming back to my little model, and the point about Joe not wanting "bank assets" but cash:
One of the major points there is that without borrowing anything from outside the two-bank system, the amount of deposits - that is, money even according to Joe - has been increased by €130bn, or 2.3 times. From Joe's perspective, the fact that the banks' assets are now more in the form of loans than reserves is completely irrelevant - Joe, and everybody else, has not been paid with "bank assets" but with deposit money.
And you can simply keep running that model. Reserves don't get depleted unless they're lost outside the system.
cordially,
Scofflaw0 -
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It's the same bit of cash being recycled. When Joe receives the money for the land, in this closed system of two banks, he deposits it in one or other of the banks where it can be lent out again. Joe is the enabler of future landing by the banks. Now even if Joe puts all of the cash back in the banking system, the system itself can't grow indefinitely as it needs to keep a certain reserve as a percentage of all deposits. It needs to find this money to grow. But on top of this, Joe may decide that the banks are engaging in risky lending and he may take it all out and put it in his mattress. Hence there are limits even in a system such as this to how big the system can grow.Coming back to my little model, and the point about Joe not wanting "bank assets" but cash:
One of the major points there is that without borrowing anything from outside the two-bank system, the amount of deposits - that is, money even according to Joe - has been increased by €130bn, or 2.3 times. From Joe's perspective, the fact that the banks' assets are now more in the form of loans than reserves is completely irrelevant - Joe, and everybody else, has not been paid with "bank assets" but with deposit money.
And you can simply keep running that model. Reserves don't get depleted unless they're lost outside the system.
All this is very theoretical however. Rather than quibble about the details, we do know that money flooded into Ireland from outside. This is not disputed. This money went to banks like Anglo which in turn lent it to property developers and others unwisely. The lending to Anglo which was known to be lending heavily to developers during the bubble was itself therefore unwise.
Again, Sea Sharps point is therefore valid that there was no complaint among these lenders when things looked good. Only when they realized their mistake were moves made to ensure that they were paid back in full by the Irish.0 -
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