The Honohan and Regling reports

Jim Stewart27/05/2010

Jim Stewart: There is considerable media coverage and speculation about the contents of the forthcoming Honohan Report on the role of the Central Bank, and the report by the Financial Regulator on the financial and economic crisis (See Simon Carswell, Irish Times 26/5/2010, Emmet Oliver, Irish Independent 25/5/2010, Ian Kehoe, Sunday Business Post 23/5/2010) David Clerkin and Cliff Taylor Sunday Business Post 23/5/2010).

In addition some of the key people involved in financial decision making have also expressed considerable interest in the findings - for example, Michael Somers (interview in the Sunday Independent (23/5/2010). Of the two reports, the Honohan Report is likely to be the more interesting, for example in understanding policy mistakes made by the Central Bank and the Financial Regulator.

It is also of interest that Michael Somers, in giving evidence to the Central Bank Governor (rather than the inquiry team), stated that he was not in any way involved in the decisions to give guarantees to the six covered institutions on 29th September 2008. Michael Somers is quoted as stating :- Patrick Honohan asked me to meet with his team of inquirers and I said I would meet with him, which I duly did. I think his main interest really was what was happening at the time of the guarantee. I said: 'I can't help you because I wasn't here'." (He does not appear to have had a Blackberry!) This statement appears to contradict the view of Eamon Gilmore (Dail Debate April 1) that the terms of reference of the inquiry excluded the government’s decision in respect of the guarantee.

Whether the guarantee is included or excluded from the scope of the inquiry is of great interest, because it is seen by some (for example, Morgan Kelly Irish Times 22/5/2010) as being disastrous for the stability of exchequer finances and any possible recovery. The guarantee helped the survival of all the covered institutions, but the issue is whether two of those institutions should not have been supported with a consequent reduction in the cost to the State. The ending of the guarantee gives an opportunity to revisit this decision. The guarantee also had a cost in terms of increasing the overall borrowing rate estimated at 0.15 -0.3% (Department of Finance Banking Statement Supplementary Documentation), recouped from the covered institutions via charges.

The decision to implement the guarantee may lie in an important Ecofin (Economic and Financial Affairs Council) decision one year earlier, that responsibility for managing any crisis effectively rested with national authorities (Ecofin meeting October 9, 2007). In late September 2008, following the Lehman collapse, a loss in confidence in banks raised the real possibility of bank runs. In response, individual countries competed for deposits via more and more generous insurance schemes. As Fonteyne et al state (available here) “Starting in early October 2008, EU member countries effectively raced one another to extend deposit and other bank guarantees”. Ireland was one of the first countries “out of the trap” to start this race, and this led to considerable criticism at the time (See for example, Charlie Weston, Irish Independent, October 1, 2008).

Fonteyne at al also note that bank failures “have been very rare in the EU and have usually been limited to small banks”. Restructuring via injections of public funds has been common, and exit via arranged mergers. This was attempted in the case of Anglo Irish and Irish Nationwide. The rarity of decisions to allow banks to fail within the EU is also likely to have influenced decision-making in implementing the guarantee.

The ending of the bank guarantee provides* an opportunity to ‘close’ both Anglo Irish and Irish Nationwide by withdrawing State support, which is very likely to cause them to move into liquidation. Alternative options between liquidation and continuing State support are also possible and deserve extensive analysis. In any event the liquidation of both institutions now, would not (unfortunately) remove all liabilities for the Irish State, central bank deposits would have to be repaid, ordinary depositors and perhaps commercial bank depositors (should there be any) are likely to be repaid in full.

Given the international nature of Anglo Irish’s assets and liabilities, allowing this bank to fail in view of the absence of an EU-wide special resolution regime is likely to be resisted by EU bodies such as the ECB.

The forthcoming reports are important. Given the public interest nature of the issues involved, including as much detail as possible would add enormously to their value.

* The guarantee has been extended for certain debt instruments and the main scheme may be extended until December according to Cliff Taylor, Sunday Business post 23/5/2010).

Posted in: Banking and financeBanking and financeBanking and financeBanking and finance

Tagged with: angloirishbankbankingBanking InquiryIrish Nationwide

Prof Jim Stewart

James Stewart

Dr Jim Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.

He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).



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