Why did the Irish Banking System Fail ?.

x PyRo

Evening all,

I'm in the middle of doing an assignment for my Business course in Sligo, and i'd like to ask all of you why do you think the Irish banking system failed ?.

Or if there is any good articles on it that you could link me to i'd also appreciate it.

Nearly have it done, and just want to get everyones personal opinions on it.

Thanks to anyone who can help.

anymore

Google David McWilliams,

Biggins

Some maybe useful links that you could gleem some info from:

http://www.irishcentral.com/opinion/Top-five-Irish-scandals-of-the-decade-80132567.html
http://www.finfacts.ie/irishfinancenews/article_1015573.shtml
http://www.rte.ie/news/2010/0120/banks.html
http://www.independent.ie/business/irish/flight-of-the-developers-as-creditors-tighten-grip-2017463.html
http://www.independent.ie/business/irish/fitzpatrick-yet-to-be-quizzed-over-836487m-2000690.html
http://www.independent.ie/business/irish/ecb-member-says-banks-are-taking-same-risks-as-before-1924904.html

Just to begin with...

x PyRo

Cheers lads,

Thanks very much for those links Biggins, They'll all help me alot.

fontanalis

www.thepropertpin.com

Greed, stupidity and endemic corruption and the idea that bricks and mortar would solve all our problems and by building housing estates in places with no employment opportunities also helped.

SLUSK

Excessive risk taking happens in an environment where the banks get bailed out. You should let bad banks fail, then bankers will be less inclined to gamble their money away on mad schemes.

Nate--IRL--

fontanalis wrote: »

www.thepropertpin.com

I think you meant http://www.thepropertypin.com/

Nate

fontanalis

Nate--IRL-- wrote: »

I think you meant http://www.thepropertypin.com/

Nate

Yes, thank you.
Damn typo fail.

Time Magazine

SLUSK wrote: »

Excessive risk taking happens in an environment where the banks get bailed out regularly throughout history, regardless of bailouts.

Fixed your post.

patmar

Just a little that may help

Low interest rates regime was introduced

Let me use simple figures to illustrate point I want to make

Bank lends 200000 to buy a house

Bank charges 10% interest rate

Banks make 20000 interest

new interest rate is 5%

Banks make 10000

Banks lose 5000

hardly makes banks happy ?

House prices almost suddenly take hike and this continues

Banks see themselves recovering lost money

Estate agents see their commission climb

Interest rates go even lower

Savers get fed up

Savers start buying property

Is it all as simple as I say ?

Now, whatever you do in your exam do not try to explain how highly educated, highly trained and highly motivated people in the financial sector went so out of control and carried out transactions that can only be described as crazy

best of luck to you

fontanalis

I think prime time is doing a show on the banks tomight. If you are looking at the international (US) perspective it may be worth googling Credit Default Swaps and Collateralised Debt obligations.
Try this article.
http://www.rollingstone.com/politics/story/32255149/wall_streets_bailout_hustle/1

x PyRo

Once again thanks very much lads, all has helped very much. Can't get a better forum for getting help when one is stuck.

johnnyskeleton

People, especially those working for the banks, forgot that banks could go bust, loans could go unpaid and property prices could go down as well as up - i.e. reckless lending to property speculation while depriving the productive economy of credit.

Tommy Bateman

Sure Cowen, Lenny and the boys had warned them but they wouldn't listen. It was all greed back during the boom, and sure them eurozone intetest rates are probably partly to blame as well.

dynamick

x PyRo wrote: »

why do you think the Irish banking system failed ?

What happened?

• After entry to the euro, the Irish banks found they had access to a huge amount of wholesale funding. Instead of getting money in the door from depositors, they could just raise it on the international markets. As a result they had a lot more cash to lend out.
• Next there were some new foreign banks in Ireland who offered better deals and loser credit than the Irish banks. Scared of losing market share to these newcomers and unused to competition, the Irish banks responded by loosening credit checks and introducing 100% mortgages, interest only mortgages etc
• Following euro entry, Ireland had no more control over interest rates. As a result, interest rates were set by the ECB at a low rate appropriate for Germany and France but far too low for our booming economy.
• The banks handed out more and more money to people to buy houses and in turn more and more money to developers to buy land and build houses. People were willing to pay whatever they could borrow for a house and developers were willing to pay whatever they could borrow to buy land to build on.
• Fortunes were being made and every wanted to get on the free money train.
• Then in 2007, the source of all the cheap cash on the international markets dried up following falls in house prices in the USA in 2006.
• The Irish banks could not lend out any more money and so there were no buyers for all the property they had lent money to build. Loans to developers were not being repaid and Irish banks had 10s of billions of euro in these loans on their books.
• The government then stepped in to save the banks by guaranteeing all their debts and later introducing NAMA.

Why did it happen?

• Banks got caught up in a herd mentality rush for market share, forgetting that the quality of loans is just as important as the quantity. They abandoned all their past prudence and lent far too much.
• The regulators (Central Bank and Irish Financial Services Regulatory Authority) failed to stop the banks from overlending. They didn't see the massive growth in the balance sheets of the banks as a risk. They didn't notice the risk inherent in the fact that the banks had changed their approach to funding from looking for consumer deposits to seeking out volatile international capital.
• The general populace got caught up in the bubble mentality that buying as much property as possible with as much debt as possible was the fastest safest ticket to riches. People were even borrowing money to pay stamp duties and other property taxes.
• The government and opposition parties failed to notice that a bubble had been created and instead saw the problem in terms of helping people to get on the property ladder with tax incentives or 'affordable housing' schemes or relaxed planning and rezoning. All of which served to further inflate property demand.

x PyRo

Thanks again, Dynamick that'll come in very handy, thanks for the information.:)

imme

Greed would have to be the answer, wouldn't it?

dynamick

No. Greed drives the economy.

Irrationally risky behaviour damaged the economy. Borrowing 10 times your income to buy a house is risky and stupid. And so is lending someone 10 times his income.

Funglegunk

I found this useful. (Again from an US/International perspective.)

https://www.youtube.com/watch?v=Q0zEXdDO5JU

https://www.youtube.com/watch?v=iYhDkZjKBEw

imme

dynamick wrote: »

No. Greed drives the economy.

Irrationally risky behaviour damaged the economy. Borrowing 10 times your income to buy a house is risky and stupid. And so is lending someone 10 times his income.

eh, that sounds suspiciously like GREED to me:rolleyes:

x PyRo

Funglegunk wrote: »

I found this useful. (Again from an US/International perspective.)

https://www.youtube.com/watch?v=Q0zEXdDO5JU

https://www.youtube.com/watch?v=iYhDkZjKBEw

Very helpful, Thanks Fungle!.

zootroid

dynamick wrote: »

What happened?

• After entry to the euro, the Irish banks found they had access to a huge amount of wholesale funding. Instead of getting money in the door from depositors, they could just raise it on the international markets. As a result they had a lot more cash to lend out.
• Next there were some new foreign banks in Ireland who offered better deals and loser credit than the Irish banks. Scared of losing market share to these newcomers and unused to competition, the Irish banks responded by loosening credit checks and introducing 100% mortgages, interest only mortgages etc
• Following euro entry, Ireland had no more control over interest rates. As a result, interest rates were set by the ECB at a low rate appropriate for Germany and France but far too low for our booming economy.
• The banks handed out more and more money to people to buy houses and in turn more and more money to developers to buy land and build houses. People were willing to pay whatever they could borrow for a house and developers were willing to pay whatever they could borrow to buy land to build on.
• Fortunes were being made and every wanted to get on the free money train.
• Then in 2007, the source of all the cheap cash on the international markets dried up following falls in house prices in the USA in 2006.
• The Irish banks could not lend out any more money and so there were no buyers for all the property they had lent money to build. Loans to developers were not being repaid and Irish banks had 10s of billions of euro in these loans on their books.
• The government then stepped in to save the banks by guaranteeing all their debts and later introducing NAMA.

Why did it happen?

• Banks got caught up in a herd mentality rush for market share, forgetting that the quality of loans is just as important as the quantity. They abandoned all their past prudence and lent far too much.
• The regulators (Central Bank and Irish Financial Services Regulatory Authority) failed to stop the banks from overlending. They didn't see the massive growth in the balance sheets of the banks as a risk. They didn't notice the risk inherent in the fact that the banks had changed their approach to funding from looking for consumer deposits to seeking out volatile international capital.
• The general populace got caught up in the bubble mentality that buying as much property as possible with as much debt as possible was the fastest safest ticket to riches. People were even borrowing money to pay stamp duties and other property taxes.
• The government and opposition parties failed to notice that a bubble had been created and instead saw the problem in terms of helping people to get on the property ladder with tax incentives or 'affordable housing' schemes or relaxed planning and rezoning. All of which served to further inflate property demand.

Good post.

I'd like to add that while the government didn't notice the construction bubble, they also benefited from construction related taxes. Stamp duty, capital gains tax, PAYE and VAT on construction related activities all filled the government coffers during the boom years. So while it can be argued that they failed to notice, it can also be argued that they didn't want to know as they were benefiting from the bubble. People were also under the illusion they were becoming richer, when in reality they were merely borrowing money that had to be repaid at a later date. So there wasn't the political will to say stop, as that would have stopped the party.

Also, while they no longer had control over interest rates, there were other measures they could have introduced, such as banning 100% mortgages, ensuring banks keep more cash on deposit so they can only lend out a certain amount (loan deposit ratio) etc, but none of these things were done as nobody wanted to believe it could crash, banks weren't being prudent, the government failed to legislate, and the regulator wasn't doing his job (enforcing existing legislation). The will wasn't there. People were making too much money (or so they thought).

In my opinion, almost everyone had a hand in it. The banks for being greedy and throwing money at everyone as they knew they'll clean up on the interest. The property developers for over leveraging themselves, borrowing too much without assessing the risk properly, again boiling down to greed. The government for failing to create strong legislation to slow down the property bubble, and the public for buying into the property bubble (remember it was peoples demand for houses that was part of the problem, without this demand the bubble would not have existed). Years ago, you could only borrow approx 3 times your salary, and you needed a deposit before a bank would give you a mortgage. Once banks started giving out more and more money, people could borrow way beyond their means (loan terms increasing from 20-25 years to 35-40 years), and borrowing 5-7 times their salary. This pushed house prices up, and with the value of everyones house going up it gave the impression that people were becoming wealthier.

x PyRo

Thank you Zootriod, my lecturer will be wondering where i got my opinions from. (The Banking Sector wouldn't be my forte)

Nate--IRL--

zootroid wrote: »

Truth

It amazing how so simple an explanation will be lost on people.

Nate

nesf

Funglegunk wrote: »

I found this useful. (Again from an US/International perspective.)

https://www.youtube.com/watch?v=Q0zEXdDO5JU

https://www.youtube.com/watch?v=iYhDkZjKBEw

The above is not useful for understanding why the Irish banks failed. We did not have a problem with CDOs and securitisation of mortgages in this country which is what those videos detail.

RoundyMooney

Anglo and Ole Seanie had a big part to play in all this. The rest of 'em were only playing catchup to Anglo and it's reckless profligacy and financial conjuring. Fitzpatrick was there so long, the <expletive not added> thought he was invincible and omnipotent.

The foreign banks were plonkers too, but they pale in comparison to what became a race to the bottom, when the other institutions reacted out of fear of being left behind.

The public caught up in necessity and the whole rat race were only too happy to take the cheap, readily available money.

And now Lendahand tells us we must throw more money at a dead bank.

x PyRo

nesf wrote: »

The above is not useful for understanding why the Irish banks failed. We did not have a problem with CDOs and securitisation of mortgages in this country which is what those videos detail.

I know that just to make it clear, still will help me on with my classes so no harm done!.

x PyRo

Once again can i say thanks a million lads, really helped my understand a topic that i had no clue about. The assignment will be handed in tomorrow and fingers crossed it goes well but with the information i've got here then it should.

Thanks so very much.

johnnyskeleton

dynamick wrote: »

What happened?

• After entry to the euro, the Irish banks found they had access to a huge amount of wholesale funding. Instead of getting money in the door from depositors, they could just raise it on the international markets. As a result they had a lot more cash to lend out.

Nothing to do with the euro per se, at that time i.e. post 911, the FED and BOE reduced their rates dramatically. BOJ had been at near zero interest rates for a while, and China, Middle-East etc were raking it in from exports. All of these factors played a part, not just entry to the euro.

dynamick wrote: »

Following euro entry, Ireland had no more control over interest rates. As a result, interest rates were set by the ECB at a low rate appropriate for Germany and France but far too low for our booming economy.

Again, I doubt that if we could have set our own interest rates during this time that we would have done anything significantly different.

dynamick wrote: »

The regulators (Central Bank and Irish Financial Services Regulatory Authority) failed to stop the banks from overlending. They didn't see the massive growth in the balance sheets of the banks as a risk. They didn't notice the risk inherent in the fact that the banks had changed their approach to funding from looking for consumer deposits to seeking out volatile international capital.

They were aware of the risks, they just didn't act on it. The Central Bank has been warning for years about the dangerously high levels of personal debt. By political pressure prevented them taking any real steps to dampen the property market. Indeed, the Bacon report was implemented to reduce house prices, when it actually did that there was a backlash and the government reversed their policies and indeed tried to inflate the market further.

dynamick

johnnyskeleton wrote: »

Nothing to do with the euro per se, at that time i.e. post 911, the FED and BOE reduced their rates dramatically. BOJ had been at near zero interest rates for a while, and China, Middle-East etc were raking it in from exports. All of these factors played a part, not just entry to the euro.

Nothing to do with the euro or not just because of euro entry? You seem to be saying both. There were certainly other worldwide factors creating a well of liquidity for Irish banks to drown in.

Again, I doubt that if we could have set our own interest rates during this time that we would have done anything significantly different.

I think you would agree that finding our interest rates set to a very low level and being unable to change them was a factor in house price growth.

They were aware of the risks, they just didn't act on it. The Central Bank has been warning for years about the dangerously high levels of personal debt.

If they were aware and didn't act on it then that's even more damning. That would be failure to discharge the duties they were paid for.

By political pressure prevented them taking any real steps to dampen the property market.

Is this conjecture or have you any evidence of political pressure on the central bank/ifsranot to limit lending?

The Central bank and the regulator have and had the authority to issue lending regulations and to withdraw licence to lend where these regulations were broken. After all that's what a regulator is. Writing the odd ass-covering memo is hardly sufficient.

Indeed, the Bacon report was implemented to reduce house prices, when it actually did that there was a backlash and the government reversed their policies and indeed tried to inflate the market further.

The stated aim of the bacon reports was to maintain house prices rather than to reduce them.

Government actions and inactions helped inflate the property bubble but there was also bank herd behaviour, irrational speculative consumer demand, regulatory failure. Our banks balance sheets grew at a monstrous rate unparalleled in recent history to reach nearly half a trillion euros and will now be unwound at taxpayers' expense.

During the bubble, rising house prices were portrayed as both a good and a bad thing. On the positive side, they made everyone who owned a house feel like they were rich and want to re-elect the government but on the downside, they made it hard for young people to get their first house. The government attempted to achieve both objectives of maintaining high house prices for owners and yet easing prices for FTBs. The big idea was 'affordable housing' where the government pays young people to buy houses. Where would they get the money? Why by confiscating land and buildings from developers. Genius!

Most commentators in the press regarded this as a brilliant idea. Who could argue with 'affordable housing'? Opposition politicians also welcomed it and those on the left simply clamoured for more and more affordable housing units.

Paying people to buy houses is a way of increasing demand and increasing demand leads to... higher house prices. And confiscating land and buildings from developers removes supply from the free market which leads to... higher house prices. A cynic would say that this was the government's evil plan all along. But I would go with the idiot theory. Hardly anyone in authority or the press criticised 'affordable housing' for being based on a misunderstanding of the simplest theory of economics.

Other mechanisms intended to reduce price but which actually served to increase demand and price included hugely generous mortgage interest relief & removal of stamp duty for FTBs.

Irish people lost the plot and now it's payback time.

Jaysoose

The Bank executives Told the first lies.......

The Financial "regulator" believed them and didnt bother doing his job with any sense of responsibility as he was most likely so full of chablis he couldnt move....

The Goverment Believed the lies that the regulator fed them....saw the money coming in and didnt see the need to regulate the regulator.

The Sheeple believed all of the above and bought into the whole Corrupt greedy sham...


Then Kabooom.....The sheeple are blaming the Goverment.....the goverment cant blame the regulator or the banks because they believed the lie and have to maintain the denial and sure they sheeple will pick up the tab anyway...say nothing lads..

Sizzler

The financial regulator Pat Neary thought everything was grand and didnt feel the need to meddle "Work away lads, all looks good from here". In hindsight Mr.Neary should have researched the work regulation before taking the position it now seems.

View

x PyRo wrote: »

Evening all,

I'm in the middle of doing an assignment for my Business course in Sligo, and i'd like to ask all of you why do you think the Irish banking system failed ?.

It would depend on how you define "failed". For any senior bank executive during the buble with a good salary and lots of shares which they could sell, it was all a wonderful success.

Even now - after the crash - most of them remain in situ as we apparently need their "expertise" on how to run a bank properly.

They didn't have an incentive to beheave prudently during the bubble and they have even less now since they know the Government tax-payer will rescue them when their next crash happens.

jmayo

Sizzler wrote: »

The financial regulator Pat Neary thought everything was grand and didnt feel the need to meddle "Work away lads, all looks good from here". In hindsight Mr.Neary should have researched the work regulation before taking the position it now seems.

I think we should just not pick one single person here.

neary was an insider inept craven smarmy git, but never forget his predecessor liam o'reilly, the guy who shafted Eugene McErlean when he went to the IFSRA/CB with allegations of AIB overcharging.
He was there in the early days of the construction boom.
Never forget john hurley who didn't exactly do much and he was head of CB.
Never forget the ones who were and still are in Dept of Finance.
Never forget the actual finance ministers in charge and the taoiseachs.

It is too easy to blame single individuals when entire institutions were remiss.
But I will gladly settle for the ones at the top to be the ones to be beggared and heading to jail.