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German Finance Minister "It's Ireland's Fault"
Comments
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At the end of the day we have a referendum on whether the government can reduce judges salaries which amounts to pittance. But we don't have any referendum on a decision that has landed this country in a financial mess for the next 50 years. "We" the people did not nationalise Anglo or enforce a bank garauntee. We thing we live in a democracy but its far from a democracy. There is no real political choice just the same 2-3 parties who are always in power. And the party who governed the whole mess are polling in the mid 20's. Until the generation of "civil war" people die off we will continue with this narrow minded politics. We need to get the young people involved and not exclude them until they are 18. Maybe open up the local elections to younger voters.
I'm not saying nothing needs to be done, but the above doesn't really offer any solutions, I'm afraid. The existing parties are as they are because they are the choice of the majority of the electorate. I know that seems incredible if they're not your particular preference, but that's the way it must be, because there's nothing constraining people to vote for those parties other than preference.
Involving young people is no panacea either. You can vote once you're 18, but how many people do? The answer is very few, so I can't see how even younger voters would change the picture at all. And that "very few" isn't some kind of sinister outcome, either - it's pretty much a universal across every democratic polity - younger people don't vote because they don't see the point of voting. Not because there is no point in them voting, but because they no more see the point in it than in pensions.
cordially,
Scofflaw0 -
dealhunter1985 wrote: »if the government chose not to guarantee the banks, would that have resulted in all of us losing any deposits we had in the banks at the time?
Deposits would be lost, because senior bonholders can't lose without deposit holders losing. They rank the same.
However, deposit holders also have an obligation to do some research and not just lump their money into the highest % account available and then cry innocent if something goes wrong like in Iceland.0 -
Yes, I agree there is a certain amount of blame on Europe too. The only thing is we totally under regulated the industry allowing people to get the likes of 110% mortgages. Allowing people to get loans without checking that they could afford them or what exactly they were being used for. If we had put more checks in with regards that type of stuff it would not have mattered what the ECB interest rates were we could have taken advantage of them in a controlled way to our benefit.
It's funny you mention regulation - the subprime crisis in the usa has often been blamed on http://en.wikipedia.org/wiki/Community_Reinvestment_Act - a federal law insisting that people on poor incomes should be allowed to have mortgages.
Indeed a lot of the problem is ours - the banks shouldn't have been guaranteed, not by a long shot. But they were, and stuck we are.0 -
It's funny you mention regulation - the subprime crisis in the usa has often been blamed on http://en.wikipedia.org/wiki/Community_Reinvestment_Act - a federal law insisting that people on poor incomes should be allowed to have mortgages.
It's not a claim that holds up very well, both because (as far as I'm aware) the empirical link doesn't hold up well, but more importantly because the problem wasn't with the risky mortgages themselves, but with the banks bundling them up into products that were designated as low risk, and trading them as such.
cordially,
Scofflaw0 -
There's actually a good (but really long) article on that just now, breaking down almost every detail of the CRA argument (those put forward by a study supporting it, in any case), on a site I read regularly:
http://neweconomicperspectives.org/2013/03/the-latest-failed-effort-to-blame-the-community-reinvestment-act-for-accounting-control-fraud.html
Gives a really good and detailed overview of the fraud that drove the crisis as well (the guy who wrote it is a fraud expert, and was a regulator during the 80's 'Savings and Loans' crisis).0 -
I'm not saying nothing needs to be done, but the above doesn't really offer any solutions, I'm afraid. The existing parties are as they are because they are the choice of the majority of the electorate. I know that seems incredible if they're not your particular preference, but that's the way it must be, because there's nothing constraining people to vote for those parties other than preference.
Involving young people is no panacea either. You can vote once you're 18, but how many people do? The answer is very few, so I can't see how even younger voters would change the picture at all. And that "very few" isn't some kind of sinister outcome, either - it's pretty much a universal across every democratic polity - younger people don't vote because they don't see the point of voting. Not because there is no point in them voting, but because they no more see the point in it than in pensions.
cordially,
Scofflaw
How about if you have a passport you can vote...simple!0 -
How about if you have a passport you can vote...simple!
One problem for youth participation, you can't vote from overseas.
Other issues are that no parties really go after the younger vote. There may be a gap there for some small parties to exploit however the way the Dail is set-up makes it difficult to get in special representative interests beyond sheep farmers and turf cutters.0 -
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It's not a claim that holds up very well, both because (as far as I'm aware) the empirical link doesn't hold up well, but more importantly because the problem wasn't with the risky mortgages themselves, but with the banks bundling them up into products that were designated as low risk, and trading them as such.
There's a decent explanation of it here.
The shorter version than this is that due to accounting rules, when the banks realised they were worthless they had to write off practically the entire investment as it was impossible to unwind the bad loans from good.
It became a worldwide problem because the CDS market was selling these things all over the world, helped by ratings agencies who bizarrely rated them AAA. And thus AIG fell because it issued most of the CDS policies were invoked.0 -
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antoobrien wrote: »There's a decent explanation of it here.
The shorter version than this is that due to accounting rules, when the banks realised they were worthless they had to write off practically the entire investment as it was impossible to unwind the bad loans from good.
It became a worldwide problem because the CDS market was selling these things all over the world, helped by ratings agencies who bizarrely rated them AAA. And thus AIG fell because it issued most of the CDS policies were invoked.
And the problem with CDS is that because they're fundamentally insurance but not described as such, they need capital to be available to cover the default (because they're insurance), but have no regulatory requirement that the capital actually be available (because they're not regulated as insurance).
So the very risky subprime mortgages were split up, bundled up into products that were effectively financial "programmes" written by mathematicians and physicists designed to cope with every possible outcome, and as a result so complex they were barely understood and uncertain to work - and in a vote of no confidence, buyers were offered alongside them an insurance contract in the form of a CDS for which no capital was set aside.
It's impressive...
cordially,
Scofflaw0 -
And the problem with CDS is that because they're fundamentally insurance but not described as such, they need capital to be available to cover the default (because they're insurance), but have no regulatory requirement that the capital actually be available (because they're not regulated as insurance).
So the very risky subprime mortgages were split up, bundled up into products that were effectively financial "programmes" written by mathematicians and physicists designed to cope with every possible outcome, and as a result so complex they were barely understood and uncertain to work - and in a vote of no confidence, buyers were offered alongside them an insurance contract in the form of a CDS for which no capital was set aside.
It's impressive...
cordially,
Scofflaw
The most impressive part was that they didn't go to jail for this misbehavior.0 -
The most impressive part was that they didn't go to jail for this misbehavior.
Not really, because nobody understood it all and everybody thought the CDSs were safe, the regulations were lax if present at all. So nobody actually misbehaved.
The impressive thing is that so many people got caught by a product that they had no fundamental understanding of how it worked.0 -
"If everyone swept in front of their own door, the whole neighbourhood would be clean," the German politician added. "
It would have been a lot easdier to keep the doorway clean if foreign bankers didnt decide to have a poo on it every night.0 -
"If everyone swept in front of their own door, the whole neighbourhood would be clean," the German politician added. "
It would have been a lot easdier to keep the doorway clean if foreign bankers didnt decide to have a poo on it every night.
The problem wasn't the foreign bankers, they only gave is the food. We made the mess with it.0 -
antoobrien wrote: »Not really, because nobody understood it all and everybody thought the CDSs were safe, the regulations were lax if present at all. So nobody actually misbehaved.
The impressive thing is that so many people got caught by a product that they had no fundamental understanding of how it worked.
I'm no economics expert, but I'm pretty sure there were people who thought CDs were unstafe. It's a handy excuse to say 'we didn't know it had a chance to blow up in our faces' and meanwhile collects millions of USD in bonuses every year (the point being that when it blew up they had already made their millions). And if some genuinely didn't understand what they were selling, they certainly misrepresented themselves to clients.
There was a LOT of confirmed misbehaviour (fraud?), such as banks being on both sides of massive trades and telling different clients different stories.0 -
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I'm no economics expert, but I'm pretty sure there were people who thought CDs were unstafe.
Not until it was too late. AIG figured it before 2005 out and started quietly discontinuing & selling them off, but still got left carrying the bag.And if some genuinely didn't understand what they were selling, they certainly misrepresented themselves to clients.
Have you ever met a salesman that you believed every word they said? That's what was operating in Wall St, salesmen, not financial experts. Most of them don't even have finance or business degrees.There was a LOT of confirmed misbehaviour (fraud?), such as banks being on both sides of massive trades and telling different clients different stories.
None of that is either illegal or uncommon, so calling it fraudulent is misrepresenting the lack of knowledge of a) the area and b) just exactly what was going on for the previous dozen or so years.0 -
antoobrien wrote: »None of that is either illegal or uncommon, so calling it fraudulent is misrepresenting the lack of knowledge of a) the area and b) just exactly what was going on for the previous dozen or so years.
I suppose for the uninitiated its fine if certain too big to fail private organisations engage in sharp practice for the enrichment of their employees/shareholders even if it means their customers/clients/other organisations become collateral damage ... its a doggy doggy world out there and its only the biggest and fittest will survive. However, what's still difficult to understand is why when it all went wrong for such organisations and individuals the taxpayer had to step in and bail them out.0 -
antoobrien wrote: »Not really, because nobody understood it all and everybody thought the CDSs were safe, the regulations were lax if present at all. So nobody actually misbehaved.
The impressive thing is that so many people got caught by a product that they had no fundamental understanding of how it worked.
This is not the case. Many knew these were a lethal cocktail and an accident waiting to happen.0 -
However, what's still difficult to understand is why when it all went wrong for such organisations and individuals the taxpayer had to step in and bail them out.
Because at the end of the day, the taxpayer was bailing themselves out. All those bonds that people are whiling to be burned are, at the end of the day money that belongs to individuals.
If Bear Stearns had been let go in March 2008, the "Lehmans Moment" would have happened then, not in the middle of september 2008. Remember when Lehmans went, it took AIG with it (even though it was less than 3 weeks from being in dire trouble anyways). Hell, even GE had trouble getting finance for a week after Lehmans went.
If JP Morgan hadn't been helped buy Bear Stearns AIG would have collapsed in April 2008 and it would have brought on all that trouble 6 months earlier. And Europe would have been caught even more off guard than it was in September.0 -
None of that is either illegal or uncommon, so calling it fraudulent is misrepresenting the lack of knowledge of a) the area and b) just exactly what was going on for the previous dozen or so years.
http://www.nytimes.com/2010/07/16/business/16goldman.html?_r=0
WASHINGTON — Goldman Sachs has agreed to pay $550 million to settle federal claims that it misled investors in a subprime mortgage product as the housing market began to collapse, officials said Thursday....................
“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert S. Khuzami, the commission’s director of enforcement.
The civil suit brought by the S.E.C. focused on a single mortgage security that Goldman created in 2007, just as cracks appeared in the housing market. That security, called Abacus 2007-AC1, enabled a prominent hedge fund manager, John A. Paulson, to place a bet against mortgage bonds.
The commission contended that Goldman misled investors, who were making a positive bet on housing, because Goldman did not disclose Mr. Paulson’s involvement in creating the deal. Mr. Paulson has not been accused of wrongdoing.
Though Goldman did not formally admit to the S.E.C.’s allegations, it agreed to a judicial order barring it from committing intentional fraud in the future under federal securities laws.0 -
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Have you ever met a salesman that you believed every word they said? That's what was operating in Wall St, salesmen, not financial experts. Most of them don't even have finance or business degrees.
I'm pretty sure a lot if not most of them have finance or business degrees except for the quants.
Besides, they are not just salesmen but also acting as investment advisers in many cases.
Even if you do take them as salesmen, any company that provides a product, and if the product does not do what it says do a certain degree, that's a case for fraudulent behaviour, as indicated in the above SEC fine (which was a slap on the wrist for Goldman who made over 13 billion USD profit in 2010).
http://www.pbs.org/wgbh/pages/frontline/warning/Not really, because nobody understood it all and everybody thought the CDSs were safe, the regulations were lax if present at all. So nobody actually misbehaved.
It's easy to see what happened, CDs and derivatives offered(and still offer) a chance to keep making the money pie bigger and bigger, these guys all work off commission, more financial products, more ways to leverage up, package and sell on, more commissions, back-date it all and let the good times roll!0 -
I'm pretty sure a lot if not most of them have finance or business degrees except for the quants.
Besides, they are not just salesmen but also acting as investment advisers in many cases.
Even if you do take them as salesmen, any company that provides a product, and if the product does not do what it says do a certain degree, that's a case for fraudulent behaviour, as indicated in the above SEC fine (which was a slap on the wrist for Goldman who made over 13 billion USD profit in 2010).
The fine doesn't really seem to be for the products not doing what they said on the tin, though:The civil suit brought by the S.E.C. focused on a single mortgage security that Goldman created in 2007, just as cracks appeared in the housing market. That security, called Abacus 2007-AC1, enabled a prominent hedge fund manager, John A. Paulson, to place a bet against mortgage bonds.
The commission contended that Goldman misled investors, who were making a positive bet on housing, because Goldman did not disclose Mr. Paulson’s involvement in creating the deal. Mr. Paulson has not been accused of wrongdoing.
I suspect the problem with some of the products is that what it says on the tin is so complicated that it's nearly impossible to work out whether the product has done what it says there or not.
cordially,
Scofflaw0 -
I'm pretty sure a lot if not most of them have finance or business degrees except for the quants.
Besides, they are not just salesmen but also acting as investment advisers in many cases.
I think you should read up on it more, a surprisingly large number of them did not have financial degrees. And investment advisers are salesmen, they will not advise you to buy products they do not trade in.It's easy to see what happened, CDs and derivatives offered(and still offer) a chance to keep making the money pie bigger and bigger, these guys all work off commission, more financial products, more ways to leverage up, package and sell on, more commissions, back-date it all and let the good times roll!
20:20 hindsight. Alan Greenspan once made a comment that he had 17,000 PhDs behind him and he couldn't get to the bottom of derivatives. Of course the problem is that the comment came out after the bubble burst rather spectacularly.
The companies could say the product did what they did and would get away with it because it was almost impossible to prove otherwise at the time.
The only thing that's dubious you have described there is the backdating of products, something the SEC frown upon because it's often used to falsely inflate stock prices.0 -
Well it seems some of the Goldman employees knew what they were selling. How come they haven't been prosecuted?
http://www.aljazeera.com/news/americas/2012/08/2012810114857984434.html
The Senate panel probe turned up company emails showing Goldman employees deriding complex mortgage securities sold to banks and other investors as "junk'' and "crap".
Levin said during his subcommittee's investigation that he believed that Goldman executives "misled the Congress'' and that Goldman "gained at the expense of their clients and they used abusive practices to do it".
Levin questioned the accuracy of testimony Goldman Sachs executives gave to Congress about whether the firm steered investors toward mortgage securities it knew likely would fail.
Goldman CEO Lloyd Blankfein told the Senate panel that the company did not bet against its clients and could not survive without their trust.
http://www.huffingtonpost.com/2010/04/24/goldman-sachs-emails-big-short_n_550547.html
The firm made money on the upside -- originating, securitizing and selling subprime mortgage-based securities to investors -- and on the downside, thanks to the insurance.
"Bad news," a May 17, 2007, email began from one Goldman employee to another. A security the firm had underwritten and sold had just lost value, costing Goldman about $2.5 million.
Further down in the email, the employee, Deeb Salem, wrote "Good news...we own 10mm protection...we make $5mm."
The firm made $5 million betting against the very securities it had underwritten and sold.0 -
"Bad news," a May 17, 2007, email began from one Goldman employee to another. A security the firm had underwritten and sold had just lost value, costing Goldman about $2.5 million.
Yeah 2007 - after all the assets backing up the derivatives had turned out to be crap. That again is the product of hindsight. What about the 10 years before that, when the real damage was done?
AIG got out of selling CDS in 2005, before anyone realised that the assets were crap, because they realised if anything went wrong they were holding the whole bag for the cost of the insured assets underlying the derivatives they were insuring. They thought in 2008 they had unwittingly dodged a bullet because what they did underwrite was expiring.0 -
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Might make myself look like an idiot by asking this but I'm sortof confused, anyway:
Looking back what is it the government should have actually done?0 -
carpejugulum wrote: »Deposit guarantee exists outside of the blanket guarantee so deposits under 100k would still be guaranteed.
Nothing exists if a bank fails. Depositers need to be more aware. They'd know about the X factor or man utd, time to start learning about more important matters imho.0 -
DanDan6592 wrote: »Might make myself look like an idiot by asking this but I'm sortof confused, anyway:
Looking back what is it the government should have actually done?
...that's what's technically known as "one of those questions". The answer appears to be that at some previous point, an Irish government should have created and tested a bank resolution mechanism, and that in the decade before the crash they should have regulated the banks properly.
That would have allowed them to know that Anglo was going to fail, and allowed everyone to know what would happen when Anglo failed. Although, to be fair, AIB weren't much better than Anglo - but AIB getting bailed out is like Waterford Crystal going bust, no Irish recession is complete without it.
As it was, there weren't any good options, because the government had no idea what state the banks were in, and had to make up their responses to the unfolding disaster as it unfolded. That, in turn, was complicated by the way that each country in Europe had more or less idea of how badly its own banks were hit, and no idea at all about how much each of the other EU countries knew about their banks.
The "Ireland's fault" bit stands, unfortunately, because the government hadn't a notion what the banks were at, and had used virtually every tool at their disposal in the decade or so before the crisis to make matters worse, cheered on (and repeatedly re-elected) by the Irish public.
cordially,
Scofflaw0 -
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...that's what's technically known as "one of those questions". The answer appears to be that at some previous point, an Irish government should have created and tested a bank resolution mechanism, and that in the decade before the crash they should have regulated the banks properly.
That would have allowed them to know that Anglo was going to fail, and allowed everyone to know what would happen when Anglo failed. Although, to be fair, AIB weren't much better than Anglo - but AIB getting bailed out is like Waterford Crystal going bust, no Irish recession is complete without it.
As it was, there weren't any good options, because the government had no idea what state the banks were in, and had to make up their responses to the unfolding disaster as it unfolded. That, in turn, was complicated by the way that each country in Europe had more or less idea of how badly its own banks were hit, and no idea at all about how much each of the other EU countries knew about their banks.
The "Ireland's fault" bit stands, unfortunately, because the government hadn't a notion what the banks were at, and had used virtually every tool at their disposal in the decade or so before the crisis to make matters worse, cheered on (and repeatedly re-elected) by the Irish public.
cordially,
Scofflaw
That's the perfect world scenario.
What they should have done was let Anglo & Ir Nationwide go bust.
I also think they knew what the banks were at, but they never thought things would get so out of control.0 -
Just a thought - what would that actually have entailed at a practical level? I mean, clearly all control mechanisms broke down. So I'm looking at the same failure and similarly wondering how or if it could have been avoided. What regulation would have had sufficient hold over banks, while at the same time enable them to act as commercial entities? I'm mindful that we'd actually substantially reformed our financial regulation institutions during this period. Allegedly, this was to make it more responsive to actual risks - and to develop Ireland's reputation as a well-regulated location for international financial services. At EU level, there was a raft of legislation, allegedly intended to support the effective regulation of cross-border financial services.... in the decade before the crash they should have regulated the banks properly.
So what, actually, would more or better regulation do?0 -
GCU Flexible Demeanour wrote: »Just a thought - what would that actually have entailed at a practical level? I mean, clearly all control mechanisms broke down. So I'm looking at the same failure and similarly wondering how or if it could have been avoided. What regulation would have had sufficient hold over banks, while at the same time enable them to act as commercial entities? I'm mindful that we'd actually substantially reformed our financial regulation institutions during this period. Allegedly, this was to make it more responsive to actual risks - and to develop Ireland's reputation as a well-regulated location for international financial services. At EU level, there was a raft of legislation, allegedly intended to support the effective regulation of cross-border financial services.
So what, actually, would more or better regulation do?
Take lending. Property should be maybe 20% of their total lending, but in the Irish banks it was nearly all they had.
So, if there was to be a property crash, it was obvious the banks were finished.0 -
GCU Flexible Demeanour wrote: »Just a thought - what would that actually have entailed at a practical level? I mean, clearly all control mechanisms broke down. So I'm looking at the same failure and similarly wondering how or if it could have been avoided. What regulation would have had sufficient hold over banks, while at the same time enable them to act as commercial entities? I'm mindful that we'd actually substantially reformed our financial regulation institutions during this period. Allegedly, this was to make it more responsive to actual risks - and to develop Ireland's reputation as a well-regulated location for international financial services. At EU level, there was a raft of legislation, allegedly intended to support the effective regulation of cross-border financial services.
So what, actually, would more or better regulation do?
Portfolio diversification, stronger prudential policy, adequate risk analysis, proper oversight of what the banks were actually doing, reduced leveraging, less 'regulatory capture' and groupthink. There's an element of the slave in Caesar's chariot, whose job was remind him he was mortal, there's an element of the government having some idea of what the banks were actually doing, and there's a real element of regulating the growth rates of banks by insisting on prudential lending.
Because when you think about it, banks are systemic institutions. Acting to "enable them to act as commercial entities" is a fundamental mistake, because they're not simply commercial entities, but a vital part of the economy. You cannot let them get themselves up the creek by pursuit of profit as if they were simply Joe Ordinary Company, because when they get themselves up the creek, they not only tend to take your economy with them, but are also usually bailed out at the expense of your economy.
Banks are utilities. They should be regulated like utilities, not commercial companies.
cordially,
Scofflaw0 -
But, sure, some institutions will be concentrated in one segment of their nature. If you're a building society, at one point, pretty much all of your lending would have been property, in a context where you've no real share captial whatsoever - all your 'shares' would have been deposits withdrawable on demand.Take lending. Property should be maybe 20% of their total lending, but in the Irish banks it was nearly all they had.
Again, I stress I'm not saying a collapse didn't happen. I'd take it as obvious one did. But if Irish banks couldn't competently lend on property - something they, at some level, were familiar with - what's to say they'd have been more successful if they tried lending into unfamiliar sectors? Bearing in mind that a few foreign banks made complete fools of themselves lending into the Irish market, which would have been diversification for them.
I'm conscious of the need for me to try to focus on a particular point, or the posts will just be unreadible. But, again on the basis that we all know a massive failure occured, wouldn't the Central Bank have said in 2007 that they were doing pretty much all that? They'd even have said that, with implementation of Basel II, reserve capital requirements were now based on the real risks that banks were taking on.Portfolio diversification, stronger prudential policy, adequate risk analysis, proper oversight of what the banks were actually doing, reduced leveraging, less 'regulatory capture' and groupthink.
I think we need to be careful at this point that we don't have a needless discussion out of (I think possibly) the two of us using the term 'commercial entities' to mean slightly different things.Acting to "enable them to act as commercial entities" is a fundamental mistake, because they're not simply commercial entities, but a vital part of the economy.
My point is, as is and was the situation, regulators set down how much capital banks need to hold to cover losses. Once the banks hold enough capital, they can lend away. The price they charge for that lending will reflect the cost of holding that reserve capital.
My point is that, unless you get into the (hard to envisage) business of regulators actually becoming involved in the operation detail of the loan approval process, it's hard to see what practical additional regulation is possible. And if the regulators make the individual lending decisions, you've reached a point were the bank has ceased to be an independent commercial entity.0 -
GCU Flexible Demeanour wrote: »But, sure, some institutions will be concentrated in one segment of their nature. If you're a building society, at one point, pretty much all of your lending would have been property, in a context where you've no real share captial whatsoever - all your 'shares' would have been deposits withdrawable on demand.
Again, I stress I'm not saying a collapse didn't happen. I'd take it as obvious one did. But if Irish banks couldn't competently lend on property - something they, at some level, were familiar with - what's to say they'd have been more successful if they tried lending into unfamiliar sectors? Bearing in mind that a few foreign banks made complete fools of themselves lending into the Irish market, which would have been diversification for them.I'm conscious of the need for me to try to focus on a particular point, or the posts will just be unreadible. But, again on the basis that we all know a massive failure occured, wouldn't the Central Bank have said in 2007 that they were doing pretty much all that? They'd even have said that, with implementation of Basel II, reserve capital requirements were now based on the real risks that banks were taking on. I think we need to be careful at this point that we don't have a needless discussion out of (I think possibly) the two of us using the term 'commercial entities' to mean slightly different things.
My point is, as is and was the situation, regulators set down how much capital banks need to hold to cover losses. Once the banks hold enough capital, they can lend away. The price they charge for that lending will reflect the cost of holding that reserve capital.
And that seems to have been inadequate. Am I the best person to determine what new or enhanced regulation of the banks would improve the situation? Probably not - I think the best thing I can do here, perhaps, is to quote, at some length (with apologies), the Deputy Governor of the CBI:Following the crisis, there has been much work on the development of macro-prudential tools that reduce the likelihood of property-driven financial crises, and that reduce or limit their consequences if they do occur. As the Central Bank is the macro-prudential authority in Ireland,[21] the bank is following this debate closely.
What are macro-prudential tools? The IMF (2011c) proposes two criteria. First, they explicitly and specifically target the build-up of risk across the financial system – systemic risk – as the bubble grows. Second, they are controlled by the macro-prudential authority.[22] However, few macro-prudential tools have been used systematically and there is little practical experience for policy makers to rely on.[23] Nonetheless, several tools that target real estate lending have been adopted in a small number of economies.[24] They can be grouped in three broad categories.[25]
The first category relates to capital requirements on property lending. For instance, capital requirements for mortgages for buy-to-let properties could be increased relative to those for primary dwellings. This would tend to reduce this type of lending, which appears to be associated with greater credit risk, and ensure that banks’ resilience is bolstered by the additional capital buffer.[26]
Second, dynamic provisioning requires banks to hold provisions against expected losses due to credit risks. This tool has been implemented in Spain, where banks are required to build up buffers against performing loans in an upturn, which can then be drawn down in a recession.[27] This naturally slows bank lending in the boom phase and leaves banks in a better position to withstand loan losses in a crash.
Third, limits on loan-to-value (LTV) and loan-to-income (LTI) ratios target the creditworthiness of borrowers more explicitly. While LTV limits help ensure that the underlying collateral – the property – is sufficient to cover the loan, were the borrower to default, LTI limits enhance the creditworthiness of borrowers by limiting their repayment burden. Tightening these ratios in the as the boom gets underway raises the ability of the financial system to cope if the bubble bursts. Their potential use in Ireland warrants further reflection.[28]
It is sometimes argued that tighter monetary policy – higher interest rates – is the appropriate way to deal with property bubbles. However, monetary policy is a blunt tool that affects all lending, risky and less risky. In contrast, macro prudential tools can be targeted narrowly on the most risky borrowers. Such a sharp focus may lower the overall cost of preventive action.
However, the narrow focus may enable borrowers and lenders to seek to circumvent the restrictions. For instance, Crowe et al. (2011a) report that, in Korea lower LTV limits were implemented for loans of less than 3 years substantially increasing the popularity of loans of three years and one day. Furthermore, LTV limits have been circumvented by taking out a personal loan to cover a portion of the house price. Moreover, measures aimed at limiting credit provision by banks risk pushing lending into other, less regulated, sectors. To overcome these problems, policy makers will likely employ several macro prudential tools at the same time. While this may reduce the risk of avoidance, it may be difficult to calibrate the setting of the different policy instruments since they are likely to interact. It is to be expected that re-calibration of instruments will take place regularly as experience with macro prudential policy is gathered.
In addition, using macro-prudential policy requires detailed micro and macro data in order to determine whether and which tools are needed. Moreover, there is a need for expert judgement, which will be a scarce commodity at the outset.[29] There are also requirements in terms of the legal framework in countries in enabling the imposition of macro-prudential instruments. Macro prudential instruments are often forward looking and preventive in nature and it may be difficult, if the legal framework places the burden of proof on the macro prudential authority, to justify a tightening of macro prudential policy, particularly in a situation in which financial tensions are not clearly evident to outside observers.
Nonetheless, there is evidence that such policies can be successful. In terms of the impact on housing market activity, Ahuja and Nabar (2011) using data on 49 emerging and advanced economies find that LTV limits slow property price growth. In a case study of Hong Kong SAR, they find that tightening LTV limits reduced both transaction volumes and price growth, albeit with a lag.[30] Wong et al. (2011), using data on Hong Kong, Singapore and Korea, find that the impact of LTV limits on property market activities is inconclusive, but that there is strong evidence that they restrict household leverage.[31]
In terms of the impact on the banking sector, Lim et al. (2011) based on IMF survey data[32] of countries’ experiences find that LTV and LTI limits and dynamic provisioning, among other instruments, may be effective in reducing credit growth. Ahuja and Nabar (2011) find that LTV and LTI limits slow property lending and that LTV limits lower non-performing loans over the longer term, while Wong et al. (2011) find that LTV limits had a significant positive impact on banking stability in Hong Kong SAR.
Overall, the idea is that regulation assumes, shall we say, a more flexible demeanour through more general contact between regulation and banking.GCU Flexible Demeanour wrote:My point is that, unless you get into the (hard to envisage) business of regulators actually becoming involved in the operation detail of the loan approval process, it's hard to see what practical additional regulation is possible. And if the regulators make the individual lending decisions, you've reached a point were the bank has ceased to be an independent commercial entity.
That, admittedly, doesn't worry me, because it seems that we don't treat them as independent commercial entities when things go wrong, which suggests that treating them as independent commercial entities when things are apparently going well may also be a poor approach.
cordially,
Scofflaw0 -
And, to be clear, I'm not expecting the thread to conclude with an infallible ten point programme to guarantee financial stability. I'm just seeing if we can explore a little behind the (perfectly plausible) view that more regulation will do the trick.Am I the best person to determine what new or enhanced regulation of the banks would improve the situation? Probably not - I think the best thing I can do here, perhaps, is to quote, at some length (with apologies), the Deputy Governor of the CBI:
Grand, but the Central Bank have had the power to set an individual capital requirement for a bank since 1970-something. In other words, at any time they could have formed the opinion that, say, Anglo were starting to take on riskier business than other banks and hit them for additional capital. If you look at the Central Bank Financial Stabilty Report from 2007, you'll not only see a load of "banks are well capitalised" stuff. You'll also see references to the kind of material that the Deputy Gov is referring to in the material you quoted. On LTV, for example, the 2007 report seemed to be of the opinion that average LTV across loan books was OK, and they particularly took comfort from the fact that Irish banks didn't have exposure to sub-prime lending.Overall, the idea is that regulation assumes, shall we say, a more flexible demeanour through more general contact between regulation and banking.
http://www.centralbank.ie/publications/documents/1.%20financial%20stability%20report%202007%20-%20part%201.pdf
Now, my point is not to get lost in the specifics of that assessment. My point is simply that the 2007 report provides evidence that all those risks (or, at least, a comparable process of review) was undertaken - but seems to have brought no practical benefit. We can respond to that by saying "they should do more/better/properly". But that's not really identifying what we'd really be doing differently.
It may simply be the fact that having a bunch of nerds crunching numbers in your Central Bank will never have any impact on the issue, because all they'll ever tell you is "ooooh, that looks a bit dangerous. I hope you know what you're doing".
Look, grand, maybe we end up with An Bord Credit. But that's an ocean away from where we are, to such an extent that it's probably no feasible.That, admittedly, doesn't worry me, because it seems that we don't treat them as independent commercial entities when things go wrong, which suggests that treating them as independent commercial entities when things are apparently going well may also be a poor approach.
As I understand it, we're part of an EU legislative framework when it comes to banking. So any company that obtains a banking licence in any Member State can trade here. Unless we leave the EU, Ireland cannot decide to plow an independent course in limiting who can do banking business.
So, I'd feel, the question is really around concretely what we'd expect Central Bank/regulators to be doing that wasn't done. And better/right/properly isn't honing that down at all.0 -
GCU Flexible Demeanour wrote: »But, sure, some institutions will be concentrated in one segment of their nature. If you're a building society, at one point, pretty much all of your lending would have been property, in a context where you've no real share captial whatsoever - all your 'shares' would have been deposits withdrawable on demand.
Again, I stress I'm not saying a collapse didn't happen. I'd take it as obvious one did. But if Irish banks couldn't competently lend on property - something they, at some level, were familiar with - what's to say they'd have been more successful if they tried lending into unfamiliar sectors? Bearing in mind that a few foreign banks made complete fools of themselves lending into the Irish market, which would have been diversification for them.I'm conscious of the need for me to try to focus on a particular point, or the posts will just be unreadible. But, again on the basis that we all know a massive failure occured, wouldn't the Central Bank have said in 2007 that they were doing pretty much all that? They'd even have said that, with implementation of Basel II, reserve capital requirements were now based on the real risks that banks were taking on. I think we need to be careful at this point that we don't have a needless discussion out of (I think possibly) the two of us using the term 'commercial entities' to mean slightly different things.
My point is, as is and was the situation, regulators set down how much capital banks need to hold to cover losses. Once the banks hold enough capital, they can lend away. The price they charge for that lending will reflect the cost of holding that reserve capital.
My point is that, unless you get into the (hard to envisage) business of regulators actually becoming involved in the operation detail of the loan approval process, it's hard to see what practical additional regulation is possible. And if the regulators make the individual lending decisions, you've reached a point were the bank has ceased to be an independent commercial entity.
That is true, so take Irish Nationwide, that was a building society, and it was turned into a gambling bank, worse than Anglo. Why was a building society involved in commercial speculation? That proves regulation completely failed.
One could have sympathy for EBS & IL&P in that they stuck to property but got caught with trackers and the crash/high prices.0 -
We can take it as read that regulation was ineffective and didn't prevent collapse, as collapse occured in the presence of regulation. But I don't think we've advanced how, systematically, regulation could have done any better. That's really what I'm getting at.That is true, so take Irish Nationwide, that was a building society, and it was turned into a gambling bank, worse than Anglo. Why was a building society involved in commercial speculation? That proves regulation completely failed.
There's nothing intrinsically wrong with building societies entering new business areas. There was provision to allow them to do it since 1989 and under EU legislation, building societies are subject to the same reserve capital requirements as banks. So (for the sake of argument) saying that building societies should have been restricted to issuing housing loans to their member-depositors is just retrofitting the particular picture of INBS at the time of its collapse onto the sector. If building societies hadn't been allowed to broaden their product base, they'd probably have died out (albeit in less dramatic circumstances) a lot earlier.
So I think we're still without any real statement or insight into what can or could be done to mean regulation would have been the thing that averted a crisis.0 -
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There are various aspects to the banking scam, all centreing on the fact that they are licensed to invent money, or credit, in return for "collateral".
The collateral can be just the borrowers promise to repay, such as a mortgage agreement. The bank then collects interest on the loan of this newly created money. The bank lends it, but did not previously have to earn this money.
The "failure of regulation" comes into it as follows. If a corrupt banker wants more profit, he must invent and lend out more of this money. He must grow the bank. But how does he achieve this rapid growth? He lends to people who are less likely to repay the money. This is a vast untapped market that the more respectable banks will ignore.That was the strategy of Anglo and Irish Nationwide. The banker knows that in the long run, the bank will collapse as many of the loans will eventually become "non-performing." But for a few glorious years, the profits roll in as the initial interest payments are being made on all the loans. In those years, the banker arranges to syphon off huge bonuses and ringfences a fat personal pension for the future. It is essentially a pyramid scheme, and when it collapses, somebody must pay. As Scofflaw pointed out, that is usually the taxpayer. The reason this happens is the banker will meet the politician during the last days of the bank, and arrange for the transfer of liability. So, in the case of Anglo, we had the infamous banker dinner at Druids Heath golf club with Lenihan et al.
Not always though. The Icelandic politicians told the bankers to f**** off, mainly because the electorate were parked outside the parliament banging pots and pans.
In our case, neither the people nor the politicians have the necessary cojones for that. Therefore tight regulation is needed to prevent the pyramid scheme from getting off the ground in the first place. Regulation to ensure the bank does not make excessively risky loans, and has more capital reserve, and/or some credit default insurance.0 -
Grand. But if neither the people nor the politicians especially care, where is the impetus for tight regulation going to come from? Tight regulation won't just arrive like the weather.In our case, neither the people nor the politicians have the necessary cojones for that. Therefore tight regulation is needed to prevent the pyramid scheme from getting off the ground in the first place.
Grand, but the point is that all that was done.It just made no appreciable difference. Banks were not adjudged to be making excessively risky loans. For instance, the regulators noted that Irish banks didn't take on subprime business. Captial reserves were assessed as adequate, because they were well in excess of the minimum requirements. Systems to do all of that were there; it just made no difference. I'm mindful of that line "Insanity: doing the same thing over and over again and expecting different results."Regulation to ensure the bank does not make excessively risky loans, and has more capital reserve, and/or some credit default insurance.0 -
From Frankfurt. Banking union requires it, in order to protect the euro from being devalued by defaulters.GCU Flexible Demeanour wrote: »where is the impetus for tight regulation going to come from?
They were making excessively risky loans; the proof of the pudding is in the eating. Poor judgement by top bankers at the time does not alter that fact. "Sub-prime" is a term associated with mortgages to people on low or unsecure incomes in the USA. In Ireland, that terminology is not commonly used. Irish bankers simply ignored the "loan as a multiple of personal earnings" rules and then bent the rules further to allow mythical overtime be taken into account. Result; a sub-prime loan all dressed up as prime collateral.GCU Flexible Demeanour wrote: »Banks were not adjudged to be making excessively risky loans. For instance, the regulators noted that Irish banks didn't take on subprime business.
The little people did not cause the collapse though. It was the € multi-million borrowers who did it all through limited companies which they could fold up in the event of something going wrong, leaving the bank with a bad loan.
That assessment was wrong. Hence the minimum requirement has gone up;GCU Flexible Demeanour wrote: »Capital reserves were assessed as adequate, because they were well in excess of the minimum requirements.
http://www.irishtimes.com/business/economy/europe/eu-banks-told-to-keep-capital-reserves-up-1.547314THE EUROPEAN Union’s banking regulator has told banks to keep capital levels at a higher target
Gurdgiev said it best;As a member of the Euro zone, Ireland retained full control over one of the tools of monetary policy, known as 'reserve requirement ratio' - or capital requirement ratio. Irish regulators (CBFSAI) has a full right to increase requirement on the banks operating in Ireland to hold the proportion of their deposits and/or proportion of their loans in reserves as capital to cover any expected losses.
Such an increase in the ratio would have reduced amount of credit available in the system and would have offset the dramatic increase in lending spurred on by the introduction of higher risk products such as 100% mortgages.
At a dinner event in 2006 I told, at the time, Governor of the Central Bank of Ireland that this is exactly what he needed to do to cool down the market for mortgages lending in the Republic. His reply was along the lines that this was politically impossible to do.
That this lever of policy is still available to Ireland is best illustrated by the two recent decisions by the new Financial Regulator to hike capital requirement ratios for Irish banks to 8% Tier 1 and most recently to 12%. Unfortunately, this decision came too late.0 -
All through this period, Irish banks were subject to the common rules on reserve capital requirements set out in EU Directives. And the point is they held substantially more capital than those rules required.From Frankfurt. Banking union requires it, in order to protect the euro from being devalued by defaulters.
They certainly were - the point is that assessments of the kind that people talking about were undertaken, and failed to change anything. Hence, the relevance of that definition of insanity. We haven't actually identified anything new or different to do.They were making excessively risky loans; the proof of the pudding is in the eating.
The term is used in the Central Bank financial stability report that I linked above - I'm using the term because they used it, in the context of assessing financial risks prior to the crash."Sub-prime" is a term associated with mortgages to people on low or unsecure incomes in the USA. In Ireland, that terminology is not commonly used.0 -
Do you not accept the point that regulation has become tighter?GCU Flexible Demeanour wrote: »We haven't actually identified anything new or different to do.
If you crash your car on a bend it's because you failed to turn the steering wheel enough. It does not mean you need a joystick instead of a steering wheel.0 -
I completely reject the car analogy, as it suggests a degree of certainty around cause and effect that simply doesn't exist in economics.Do you not accept the point that regulation has become tighter?
If you crash your car on a bend it's because you failed to turn the steering wheel enough. It does not mean you need a joystick instead of a steering wheel.
In fact, even steering isn't as simple as you suggest.
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There are various aspects to the banking scam, all centreing on the fact that they are licensed to invent money, or credit, in return for "collateral".
The collateral can be just the borrowers promise to repay, such as a mortgage agreement. The bank then collects interest on the loan of this newly created money. The bank lends it, but did not previously have to earn this money.
The "failure of regulation" comes into it as follows. If a corrupt banker wants more profit, he must invent and lend out more of this money. He must grow the bank. But how does he achieve this rapid growth? He lends to people who are less likely to repay the money. This is a vast untapped market that the more respectable banks will ignore.That was the strategy of Anglo and Irish Nationwide. The banker knows that in the long run, the bank will collapse as many of the loans will eventually become "non-performing." But for a few glorious years, the profits roll in as the initial interest payments are being made on all the loans. In those years, the banker arranges to syphon off huge bonuses and ringfences a fat personal pension for the future. It is essentially a pyramid scheme, and when it collapses, somebody must pay. As Scofflaw pointed out, that is usually the taxpayer. The reason this happens is the banker will meet the politician during the last days of the bank, and arrange for the transfer of liability. So, in the case of Anglo, we had the infamous banker dinner at Druids Heath golf club with Lenihan et al.
Not always though. The Icelandic politicians told the bankers to f**** off, mainly because the electorate were parked outside the parliament banging pots and pans.
In our case, neither the people nor the politicians have the necessary cojones for that. Therefore tight regulation is needed to prevent the pyramid scheme from getting off the ground in the first place. Regulation to ensure the bank does not make excessively risky loans, and has more capital reserve, and/or some credit default insurance.
I agree with almost all of this. I would just mention that the nature of modern banks , especially in the West, lend themselves to more risky lending behaviour. That is because the management are not usually the owners and the management will change over the medium to long-term, as will the owners. The management is vetted on a yearly basis , by a combination of financial earnings and non performing loans. The only way to grow those earnings, in a non growth economy like the US for instance, was to loosen stringent lending criteria.
Having a bank with a with a few private owners doesn't mean it's never going to go bust, but when those owners financial future is linked with the banks future, you know they are going to be more careful with their money.
Where I am based there are over 20 banks, not one has gone bust in over 25 years. Why is that (even though this is, according to modern financial circles, too many banks)? Mostly because they are majority owned by rich families or individuals who know that they will lose out if the banks generate too much bad debt.0
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