It Was The Lending
Saturday, January 1, 2011 at 11:07AM
What really caused the Irish banking crisis ?
Although some of them made a contribution- It wasn't the PDs
- It wasn't Charlie McCreevy
- It wasn't Bertie Ahern
- It wasn't Brian Cowen
- It wasn't "the Government" or "the politicians"
- It wasn't the Central Bank
- It wasn't the Financial Regulator
- It wasn't the ECB
- It wasn't the builders or developers
- It wasn't Lehman Brothers
- It wasn't the bonuses, or high executive pay
- It wasn't the tax-breaks
- It wasn't the hidden directors' loans
- It wasn't the "Golden Circle"
- It wasn't interest rates
- It wasn't the "Partnership process"
- It wasn't benchmarking
- It wasn't the economists
- It wasn't the tribunals
- It wasn't the "wall of €100 billion euros"
- It wasn't the EU or the Euro
- It wasn't the Bondholders
- It wasn't the Media
- It wasn't fraud
- It wasn't the house-buyers or other borrowers
- It wasn't securitisation
- It wasn't exotic derivatives
- It wasn't over-charging customers
- It wasn't "pure greed"
- It wasn't NAMA
- It wasn't even property prices
No, it was the lending. The bad lending. The giving of mis-priced loans to unworthy borrowers, over-concentrated in one sector notorious for regular "bubbles", for uneconomically sound purposes backed by inadequate "collateral" incompetently assessed and often negligently secured, if at all.
Lending money carefully has always been regarded as the "key competence" of the banking industry. Even at single-digit interest rates, it can be profitable if done well. To lend well requires diligent application of standards throughout the process. The scope for error is minuscule. If "grip is lost" across the process, disaster is not merely courted but guaranteed.
That is what happened at Irish banks in the period up to 2007.
It was the lending.
Fergus O'Rourke
Fergus O'Rourke
Reader Comments (11)
It was the regulator, who allowed bad lending practices to continue.
It was the politicians, who appointed the regulator, ignored the warning signs when he didn't do his job, and failed to rein in the banks who put the bad lending practices in place.
Do you want me to go on?
You can argue about the proportion of the blame to allocate to different people, but people are to blame. It wasn't an abstract noun, it was people. Your blog attempts to handwave away the blame, but contrary to popular belief, s*** does not just happen. People make decisions that cause s***.
Ireland, I've always thought, has had an unhealthy pre-occupation with Property, believing as a nation that it could not go down. While other countries have other, comparatively much healthier national obsessions (football, pasta, hardwork ethic) - Irish people (as a whole - above 90%) believed that you couldn't own enough property and that it would just keep going up - therefore it didn't matter how much you borrowed, how much that cost or where you bought. As long as you bought.
And if you didn't - you were an idiot or a criminal or something else.
No, it was the lending.
Of course, the lending was done by people, who were bankers. Not all bankers are involved in lending, though, something which appears to be beyond the ability of some people to comprehend. I am not attempting to wave the blame away from the actual bankers responsible, but to focus on that activity by them which caused the damage. It was the lending.
The other people mentioned by you did not do the lending. Their failures in their own spheres of responsibility were real enough, but to blame them for the lending is like blaming police for the activities of criminals, or blaming the owners of the Media for the occasional mendacity, wrong-headedness and malice of journalists.
Bad borrowing has caused a lot of damage, but it is not the borrowers who have ruined the Irish banks, it is the lenders (which term is to be understood as referring to every banker involved in lending activities with the power to say "no").
The answer to the "what ?" question is the one that I have given.
The answer to the "who ?" question, which I was not answering is:
It was the lenders
(which term is to be understood as referring to every banker involved in lending activities with the power to say "no").
And we have saint David Begg, who decries the profligacy of the bankers, but he himself was on the board of the central bank. What did he do? Does he not really know anything about banking? If so why was he appointed and why did he accept the position?
And we have a government, which is elected and well paid (to say the least) to manage the economy among other duties. If they didn't watch for the signs and take action, they were either incompetent or negligent, in either case they share a large part of the responsibility.
And then, there were the French and German Banks (and probably others, I don't have and details) who lent recklessly to the Irish Banks, when simple prudence on their behalf should have seen the signs of impending doom in the Irish Banks, so they were either incompetent or reckless.
There was a systemic failure on so many levels. Yes in the final analysis the bankers made reckless lending decisions, but we the citizens and taxpayers forked out for a system of control and regulation and so many people that were in place failed to do what they were appointed and paid to do. So it wasn't just the bankers.
The real problem were the credit default swaps - They are like private insurance policies (just bets, really) where the issuer agrees to pay for the loss of a borrower with a mortgage defaults. These were though to be so unlikely to happen that banks and brokerage houses started selling them like candy. Many or most were sold on the same property several times to speculators who wanted to gamble that the borrower would default.
When the defaults happened. the "insurers" couldn't handle the losses because they were multiplied, leading to the inability to pay those obligations.
Credit default swaps did not really feature in the Irish story. If you have evidence that they did, I'd be interested to see it.
Until then, I'll still maintain that it was the lending.
The reason seems to be that our banking system was from 2002 or so onwards controlled not by ourselves but by a foreign central bank whose jurisdiction mainly covered tens of millions of thrifty, hardworking Germans etc. who are good credit risks and who deserve low interest rates. It looks like we and the Greeks and the Portuguese etc., who (pardon the stereotype) are, by comparison, spendthrifts and sluggards who are bad credit risks, received the same once-size-fits-all interest rate as the Germans, Dutch and Luxemburgers did.
We ought not to have received such easy money. When we got the easy money, we took out too many loans. Interest rates seem disproportionately to affect long-term projects like building and development (because one doesn’t need to get a big loan to buy short-term things like clothes, food etc.). Given our evidently short-term thinking, the easy money seemed at first like an unalloyed windfall, but as it later turned out, it was not.
Surely, bankers, builders and house-buyers have always been greedy. Greed is surely a constant. The big change seem to have been the change of financial/monetary control back in 1999-2002 from our own central bank to the ECB.
That’s my tuppence’ worth anyway!
It wasn't and never will be in the purvue of the regulator to get involved with the
individual lending decisions, so this specific issue was not their
responsibility.
It wasn't easy money and it wasn't any other foreign entity. Easy money
is good for the economy, as long as it is lent on a sound basis and repayable.
The banks insist on using internally developed people to assess lending.
I have dealt with them on many occasions. The Banks need to go out and
recruit commercially experienced finance people instead. This is the
only way that Banks can be relied on in the future not to repeat the
stupidity.
The banks became unacceptably and unprofessionally self deluded about
the value of the assets being offered as collatoral and the 'predicted' value of the
assets that were being built with the borrowed money.
The developers were of course assenine in their borrowing. That is for
sure. But it is the Banks job to be responsible for their own funds and
their own lending. Hence it is ultimately their fault for the bad loans.
Too many people in this country do not understand the difference between
normal lending and investing. Too many business people aproach banks
with proposals that are essentially Investments. Banks don't invest. But
they became so self deluded about the values I mention above that they
effectively transformed themselves into investors in a market that was
widely predicted to pop.
Where we are now. ..... One of the stupidest demands we hear every day
in the media is that the Banks should be lending more to business now,
to get the country back on it's feet.
This is yet again a complete misunderstanding of the Banks role and
common sense lending and is essentially saying to the banks that bad lending was wrong and led to the crisis, but now it's ok.
Businesses across the country are in serious shit. They are in serious
shit because the money isn't in the pockets of the consumer to spend and
they are not selling their product. Lending these businesses money is
not going to change that.
The Banks should be lending based on the ability to repay; on sound
business plans that are justifiable and supported by an economy that has
the money to spend.
If lending has to be low right now then so be it. The economy needs to
grow itself organically.
IMHO - tax rates should have been cut and VAT should have been cut instead
of raised at the start of the crisis.