Bank guarantee was crucial to 'buy time'

On the first anniversary of the Government’s bank guarantee scheme, is the Irish banking system any better off?

IT WAS the day most stockbrokers want to forget. Exactly one year ago, on Monday, September 29th, 2008, the Irish Stock Exchange lost almost €6.5 billion in value – its biggest fall in more than a quarter of a century.

By the time the public was waking up the following morning, the biggest market intervention in Irish history had been announced.

The Government was to guarantee deposits and debts totalling €400 billion at six Irish-owned lenders to protect the State’s financial system.

In the US, Congress was desperately trying to push through a $700 billion (€480 billion) plan to inject money into the faltering bank system, and in the process stabilise the global financial system. Although the Bill was rejected on September 29th at the 11th hour on Capitol Hill, it was enacted on October 3rd.

A year is a long time in finance, and Ireland’s guarantee scheme – or the Credit Institutions (Financial Support) Bill 2008, to use its more prosaic name – introduced on the night of September 29th/30th was to be just the first in a series of unprecedented moves undertaken by Brian Lenihan (who was then less than five months in his job as Minister for Finance) to stabilise the Irish banking system.

The aim of the scheme, he told a press conference on the morning of September 30th, was not to protect the interests of the banks, but to “safeguard the economy and everyone who lived and worked in this country”.

One year on, is the Irish banking system any better off?

Prof Ray Kinsella of the UCD Michael Smurfit Graduate Business School believes it was an inevitable and bold step. “People forget that this day last year we were very close to the precipice.”

However, he said that the banks should have taken advantage of the window of opportunity that opened.

“The banks sat back. Firstly, they should have taken the opportunity to recognise the size of their projected losses. Secondly, it was a chance for them to go to the capital markets and strengthen their capital base.”

He believes the guarantee scheme was crucial in buying the Government more time, but that one year later budgetary policies have meant that the Government has squandered this chance.

Larry Broderick, general secretary of the Irish Bank Officials’ Association, also believes the Minister’s intervention “was essentially about buying time”.

However, one year later, the association is “seriously concerned at the continued lack of appreciation by industry leaders of the need to change the banking culture which generated the crisis in the first place”.

He says there is a need for new governance structures and regulation and “a radical approach to remuneration and human resources policies – which would reward long-term stability rather than short-term recklessness”.

Lecturer in economics at Cork Institute of Technology Tom O’Connor believes that while Lenihan had little choice, ultimately, a guarantee was insufficient. “He had to act, as the banks hadn’t declared the extent of their liquidity crisis until the 11th hour.”

He says while the guarantee was enough to stave off the crisis at that time, recapitalisation was the crucial step. “The response of the markets showed that it was capital, not guarantees, that the banks needed.”

Prof Brian Lucey of Trinity College Dublin says the public will never know the full reasons behind the Cabinet’s decision until the Government papers are released in 29 years’ time, but he is concerned that the Cabinet may have made the decision without taking any expert advice.