THE NATIONALISATION of AIB and Bank of Ireland must be seen as a last resort and the Government is correct to pursue every other viable alternative. Although taking them into State ownership appears to offer the prospect of bringing an end to the protracted death by a thousand cuts the banks are currently enduring, it has its dangers.
This State will have to borrow colossal sums – €26 billion this year alone – as the economy is restructured over the next five years. Nationalising the banks leaves the exchequer liable for all their losses and has the potential to hamper both the ability to raise the funds it needs to borrow and the cost to the taxpayer of servicing the borrowings involved.
Furthermore, nationalisation – once it takes place – is not easily reversed and will result in the banking system remaining in State control for years to come. And while private sector ownership may have resulted in appalling errors of judgment and malpractice at the Irish banks, there is no reason to believe that public ownership will lead to a banking system that is any better run or more competitive. The appropriate response to the ethical failings exposed by the collapse of Anglo Irish Bank lies in better regulation. The question of who owns the banks is not of primary importance now in this context.
Although of less concern, nationalisation also wipes out whatever slim chance there is of shareholders recouping some of their losses.
Given this background, the Government is right to hold its nerve and to attempt to execute its planned recapitalisation of AIB and Bank of Ireland, despite the pressure on their share prices. A run on bank shares is not the same as a run on bank deposits. Only the latter has a direct impact on solvency and makes nationalisation unavoidable.
That said, the State’s position must be tempered by realism and an acceptance that the situation facing it is dynamic. The plan put forward before Christmas for recapitalising the sector is clearly no longer workable and must be revised. This appears to have been understood insofar as the Government seems to have conceded the need for a further €2 billion in capital for AIB and Bank of Ireland over and above the €6 billion earmarked in December. However, the amounts required by the two banks are now so large that the stakes the State will receive in the banks in return for its money may equate to quasi-nationalisation, with the Government owning over 50 per cent of the banks.
This remains preferable to full nationalisation but it should be avoided if at all possible. In order to do so, it may be fruitful to reopen talks with various private consortiums which have expressed a willingness to co-invest in the banks. However, any deal with them must include a mechanism that protects the State’s longterm interests. Equally, the Government should look at other proposals, such as capping the banks’ exposure to toxic assets.
The imperative, as matters stand, is not for nationalisation of the banks but for quick and decisive action in finding alternatives.