IN A wide-ranging assessment of the banking crisis and the Government’s record on handling it, Prof John McHale of NUI Galway told an annual economics conference in Kenmare last night that the failure of Anglo Irish Bank was well on the way to being the most expensive bank failure ever.
The wider crisis represented “perhaps the most intense economic policy challenge faced in the history of the State”.
Stressing the scale of the challenge policymakers faced, he said: “We should not be blind to the achievements – not least that the credit and payments system continues to function.”
This notwithstanding, he was critical of a number of Government actions and inactions in relation to the banking crisis.
He examined the four main policy instruments the Government has deployed: liability guarantees; the National Asset Management Agency; recapitalisation; and the new regulatory/supervisory regime.
Prof McHale described the original blanket guarantee as an “overreaction” because it did not make a clear distinction between the outstanding bank debt and new debt issued.
He said that a guarantee for the latter was certainly needed to allow a hugely weakened banking system continued access to funding. He went on to say that even recognising the huge pressure the authorities were under in the days running up to September 30th, 2008, the decision to guarantee the stock of debt – and Anglo’s debt in particular – was “hard to understand”.
In order to maintain political support for continuing guarantees, Prof McHale suggested “a bright line needs to be drawn between the mistake of the original guarantee”.
On Nama, he said the worst fears of its early critics had not come to pass.
Overpayment by Nama for bank loans has broadly not occurred. That said, he described the agency’s projected losses of €800 million as “implausibly low”.
Prof McHale was critical of the Government’s reluctance to move more aggressively to recapitalise the banks, but also said that full nationalisation of AIB and Bank of Ireland would have been a risky experiment owing to the dangers of politicised lending.
“Bad commercial decisions may have got us into the crisis; the solution is not to make non-commercial decisions,” he told delegates at the conference in the Park Hotel, Kenmare.
Describing the changes on banking regulation instituted since the crisis began as a “major accomplishment in both structure and leadership”, he went on to warn that there was a risk that bank lending practices will swing to the opposite extreme of that which pertained during the credit boom.
Prof McHale was especially critical of the absence of legislation to give the Government wider powers to wind down failing banks at a lower cost to the taxpayer. Such legislation could draw on “international best practice and on the recent UK legislation in particular”, he said.
On the extent to which the Government had achieved the triple objective of fixing the credit system, minimising the fiscal burden of the rescue, and ensuring future financial stability: “only time will tell”, Prof McHale concluded.
