BANKING:THERE IS no guarantee that normal bank lending practices will resume after bad debts are removed from the books of the banks by the National Asset Management Agency (Nama), the ESRI warns in its latest Quarterly Economic Commentary.
The ESRI economist Alan Barrett said Nama was “not necessarily the silver bullet” that would restore the Irish banking sector to full health.
“We think Nama, and the principles behind Nama, are quite right. But just because you set up a Nama doesn’t mean that banks will return to normal lending practices,” Mr Barrett said. “Having been so sorely burned, they could overreact and we would end up with innate conservatism in the system.”
In this scenario, individual bankers may fear losses to the extent that they are unwilling to advance credit to the businesses and consumers who require them. Higher interest rates may also be charged as loss-making banks seek to improve their margins, he said.
Mr Barrett has previously questioned the rationale for Nama, suggesting that there was an implicit difficulty with the Government’s plan for dealing with the toxic assets in the banking sector.
The ESRI said getting the banking system functioning properly was one of the conditions that must be in place to facilitate robust growth in the economy after 2010. A restoration in the public finances, improvements in competitiveness and a return to growth in the global economy would also be required to turn the Irish economy’s fortunes around.
ESRI economist Jean Goggin, co-author of the report, pointed to global forecasts from the Organisation for Economic Co-operation and Development (OECD), which take the view that “an end to the downturn is in sight”.
Ms Goggin said there were concerns that if the Irish recovery lagged the euro zone recovery, the European Central Bank (ECB) could raise interest rates at a time when the economy here is still subdued. However, the ESRI expects the ECB to leave its key lending rate at 1 per cent until mid-2010.
