The Causes and Effects of the Financial Crisis 2008
The post Irish banking crisis was the situation whereby, due to the Great Recession , a number of Irish financial institutions faced almost imminent collapse due to insolvency. This then led to a number of unexpected revelations about the business affairs of some banks and business people. Ultimately, added onto the deepening recession in the country, the banks bailout was the primary reason for the Irish government requiring IMF assistance and a total restructuring of the Irish Government occurred as result of this.
This growth in bond funding was quite exceptional relative to the aggregate euro area and the focus of the Central Bank and most external observers was on the apparently strong capital adequacy ratios of the banks or Pillar One of the Basel framework. In particular, the Basel II guidelines contain an extensive section on the importance of dealing with "credit concentration risk", i.
By October it was German and French banks that were most exposed in the periphery of the eurozone, with more than 40 per cent of the foreign claims on Greece, Ireland, Portugal, Italy and Spain being French and German. The rising rate of foreign borrowing by local Irish banks in the years before reflected the enormous increase in their lending into the Irish property market,    a lending area which since seemed to be able to provide an endless flow of profitable lending opportunities as the Irish public relentlessly bought and sold property.
Firstly, with no new money available to borrow, withdrawal of deposits caused a liquidity problem. In other words, there was no cash available to honour withdrawal requests. A liquidity problem on its own is usually manageable through Central Bank funding. However, the second problem was solvency and this was much more serious.
The lack of new money meant no new loans which meant no new property deals. No new property purchases both exposed the fragile cash-flows of developers and highlighted the stratospheric valuations of property. With the value of most of their assets loans declining in line with the property market, the liabilities deposits of the six Irish domestic banks were now considerably greater than their assets.
Insolvency loomed and Irish banks would need major cash injections recapitalisation to stay open.
Financial Banking Crisis 2008 - Detailed Overview
On 29 September Minister for Finance Brian Lenihan agreed to issue a broad state guarantee of Irish domestic banks under the Credit Institutions Financial Support Act for two years, with the intention of recapitalising them to enable them to continue to lend into the Irish economy. Government interventions  would cover liabilities existing from 30 September or at any time thereafter up to and including 29 September This guarantee was in respect of all retail and corporate deposits to the extent not covered by existing deposit protection schemes in the State or any other jurisdiction , interbank deposits, senior unsecured debt, asset covered securities, and dated subordinated debt.
This scheme guarantees specific issuances of short- and long-term eligible bank liabilities, including on-demand and term deposits, senior unsecured certificates of deposit, senior unsecured commercial paper, senior unsecured bonds and notes and certain other senior unsecured debt whose maturity could range from overnight to five years.
In March , Central Bank Governor, Patrick Honohan described the crisis as "one of the most expensive banking crises in world history". A mysterious " Golden Circle " of ten businessmen are being investigated over shares they purchased in Anglo Irish Bank in Anglo Irish was nationalised on 20 January , when the Irish government determined that recapitalisation would not be enough to save the bank.
Since then it has emerged that Anglo Irish falsified its accounts before it was nationalised, with circular transactions between it and another bank, Permanent TSB , being uncovered.
Following a revelation that Government appointed directors in Anglo Irish Bank and the Financial Regulator were investigating a deposit of billions of euros into the institution, Irish Life and Permanent admitted on 10 February that it had provided what it called "exceptional support" to Anglo during September However this volatility in deposits in Anglo Irish Bank has been stated as one of the reasons why the Government moved to nationalise it.
Following reports of a communication breakdown at the office of the Financial Services Regulatory Authority, the Chief Executive of the Financial Regulator Patrick Neary on 9 January announced his decision to retire as of 31 January that year. Financial observers indicated that a replacement for Neary might have to be sought in the United States or United Kingdom.
The crisis began through a failure by banks, the government, news organisations and the corporate sector to heed signs that the economy was overheating. Morgan Kelly, a professor of economics at University College Dublin , was particularly concerned about the real estate bubble which was reaching its climax in the summer of Kelly predicted the collapse of Irish banks, which had fuelled the rapid rise of real estate by increasingly lowering their lending standards and relying more on 3-month interbank loans than on their deposit base.
Kelly's prognostications caused a minor controversy but mostly went unnoticed until March , when Philip Ingram, an analyst at Merrill Lynch , wrote a scathing report about the real estate bubble, focusing on the three major Irish banks most responsible for the crisis, Anglo Irish , Bank of Ireland , and AIB.
Merrill Lynch had major, lucrative underwriting relationships with those banks, and a senior executive at Anglo Irish, Matt Moran, who had registered displeasure with Kelly over his articles, among others, did the same to Merrill.
The Causes and Costs of the Worst Crisis Since the Great Depression
Merrill in turn retracted the report within hours, and fired Ingram by yearend. From May the banks' share prices on the Irish stock market declined markedly, and they had halved by May This had an inevitable effect on their capital adequacy ratios and therefore their ability to lend ever-higher amounts that were necessary to support property prices. Formerly a lawyer and minister, he had no experience of finance, and opponents deplored that he would have to "learn on the job".
Ignoring the property bubble, he concluded that: ".. Our public finances are sound, with one of the lowest levels of debt in the euro area.
Our markets are flexible allowing us to respond efficiently to adverse developments. We have a dynamic and well-educated labour force. We have a pro-business outward looking society. The tax burden on both labour and capital is low.
Not many countries anywhere in the world are facing the present global economic difficulties with such advantages. At the end of September the guarantee covering the six bailed out banks expired. Just before the expiry of the guarantee, the covered banks faced a huge set of bond repayments - a result of most lenders only lending to the covered banks within the period of the original blanket guarantee - which resulted in a rapid and massive resort to ECB financing.
On 28 November , European Commission , European Central Bank ECB and the International Monetary Fund IMF , colloquially called the European Troika , agreed with the Irish government in a three-year financial aid programme on the condition of far-reaching austerity measures to be imposed on the Irish society in order to cut government expenditure. The severity of these initially proposed rates left a lingering shock. The original bailout agreement marked a portion of the loaned money for any bank recapitalisations - again, this reflects the uncertainty over whether the PCAR stress tests in early would reveal further large funding needs.
Banking crisis 2008 pdf creator
However, the Irish government used none of the borrowed money for bank recapitalisation, at least directly. In fact, the bank bailout was funded through a combination of NPRF cash and promissory notes - the former required no borrowing, being cash to hand, while the latter was a promise to pay at a later date, which required no immediate borrowing. While the promissory notes were recorded on the national debt - because they would eventually require payment, and were thus a liability - they did not involve any expenditure at the time.
After this date, no new liabilities will be guaranteed under the ELG Scheme. This does not affect any liabilities already guaranteed as of 28 March On 15 December , Ireland successfully exited the bailout programme, with market bond rates at a recent historic low.
It was a joint committee of the Houses of the Oireachtas. It published its final report on 27 January O'Brien then wrote to special liquidator Kieran Wallace to demand that these same favourable terms that were granted him by way of verbal agreement be continued. The Irish government later appointed Kieran Wallace to conduct an investigation into these same dealings. The Irish media therefore could not report on details of the injunction.
The Commission is due to report before the end of From Wikipedia, the free encyclopedia. Main article: Anglo Irish Bank hidden loans controversy. Further information: Sean FitzPatrick. Main article: Economic Adjustment Programme for Ireland. Banks portal. Retrieved 16 August Retrieved 27 September International Monetary Fund Publication Services.
Bank for International Settlements. The Irish Examiner. International Monetary Fund.
Leave a Reply.
International banking and financial market developments" PDF. December Retrieved 9 July The Wall Street Journal. Statistical and Social Inquiry Society of Ireland. January Archived from the original PDF on 28 September The Irish Times.
The New York Times. European Commission Representation in Ireland.
Post-2008 Irish banking crisis
Archived from the original on 28 September The Economic and Social Review. TCD Policy Institute. Central Bank of Ireland. Cite error: The named reference "Credit Institutions Financial Support Act " was defined multiple times with different content see the help page.
Statutory Instrument of the Government of Ireland. European Central Bank. Archived from the original on 17 February Retrieved 15 February Archived from the original on 15 February Retrieved 13 February Retrieved 21 November Minister for Finance.
Archived from the original on 18 June Retrieved 6 April Retrieved 16 September Retrieved 6 March Archived from the original on 3 February