Nama and bank guarantee are unusual, says IMF

IRELAND’S HANDLING of the ongoing banking crisis has been more similar to the responses of other governments during past financial crises than to the responses during the current financial crisis, according to the International Monetary Fund (IMF).

A report published yesterday by the IMF said that along with Iceland and Ukraine, in Ireland “the sequence and type of responses more closely resembled those of past crises, including due diligence of the viability of financial institutions and quality of assets, public recapitalisation, removal of non-performing assets [and] operational restructuring”.

The 2008 guarantee of all bank liabilities was also unusual. The report notes the “blanket guarantee of all creditors was only adopted in Ireland whereas [such wide-ranging guarantees] were deployed in half of all previous crises in advanced economies”.

The use of Nama-like structures was another unusual aspect of the Irish policy response. “During the recent crisis in comparison to most past episodes, such as the Nordic and Asian crises, fewer assets have been removed from the balance sheets of financial institutions through public asset management companies (public AMCs) or other programmes. One important exception is Ireland, where distressed loans with a book value equivalent to 44 per cent of GDP were transferred to a public AMC,” the report states.

During the Asian crisis in the late 1990s Thailand and South Korea bought bad assets equivalent to 13.7 per cent and 19.5 per cent of gross domestic product, the report says.

In Crisis Management and Resolution: Early Lessons from the Financial Crisisthe IMF staff discussion paper claims governments internationally have stored up trouble by moving slowly to restructure banks following the global financial crisis compared with previous crises.

While the rapid monetary and fiscal reaction had helped to cushion the effects of the crisis on financial institutions, governments had supported banks with liquidity and liability guarantees without insisting on a fundamental cleaning-up of their balance sheets, said IMF staff.

“The diagnosis and repair of financial institutions and overall asset restructuring are much less advanced than they should be at this stage,” the report concluded.

“Confidence in financial systems is still highly dependent on explicit and implicit central bank and government support.”

The report said the expectation of future central bank support had increased “moral hazard” in the system by underwriting risky bank activity; a danger increased by greater concentration within financial services sectors in many countries which has created institutions considered too big to fail.

The paper does not necessarily represent the views of IMF management or its executive board, but its conclusions are likely to inform the fund’s advice in future financial crises. – (Additional reporting: Financial Times Ltd 2011)