THE GOVERNMENT’s efforts to restore confidence in the banking industry are in danger of descending into farce. The effectiveness or otherwise of the Minister for Finance’s latest proposal for recapitalising the banks is hard to judge as it has been almost completely overshadowed by the growing controversy about back-to-back loans between Anglo Irish Bank and Irish Life Permanent. It is a controversy in which Mr Lenihan has managed to fully immerse himself.
Shares in AIB and Bank of Ireland fell 10 per cent and 16 per cent respectively yesterday. It is a matter of conjecture as to whether that decline was driven by concerns about the nature of the recapitalisation proposal itself or by a belief abroad – fostered by the latest revelations – that there is something so fundamentally amiss with Ireland’s banking culture that no amount of money can fix the problem.
Given that the recapitalisation proposal failed to specifically address the central issue of the banks’ bad debts, there may be some grounds for hope that the former rather than the latter reason triggered the fall.
By long-fingering the issue of so-called toxic assets, the Government has stayed true to form; doing the least possible at the last minute. This has the advantage of allowing it to learn from mistakes being made elsewhere – and there is no shortage of them. However, on the downside, it has risked exacerbating the damage being done to the economy by delaying the steps necessary to facilitate the return of a properly functioning banking system.
As a result of this gradual approach, we find ourselves only now finalising the mechanism by which we will put capital into the banks. In contrast, governments in most other developed economies are fully engaged, some for the second time, in the bigger issue: trying to sort out the toxic assets at the heart of the problem.
The need to address this issue was illustrated yesterday when Bank of Ireland and AIB, despite having the promise of €3.5 billion in Government money each, had their credit ratings cut. The trigger was the decision by Bank of Ireland to give a more realistic assessment of the bad loans on its books.
In the absence of a comprehensive and credible plan to deal with their bad loans, Irish banks will continue to be treated with the utmost caution by their peers. There should be no further delay in addressing this issue even though the remedial action required is likely to involve further risks for the taxpayer.