Alternative responses to crisis were overlooked

BANK GUARANTEE:THERE WAS "no question" but that the authorities should have had a better idea of the underlying situation with the banks prior to September 29th, 2008, the night of the bank guarantee.

Peter Nyberg said such an understanding was a precondition for crisis management based on a real underlying situation. A more systematic and rigorous assessment of alternatives to a broad guarantee could then have been undertaken, he said. Such an assessment could have occurred “possibly several years before”.

However, he added that, in the conditions that existed at the time, “it is difficult to conclude with any certainty that this would have appreciably reduced the ultimate burden to the State of saving the Irish banking system”.

At the time, the Department of Finance and the Central Bank did not give serious consideration to the possibility the banks could experience future catastrophic losses in asset values. This view was held despite the fact, at the time, the markets had a negative view of the Irish banks because of exposure to the property market.

“Had there been sufficient appreciation of the long-term risk, the alternatives to initially limit, as much as feasible, the potential future liabilities of the State might have appeared more attractive than they apparently did at the time.”

Some alternatives were discussed on the night but were discarded. Instead, ministers became more concentrated on the short-term risk affecting market funding the following morning.

He said finding ways to buy time would not have been an idle exercise, even if it was just a week. While it would not have been without risk, it would have been worthwhile to explore alternatives in more depth. The amount guaranteed on the night was €375 billion, over twice the Republic’s gross national product.

The commission says its review of the decision was complicated by the lack of official records from the night. It appeared the options considered were ones produced by Merrill Lynch rather than the Central Bank, the Financial Regulator or the Department of Finance.

Mr Nyberg was critical of how the banking crisis was handled in the period after the guarantee.

An analysis of the banks’ books by PricewaterhouseCoopers after the guarantee was viewed by the authorities as “generally benign”. However, the report said the nature, scale and concentration of the loan exposures listed should have triggered more heightened and widespread concerns that institutions were likely to face solvency difficulties.

Also Irish bank share prices were continuing to fall despite the guarantee. “A faster appreciation of the reality, and the associated looming costs, underlying the above elements would have allowed the authorities to take earlier, more decisive and more credible action.”

The solvency of some of the banks could have been strengthened prior to renewed liquidity problems emerging, and non-systemic insolvent institutions could have been wound down in a “normal” way. Instead, the announcement of plans that had to be abandoned did little to build market confidence. Given the broad guarantee, doubts about sovereign creditworthiness and the credibility of the guarantee began to crop up.

This may have contributed to the continued erosion of the liquidity position of banks.

THE POLITICIANS: THE BANK GUARANTEE

'Proper information is a precondition for any crisis management based on reality. As it turned out, decisions were made on
the erroneous assumption that all banks were and would remain solvent.' – Nyberg on the bank guarantee

TAOISIGH

Bertie Ahern, June 1997 - May 2008

Brian Cowen, May 2008 – Mar 2011

MINISTERS FOR FINANCE

Charlie McCreevy, June 1997 - September 2004

Brian Cowen, September 2004 -May 2008

Brian Lenihan, May 2008- Mar 2011