GOVERNMENTS IN Germany, Belgium, the Netherlands, Luxembourg, the UK and Iceland have all stepped in to rescue ailing financial institutions as the epicentre of the global credit crisis crossed the Atlantic over the weekend. Ireland is far from immune to the latest development and Irish bank shares came under intense pressure yesterday as the markets bet that the credit crunch could yet expose fatal weakness at one or another Irish institution.
Those banks whose business had the most in common with last weekend’s casualties came in for the worst battering. The collapse of the UK lender Bradford Bingley which had a significant exposure to the buy-to-let market has put Bank of Ireland and Irish Life in the spotlight because of their presence in this sector.
The €35 billion lifeline extended by the German authorities to Hypo Real Estate Bank – the country’s second largest commercial property lender – put pressure on Anglo Irish Bank which is seen as its peer. It did not help that the problems which brought Hypo to the brink manifested at its Irish operation, the IFSC based specialist lender DEPFA bank which is larger in asset terms than either AIB or Bank of Ireland.
Anglo Irish Bank shares lost almost half their value on what was the worst day on the Irish stock market in two decades. Similar records were being broken across Europe.
There is no sign of any relief for Irish and European banks in the short term. And yesterday’s rejection by the House of Representatives of the $700 billion rescue package for US banking will not help matters.
In the meantime the ECB, the US Federal Reserve and other central banks continue to feed money into the system in order to provide liquidity. But it is an inevitability that if banks continue to refuse to lend to each other that there will be further casualties and as more banks collapse the deeper grows the distrust.
The Central Bank has repeatedly expressed confidence in the Irish banks, and it is a reflection of the inherent strength of the Irish banking sector that none have yet buckled despite the pressure they are undoubtedly under. However there is a limit to what any institution can withstand – as shown by the collapse of banks of the stature of Fortis and Hypo.
The authorities here have already made plans to deal with various contingencies and those plans were being stepped up a gear last night as the odds on an intervention shortened. Central to any rescue has to be the safeguarding of customers’ funds, but shareholders inevitably face big losses.
The key to any attempt to impose a systemic solution to the problems being encountered by the Irish banks is funding. The bald fact of the matter is that no Irish bank is in a position to help out another Irish institution without the support of the Government.
As the situation continues to deteriorate in the US and, now, Europe, it would not be surprising if we were to see a move in that direction in the coming days.