Post-2008 Irish banking crisis
The post-2008 Irish banking crisis occurred when a number of Irish financial institutions faced almost imminent collapse due to insolvency during the Great Recession. In response, the Irish government instigated a €64 billion bank bailout. 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 government occurred as result.
Background
During the second half of the 1995–2007 'Celtic Tiger' period of growth, the international bond borrowings of the six main Irish banks—Bank of Ireland, Allied Irish Banks, Anglo Irish Bank, Irish Life & Permanent, Irish Nationwide Building Society and Educational Building Society—grew from less than €16 billion in 2003 to approximately €100 billion by 2007.This growth in bond funding was quite exceptional relative to the aggregate euro area; the focus of the Central Bank of Ireland and most external observers had been on the apparently strong capital adequacy ratios of the banks or Pillar One of the Basel framework. For example, the 2007 International Monetary Fund Article IV Consultation—Staff Report on Ireland has a heading summarizing the position of the banking sector as "Banks Have Large Exposures to Property, But Big Cushions Too.". However, this appears to have come at the expense of a lack of emphasis on the second pillar, which relates to the supervisory process. In particular, the Basel II guidelines contain an extensive section on the importance of dealing with "credit concentration risk", i.e. banks having too much exposure to one source of risk. Inadequate and/or lax supervision of the Irish banking system had allowed excessive borrowing by the Irish Banks on the corporate and international money markets.
By October 2009 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. In 2010 the Bank for International Settlements recorded between US$186.4 billion and $208.3 billion in total exposure to Ireland, with $57.8 billion in exposure to Irish banks. The German monetary financial institution sector was the largest investor in Irish bank bonds during the pre-crisis period and according to the Bundesbank's consolidated figures German banks had, by September 2008, the month of the bank guarantee, €135 billion invested in Ireland. These figures for the exposure of German banks to "Irish" banks, however, relate almost in their entirety to their exposure to their own large subsidiaries based in Dublin's International Financial Services Centre, for example Depfa, which reportedly had an external focus and external ownership.
The rising rate of foreign borrowing by local Irish banks in the years before 2008 reflected the enormous increase in their lending into the Irish property market, a lending area which since 1996 seemed to be able to provide an endless flow of profitable lending opportunities as the Irish public relentlessly bought and sold property.
The total stock of mortgage loans in Ireland exploded from €16 billion in the first quarter of 2003 to a peak of €106 billion by the third quarter of 2008, about 60 percent of Ireland's GDP for that year. This, in turn, led to a massive increase in the price of Irish property assets. The freezing-up of the world's interbank market during the 2008 financial crisis caused two problems for Irish banks.
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 declining in line with the property market, the liabilities of the six Irish domestic banks were now considerably greater than their assets. Insolvency loomed and Irish banks would need major cash injections to stay open.
State responses
On 29 September 2008, Minister for Finance Brian Lenihan agreed to issue a broad state guarantee of Irish domestic banks under the Credit Institutions Act 2008 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 2008 or at any time thereafter up to and including 29 September 2010. This guarantee was in respect of all retail and corporate deposits, interbank deposits, senior unsecured debt, asset covered securities, and dated subordinated debt. On 20 October 2008, the Governing Council of the European Central Bank released their recommendations on government guarantees for bank debt which included the aim of "addressing the funding problems of liquidity-constrained solvent banks".
Recapitalisation was carried out at Ireland's two largest banks, Allied Irish Bank and Bank of Ireland, with" bailouts" of €3.5 billion confirmed for each bank on 11 February 2009. On 15 February 2009 Fine Gael leader Enda Kenny, speaking in County Cork, asked the entire board of the Central Bank of Ireland's Financial Regulation section to resign.
In late 2009, the Credit Institutions Scheme 2009 came into effect Amidst the crisis, the ruling Fianna Fáil party fell to fourth place in an opinion poll conducted by The Irish Times, placing behind Fine Gael, Labour and Sinn Féin, putting Labour and Sinn Féin ahead of Fianna Fáil for the first time in Irish history. On the evening of 21 November 2010, then Taoiseach Brian Cowen confirmed that Ireland had formally requested financial support from the European Union's European Financial Stability Facility and the International Monetary Fund, a request which was welcomed by the European Central Bank and EU finance ministers.
In November 2011, the Credit Institutions Scheme was extended by the Fine Gael – Labour coalition government to 31 December 2012, subject to European Union approval of state aid. 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 2011, Central Bank Governor, Patrick Honohan described the crisis as "one of the most expensive banking crises in world history". In September 2011 he said that the banks were now financially sound.
Anglo Irish Bank's irregularities
The December 2008 hidden loans controversy within Anglo Irish Bank led to the resignations of three executives, including chief executive Seán FitzPatrick. A mysterious "Golden Circle" of ten businessmen are being investigated over shares they purchased in Anglo Irish Bank in 2008.Anglo Irish was nationalised on 20 January 2009, 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. Denis Casey, the chief executive of Irish Life and Permanent, the company that owns Permanent TSB, resigned in the aftermath of this revelation.