Could the Central Bank have limited LTV's years ago?

[room305]

Taking this to the next level, do you also think there shouldn't be any form of deposit protection, whether 20k, 100k or unlimited?

Some people regard deposit protection as a moral hazard but I don't think it's reasonable to expect the public to know which banks are fiscally sound or not.

If the government provides an environment in which they claim to licence and regulate banks, but also allow them to engage in fractional reserve lending (lend money that does not exist) then it is only fair that depositors are guaranteed in some fashion.

However, I would prefer if the taxpayer wasn't on hook for this guarantee and instead banks were told to source insurance for their deposit base as a function of obtaining a banking licence.

But the free market is an artificial construct and regulation is required to keep it in existence.

I agree that free markets are very much an artificial construct however, I disagree that regulation is required for it to function. The laws of tort and contract should be sufficient.

Banks are of vital importance to the economy, they require a license to operate and it is in the public interest that they operate in a sound fashion.

I agree wholeheartedly, but who has been quicker to address the problems in Irish banks - shareholders who dumped their stock or the government/regulator/central bank? It was only because the bond traders refused to lend to Irish banks through fears for their solvency that the government even admitted there was a problem.

Even without the credit crunch Irish banks were going to be in trouble because of their exposure to the construction industry.

Absolutely, the credit crunch is a return to normality not an aberration. It is the credit bubble preceding the crunch that was the aberration. Now that we are returning to an era of more sensible lending, a lot of banks are being left exposed.

The financial regulator, the Central Bank and the government all knew what was happening and they did nothing. I would like to know why.

Nobody likes to break up a party. I'm sure something could have been done to try and limit the madness but how effective would it have been? If LTVs were limited then perhaps banks and buyers would, with a bit of a nod and a wink, placed higher valuations on the property to make the loans look more prudent. This might have had the effect of only stoking the madness further.

If the buck stops anywhere it is either with the ECB (for keeping interest rates too low), or with the borrowers themselves.

 

[z109]

Why haven't we heard from the regulator or the head of the central bank in the past few days reassuring people that they know exactly what is on the bank's books and they feel very comfortable with what the Government is doing. I reckon it is because they haven't got a clue what is on bank's balance sheets. Also, what exactly is the role of the head of the Irish Central Bank at the moment? What does he do to justify being one of the highest paid central bankers in Europe. I work in financial sevices and I don't even know his name.

We've heard from the Regulator now, if you watched Prime Time this evening. Feeling confident about the state of the system? No me neither. What a shambles:
- property lending was not the problem
- on 95% mortgages - people need choices
- no idea what the likely loss on the bailout will be

I'm sooo looking forward to hearing from the Head of the Central Bank.

 

[wjc]

Watched Prime Time tonight. Was worried before, now scared after seeing Martin Mansergh and Pat Neary defending the Governments plan. Frankly the two of them didn't inspire confidence to put it mildly. Didn't appear to have a clue what they were talking about.

 

[Thomas22]

The FR was in a difficult position. They were concerned. They did implement stress testing. They did call for caution. Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses. They would not have appreciated that the FR was doing them a favour.

Brendan

The financial regulator should not even consider what the political backlash would have been. They are there solely to regulator financial firms and protect consumers. Nothing more

 

[Sunny]

We've heard from the Regulator now, if you watched Prime Time this evening. Feeling confident about the state of the system? No me neither. What a shambles:
- property lending was not the problem
- on 95% mortgages - people need choices
- no idea what the likely loss on the bailout will be

I'm sooo looking forward to hearing from the Head of the Central Bank.

I didn't see it. How can the regulator say property lending wasn't the problem?

 

[Raskolnikov]

Watched Prime Time tonight. Was worried before, now scared after seeing Martin Mansergh and Pat Neary defending the Governments plan.

What was most disturbing was that Pat Neary didn't acknowledge any problems with the Irish banks. Despite the Irish banking system almost being brought to collapse, he was happy to still favour the "light touch" of regulation.

This would lead me to believe that no lessons will be learned and that we shall face more trouble down the line.

 

[z109]

I didn't see it. How can the regulator say property lending wasn't the problem?

Online here:
[broken link removed]
(if you can get it to work)

He just opened his mouth and out came the words. Everyone else opened their mouths too as their jaws hit the floor.

 

[Sunny]

Online here:
[broken link removed]
(if you can get it to work)

He just opened his mouth and out came the words. Everyone else opened their mouths too as their jaws hit the floor.

I will have a look. Its great how the regulator and politicians all blame liquidity for the current problems. They don't seem very interested in asking why the Irish Banks in particular were facing such a liquidity crisis. Maybe ignorance is bliss!

 

[Afuera]

What was most disturbing was that Pat Neary didn't acknowledge any problems with the Irish banks. Despite the Irish banking system almost being brought to collapse, he was happy to still favour the "light touch" of regulation.

This would lead me to believe that no lessons will be learned and that we shall face more trouble down the line.

Very disturbing indeed. Before that interview I was questioning whether the regulator had their hands tied and lacked the clout they needed to regulate properly or whether they were simply being negligent to let things get so bad. After watching that piece on prime time though all I can conclude is that they are actually incompetant. If it's going to be up to these guys to insure the stability of the Irish financial system well then I'm well and truly worried now.

 

[sfag]

Er... no one has answered the question - can the regulator force the banks to stick to a 80% LTV.

I dont know either. I do know the government applies tax (stamp duty) to the amount you borrow. If they cant force te banks to stick to the LTV percentage they could apply a massive charge to the loan amount where it exceeds 80% LTV. That would do the trick.

I'd say they have plenty of mechanisns - all of which - as another poster above has rightly pointed out - would have very unpopular.

 

[oceanclub]

The property bubble was a result of cheap credit and massive LTV mortgages. We all knew it was happening.

We did?

*checks browser header*

I thought this was askaboutmoney.com, where everything was considered quite rosy and anyone who alluded to property crashes or rational exhuberance was just one of those begrudging missing-the-boat living-with-mummy grumpy bears...

P.

 

[Purple]

We did?

*checks browser header*

I thought this was askaboutmoney.com, where everything was considered quite rosy and anyone who alluded to property crashes or rational exhuberance was just one of those begrudging missing-the-boat living-with-mummy grumpy bears...

P.

I, for one, disagree with you and your swipe at the moderators here.

 

[Complainer]

If you tell me your opinion then I'll answer your question but I will not be replying to any more posts from you where your only contribution is to have a go at me without offering anything constructive to the thread.

Fair enough. I generally just ignore the posts where you have a go at me without offering anything constructive to the thread, but everyone to their own, I guess.

The Govt has made a huge mistake in writing an open cheque to bail out the banks, with no up-front control or up-front fees. How come the US Govt package comes to $700 bn for 220m people, and our package comes to €400 bn for 4m people. If a bank needs to be bailed out, then it should be nationalised, as the UK govt did with Northern Rock. But it seems that FF are still ruled by the 'can't interfere in business' mantra, and are quite happy just to dole out the money instead.

When will the bail out package for the primary schools ready to collapse in debt and running off the principal's credit card for basic supplies arrive? It's easy to see where the priorities lie.

 

[Purple]

Fair enough. I generally just ignore the posts where you have a go at me without offering anything constructive to the thread, but everyone to their own, I guess.

The Govt has made a huge mistake in writing an open cheque to bail out the banks, with no up-front control or up-front fees. How come the US Govt package comes to $700 bn for 220m people, and our package comes to €400 bn for 4m people. If a bank needs to be bailed out, then it should be nationalised, as the UK govt did with Northern Rock. But it seems that FF are still ruled by the 'can't interfere in business' mantra, and are quite happy just to dole out the money instead.

When will the bail out package for the primary schools ready to collapse in debt and running off the principal's credit card for basic supplies arrive? It's easy to see where the priorities lie.

They did not write a blank cheque for 400 billion, they haven't spent any money yet. They have guaranteed that they will not let the banks fail, in effect they have given them insurance. I heard on RTE radio (sorry, no link) that NCB estimate the maximum cost will be 13 billion but will probably be cost neutral and may make money.

I am not sure if this was a good idea (but decisive action was a good idea) but I think your last comment is unfair.

 

[Purple]

Wouldn't this contradict with your laissez-faire principles, i.e. "You cannot help men permanently by doing for them what they could and should do for themselves". Surely we should just let the banks fail (that's how the free market works - right), and then take it from there?

I have said on many occasions that the free market is an artificial construct which is maintained with government legislation and regulation (that’s why we have a monopolies commission).
On this issue I would love to see some banks fail but unfortunately it is not in the national interest to do so.

 

[z109]

They did not write a blank cheque for 400 billion, they haven't spent any money yet. They have guaranteed that they will not let the banks fail, in effect they have given them insurance. I heard on RTE radio (sorry, no link) that NCB estimate the maximum cost will be 13 billion but will probably be cost neutral and may make money.

I am not sure if this was a good idea (but decisive action was a good idea) but I think your last comment is unfair.

Seeing as it looks like the government is going to raise a maximum of 2 bn (according to the front page of the IT and the banks are arguing that it should be only a billion!) and the lowest estimate of the losses I've seen is 5 bn, this hardly looks like something that is revenue neutral. I suggest looking beyond the spin to doing some sums and seeing they don't add up.

As a side issue, I wouldn't trust a single word from any of the Irish stockbrokers. These are the chaps that have been recommending buy, buy, buy all the way down. Up until the recession was announced, none of them were calling a recession. Most of them up to the middle of the year were calling for a bounceback in both the economy and house prices in the second half of the year. Like the rest of our financial establishment, they are a joke. Populated by intellectual minnows and looking out for their own bonuses. Have any of them ever had a sell recommendation on an Irish share? Incest isn't the half of it.

 

[Complainer]

They did not write a blank cheque for 400 billion, they haven't spent any money yet. They have guaranteed that they will not let the banks fail, in effect they have given them insurance.

THe guarantee only has value if the guarantor is able to pay up. The exposure to the state is €400 billion.

I heard on RTE radio (sorry, no link) that NCB estimate the maximum cost will be 13 billion but will probably be cost neutral and may make money.

I read in the Irish TImes that they estimate the income at €2 billion, but sure what's €11 billion between friends. It's much more important to focus on key issues like civil servants holidays, right?

I am not sure if this was a good idea (but decisive action was a good idea) but I think your last comment is unfair.

It was certainly opportunistic, but still relevant.

I have said on many occasions that the free market is an artificial construct which is maintained with government legislation and regulation (that’s why we have a monopolies commission).

Actually we have The Competitions Authority, not a monopolies commission, but [broken link removed] And why do we have only one Competitions Authority?

On this issue I would love to see some banks fail but unfortunately it is not in the national interest to do so.

Now we're getting to the nub of the debate. I'm not so sure that it would not have been in the national interest to let one bank (particularly one that is focussed on commercial developments in the UK, rather than Irish retail customers) fail. The €100k guarantee would protect the vast majority of customers anyway. The banking sector now knows that the free market just doesn't apply to them, they can do what they like and the Govt will bail them out if things go wrong. Perhaps a bit of 'tough love' in letting one bank go might have been more in the national interest in the long term.

 

[diroche]

I'm not so sure that it would not have been in the national interest to let one bank (particularly one that is focussed on commercial developments in the UK, rather than Irish retail customers) fail. The €100k guarantee would protect the vast majority of customers anyway. The banking sector now knows that the free market just doesn't apply to them, they can do what they like and the Govt will bail them out if things go wrong. Perhaps a bit of 'tough love' in letting one bank go might have been more in the national interest in the long term.

Agree wholeheartedly. Letting one bank fail (and if possible prosecuting the directors for reckless trading) would have given the whole banking sector the kick they need to get their houses in order. But when has this government ever taken a tough decision when a fudge will do?

 

[room305]

They did not write a blank cheque for 400 billion, they haven't spent any money yet. They have guaranteed that they will not let the banks fail, in effect they have given them insurance. I heard on RTE radio (sorry, no link) that NCB estimate the maximum cost will be 13 billion but will probably be cost neutral and may make money.

I'd say there is almost no chance it will be cost neutral and carries the distinct possibility of bankrupting the state. The regulator freely admitted that nobody has examined the toxic loan books the banks have been running so have no idea what the impairments will be. The banks have been very reluctant to write down any assets and have continued to roll-up interest on developer loans.

Over €100 billion has been loaned to developers by banks (€86 billion in the republic as per Irish Times). There is no way this is only going to incur an impairment rate of 2%. In many cases the developers have no means to repay the interest on these loans without finishing the projects. Even the development projects can be completed, the developers will be selling units below cost and will not be able to pay off the entire loan.The collateral for the loans (land banks) is falling in value, in many cases by over 50%.

The problem for some of the banks was not just liquidity but insolvency.

I have said on many occasions that the free market is an artificial construct which is maintained with government legislation and regulation (that’s why we have a monopolies commission).
On this issue I would love to see some banks fail but unfortunately it is not in the national interest to do so.

You say it's not in the national interest to let any bank fail, ever - no matter how recklessly the run their business? The idea of risk-free enterprise is anathema to capitalism.

Why shouldn't the banks be allowed to fail, and just have the state guarantee all deposits. Most of which could probably be recouped through an orderly sale of the assets of the failed institution. Why are we bailing out bondholders and shareholders as well?

The state has essentially gone all-in with the entire economy on a poor hand hoping something will come up on the flop.

 

[GeneralZod]

If the buck stops anywhere it is either with the ECB (for keeping interest rates too low), or with the borrowers themselves.

If we follow that line of reasoning then shouldn't we take that one step further back and say that the mistake was ceding our briefly held (1979-1998) currency independence because it is unrealistic to expect the ECB to set rates according to Irish needs.