The 2008–2011 Irish banking crisis was a crisis in the Republic of Ireland which led to a number of financial institutions requiring government assistance, and subsequently led to a number of unexpected revelations about the private affairs of some banks.
In the 1995-2006 Celtic Tiger period of growth, development capital was raised in the interbank market, typically on a three-month basis, but with repayment not expected until two or three years later. Given a decline in Irish property values and the freezing-up of the world's interbank market in 2007, it was certain by the start of 2008 that the Irish banking system would have great difficulty in financing its day-to-day operations. This trading difficulty, and inadequate and/or lax supervision by the regulatory body, led to a series of government interventions, starting with a guarantee in September 2008.
The December 2008 hidden loans controversy within Anglo Irish Bank led to the resignations of three executives, including chief executive Sean 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 in 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.[1] Denis Casey, the chief executive of Irish Life and Permanent, the company that owns Permanent TSB, resigned in the aftermath of this revelation.
Recapitalisation was however carried out at Ireland's two largest banks, Allied Irish Bank (AIB) and Bank of Ireland (BoI), with bailouts of €3.5 billion confirmed for each bank on 11 February 2009.
Amidst the crisis, the ruling Fianna Fáil party fell to fourth place in an opinion poll conducted by The Irish Times,[2] placing behind Fine Gael, Labour and Sinn Féin, putting Labour and SF ahead of Fianna Fáil for the first time in Irish history.[3] Fine Gael leader and current Taoiseach Enda Kenny, speaking in County Cork on 15 February 2009, asked the entire board of the Central Bank of Ireland's Financial Regulation section to resign.[4]
In March 2011, Central Bank Governor, Patrick Honohan described the crisis as "one of the most expensive banking crises in world history".[5] In September 2011 he said that the banks were now financially sound.[6]
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Following reports of a communication breakdown at the office of the Financial Services Regulatory Authority, the Financial Regulator Patrick Neary on 9 January 2009 announced his decision to retire as of 31 January that year.[7] Neary's perceived weakness in dealing with Anglo Irish Bank received heavy criticism, with Green Party Senator Dan Boyle calling for a strengthening of powers within the organisation and saying that confidence in Irish financial services had been eroded by events of the previous six months. Financial observers indicated that a replacement for Neary might have to be sought in the United States or United Kingdom.[8] Following the announcement, reports emerged which indicated that the Financial Regulator may have known of the Anglo loans for eight years prior to their revelation.[9]
Emergency legislation to nationalise Anglo Irish Bank was voted through Dáil Éireann and passed through Seanad Éireann without a vote on 20 January 2009.[10] President Mary McAleese then signed the bill at Áras an Uachtaráin the following day, confirming the bank's nationalisation.[11]
Following a revelation that Government appointed directors in Anglo Irish Bank and the Financial Regulator were investigating a deposit of billions of euro into the institution, Irish Life and Permanent admitted on 10 February 2009 that it had provided what it called "exceptional support" to Anglo during September 2008.[12] Irish Life and Permanent confirmed it had made the deposit following the introduction of the Government Guarantee Scheme, which was set up to provide each bank under its jurisdiction with a limited supply of credit in the event of a collapse. However this volatility in deposits in Anglo Irish Bank has been stated as one of the reasons why the Government moved to nationalise it.[12] The Financial Regulator has stated that the transactions which took place between the two banks are "unacceptable"[13] and the chief executive of Irish Life and Permanent, Denis Casey, has resigned his position.[14] However, in a press release dated 13 February 2009, the Financial Regulator revealed that "it encouraged Irish banks to work together where necessary so as to continue to use normal inter-bank funding arrangements for liquidity purposes."[15]
On the evening of 17 February 2009, the Chairman of the building society Irish Nationwide, Dr Michael Walsh, resigned his position.[16]
The crisis began through a failure by banks, the government, news organizations and the corporate sector to heed signs that the economy was overheating. In June 2005 The Economist mentioned Ireland on a list of countries with recent property price inflation; Ireland's price inflation of 192% in 1997-2005 was the highest on its list.[17] In December 2005 Professor Brian Lucey felt that prices would continue at a "modest but still significant pace".
Morgan Kelly, a professor of economics at University College Dublin, was particularly concerned about the real estate bubble which was reaching its climax in the summer of 2006. He noted that a fifth of Irish workers were in the construction industry and that the average price of a home in Dublin had increased 500% from 1994 to 2006. He published a news article in the Irish Times, asserting that Irish real estate prices could possibly fall 40 - 50%. His second article was rejected by the Irish Independent and lingered unpublished at The Sunday Business Post until the Irish Times agreed to run it in September 2007. Kelly predicted the collapse of Irish banks, which had fuelled the rapid rise of real estate by increasingly lowering their lending standards and relying more on 3-month interbank loans than on their deposit base..
Kelly's prognostications caused a minor controversy but mostly went unnoticed until March 2008, when Philip Ingram, an analyst at Merrill Lynch, wrote a scathing report about the real estate bubble, focusing on the three major Irish banks most responsible for the crisis, Anglo Irish, Bank of Ireland, and AIB. Merrill Lynch had major, lucrative underwriting relationships with those banks, and a senior executive at Anglo Irish, Matt Moran, who had registered displeasure with Kelly over his articles, among others, did the same to Merrill. Merrill in turn retracted the report within hours, and fired Ingram by yearend.[18]
From May 2007 the banks' share prices on the Irish stock market declined markedly, and they had halved by May 2008. This had an inevitable effect on their capital adequacy ratios and therefore their ability to lend ever-higher amounts that were necessary to support property prices. In April 2008 Professor Cormac Ó Gráda noted that: "property prices [are] suffering a meltdown likely to last for some years", yet the bulk of new bank lending since 2000 was based on mortages secured on property.[19]
On 7 May 2008 Brian Lenihan, Jnr was appointed Minister for Finance. Formerly a gifted lawyer and minister, he had no experience of finance, and opponents deplored that he would have to "learn on the job".[20] On 14 May 2008 he remarked that: ".. the risks that we identified in the last Budget have materialised, risks such as recent developments in the international financial markets, further appreciation of the euro against the dollar and sterling, lower international growth and domestically a sharper slowdown in housing". Ignoring the property bubble, he concluded that: ".. we are well placed to absorb the housing adjustments and external ‘shocks’ so that our medium-term prospects will continue to be favourable. Our public finances are sound, with one of the lowest levels of debt in the euro area. Our markets are flexible allowing us to respond efficiently to adverse developments. We have a dynamic and well-educated labour force. We have a pro-business outward looking society. The tax burden on both labour and capital is low. Not many countries anywhere in the world are facing the present global economic difficulties with such advantages."[21]
Having guaranteed the six main Irish banks in September 2008, Minister for Finance, Brian Lenihan announced on 21 December 2008 that he would seek to recapitalise Ireland's three main banks, Allied Irish Bank (AIB), Bank of Ireland (BoI) and Anglo Irish Bank.[22] Under the plan the Government would take €2 billion in preference shares in each of Bank of Ireland and Allied Irish Bank and €1.5 billion in preference shares in Anglo Irish Bank, giving it a 75% control of the latter.[23][24]
On 11 February 2009, he announced the provision of two €3.5 billion bailouts to AIB and BoI as part of his government's recapitalisation scheme. The plan will also see the Minister appoint 25% of the directors at each bank, whilst the banks have agreed to provide a 30% increase in mortgages for first time buyers and a 10% increase in loans to small and medium businesses as well as to hold-off on repossessions of mortgage holders for twelve months after they fall into arrears.[25] The salaries of senior bank executives will be frozen and they will not receive performance bonuses.[25] Richard Bruton of the opposition's Fine Gael responded by calling the recapitalisation plan a "€7 billion gamble on the wrong horse".[25]
Bank of Ireland chief executive Brian Goggin announced his retirement in January 2009,[26] confessing to RTÉ that his bank has made bad lending decisions.[27] Asked about his expected salary for 2009, Goggin admitted that it would be “less than €2 million”.[28] Goggin had earned approximately €3 million in the year to 31 March 2008.[28] He was replaced as CEO by Richie Boucher whose appointment was announced on 25 February.[26]
In September 2010 government support for the six guaranteed banks had risen markedly to 32% of GDP, and this started to raise the yields of government bonds. Fatally, later that month the government decided to renew the annual guarantee covering the six main banks. By October yields were above 7%, causing concern that the deficit was now unsustainable.[29] In November 2010 the government had to seek a €85 billion "bailout" from the ECB and the IMF on onerous terms.[30] Deserted by its coalition partner, the government lost the Irish general election, 2011.
By August 2011 total funding for the six banks by the ECB and the Irish Central Bank came to about €150 billion; the largest of the six, Bank of Ireland, then had a market capitalisation of just €2.86 billion.[31]