Financial Crisis

[Student Mullet]

If the Regulator did his job would we be in the current situation? How does he still have a job? See this clip from the start of October after the state had to jump in with deposit guarantee.

I've heard that a lot but I'm skeptical of it. From what we discussed earlier, the regulator's job was to ensure that, amongst other things, the banks didn't lend more than 100/6.5% of their tier 1 capital and he seems to have done that. He refereed the banks to the appropriate international standards. The problem seems to be that those standards weren't good enough, not that this man didn't do his job.

[OneRedArmy]

I've heard that a lot but I'm skeptical of it. From what we discussed earlier, the regulator's job was to ensure that, amongst other things, the banks didn't lend more than 100/6.5% of their tier 1 capital and he seems to have done that. He refereed the banks to the appropriate international standards. The problem seems to be that those standards weren't good enough, not that this man didn't do his job.

In terms of prudential supervision, the role of the regulator is not just ensuring that banks are well capitalised on a point in time basis but also for the forseeable future. I would argue that they completely ignored the latter part.

Prudential supervision also covers liquidity and concentration risk and the Financial Regulator completely dropped the ball.

I would totally agree that the international standards failed, but I'm not sure that is enough to let the Irish regulator off the hook.

Consumer protection is the other key area of responsibility of the Financial Regulator (along with financial crime) and they really performed absymally here. There wasn't even a regime of consumer protection until last year, despite the Financial Regulator being formed 5 years (iirc) ago. The whole area of mortgage lending was ripe for enhanced scrutiny with house prices (and mortgage lending) rocketing and the Regulator did absolutely nothing (apart from a too-little-too-late change on high LTV lending last year).

At the end of the day, a lot of people were loaned amounts that were not in their best interests, and whilst these individuals need to take responsibility for this (caveat emptor must apply), consumer protection means that the Financial Regulator should be there to protect the consumers interests.

It plainly didn't.

[Student Mullet]

Does that translate into saying that he is at fault for not anticipating the housing crash? That he didn't stop people from buying houses which were due to drop in price and he let the banks become excessively exposed to the building industry?

[Stuttgart88]

Agree entirely with ORA.

Student Mullet, in my opinion the regulator should have done more to avoid the "this time it's different" thinking that prevailed among both borrowers and lenders. High LTV mortgage lending and high levels of development lending is never a good idea.

In one sense the national regulator can't really be blamed: the international capital adequacy regime was clearly at fault: it was was conceptually misperceived, lent itself far too much to "regulatory arbitrage" (i.e., rule bending but not rule breaking) and was too dependent on the pereceived quality of credit ratings.

[Student Mullet]

Student Mullet, in my opinion the regulator should have done more to avoid the "this time it's different" thinking that prevailed among both borrowers and lenders. High LTV mortgage lending and high levels of development lending is never a good idea.

You're saying that it was his job to shout stop but he didn't?

[OneRedArmy]

Does that translate into saying that he is at fault for not anticipating the housing crash? That he didn't stop people from buying houses which were due to drop in price and he let the banks become excessively exposed to the building industry?

1) Failure to anticipate the housing crash
Banks at any point-in-time are supposed to be adequately capitalised to sustain them through a full economic cycle (which by its nature includes a crash). The fact the Irish economic cycle was so long is of limited excuse, as there are plenty of international crashes we could have used data for (UK 91-94, Japan 90's, US 80's, Scandinavia 90's etc.) but the Financial Regulator chose not to use this data themselves or force the banks to stress test on it.

2) Stopping people buying houses which were due to drop in price
Price drops are irrelevant up and until you can't pay your mortgage. Its clear some brokers and banks repeatedly broke their own rules in encouraging people to provide less than full information to maximise their borrowings. This is absolutely the Financial Regulators remit. This has led to people not being able to repay their mortgages.

3)Over-exposure to the property development industry
Large Exposures and concentration risk. FinReg was absolutely awol in allowing huge concentrations both at an individual institution level and systemically to a relatively small number of developers.

[sonofstan]

http://www.irishexaminer.ie/irishexa...933-qqqx=1.asp

It's even worse than we thought - LoI club owner comes to rescue of bank!

[Billsthoughts]

At the end of the day, a lot of people were loaned amounts that were not in their best interests, and whilst these individuals need to take responsibility for this (caveat emptor must apply), consumer protection means that the Financial Regulator should be there to protect the consumers interests.

It plainly didn't.

Disagree on this point. How do you define "best interests"? Consumer protection is to stop the consumer being ripped off. I dont see these instances as ripping off the consumer. Everyone went into these with their eyes open. The one guarantee is that house prices are going to go back up anyways.

[pete]

Isn't one of the big problems with Anglo Irish that they don't have an adequate deposit base so they have to borrow on money markets? Surely the Regulator has rules for minimum deposits?

[Stuttgart88]

Yep, one failure of the Anglo model was its dependence on "wholesale funding" - borrowing both short & medium to long term from banks and other financial instutions. When Northern Rock went down in Sept '07 I immediately thought Anglo would struggle. There were subtle differences - N Rock depended on one type of wholesale funding, securitisation, almost exclusively, whereas Anglo mainly borrowed on an unsecured basis.

What astonished me in October '07 when Anglo reported interim results was that it had a deposit-to-loan ratio of 72% (if I recall correctly). I just thought that this felt wrong. Banks always engage in "window dressing" i.e., they try and make their key ratios look better at reporting dates than they'd look on non-reporting dates. Sean Fitzpatrick's director loan and temporary arrangement with INBS was an example.

In one sense it was felt that the ultimate regulator was the market. If the debt markets thought Anglo didn't have enough deposits their cost of debt would rise substantially, or even availability of debt would disappear. Likewise the stock market would make its feelings known. This is ultimately what happened. The fact that the market overlooked Anglo's financing model for so long probably lured everyone into a false sense of security.

It's funny in a sense, but all the old established sound banking principles (and other economic matters like growth cycles etc.) always seem to hold true. I'm still relatively young. I hope next time things get out of kilter - which they undoubtedly will - i'll have the sense this time to see it all coming that bit more assertively. I don't day trade or make many financial investments other than my pension, but with one hand I pat myself on the back for having invested every pension contribution I made since January 2007 in cash, but with the other hand I'm livid I didn't reallocate all my existing pension assets. Luckily my dad brought me up to be very cautious of debt.

[Stuttgart88]

Everyone went into these with their eyes open.

There are none so blind as those that won't see.

The FT cited psychological research into why so many experts failed to predict this crisis. Many actually did but the fact is that few people take on board information that doesn't suit them.

[dahamsta]

1) Failure to anticipate the housing crash

I don't think that can be regarded as a failure. At best, it was burying heads in the sand, but it's probably worse than that. I certainly felt that the property market would adjust downward at some point many, many years ago, and the closer it got to 2008, the more it looked like it was going to be a crash than an adjustment. I reckon I converted to "crash" about 2 years ago, and by a year ago most people I talked to agreed. Apart from those that were invested, of course...

adam

[OneRedArmy]

I don't think that can be regarded as a failure. At best, it was burying heads in the sand, but it's probably worse than that. I certainly felt that the property market would adjust downward at some point many, many years ago, and the closer it got to 2008, the more it looked like it was going to be a crash than an adjustment. I reckon I converted to "crash" about 2 years ago, and by a year ago most people I talked to agreed. Apart from those that were invested, of course...

adam

Will post more tomorrow, but Adam it's the Financial Regulator's job to expect the unexpected and ensure banks are up to it (stress testing etc.).

We got into a bizarre situation where the FinReg was maintaining all was well and banks were adequately capitalized. Nobody believed them and the Market was proved right.

At the minute FinReg have zero credibility.

[dahamsta]

My meaning wasn't put across very well there ORA: IMHO "failure" is far too weak a word. "Criminal" would be better, and if there was even the vaguest possibility of a criminal prosecution against the regulators (and everyone else of course: the executives and directors of the banks, the government*, and the people that call themselves economists), I'd be screaming for it.

adam

* And the "opposition" of course, for being criminally incompetent.

[pete]

Heard a story recently where someone transferred funds to Irish bank when moving back to Ireland but when tried to withdraw later the bank did not have or did not want to pay the cash. The bank tried to offer 3 houses as alternative payment. Might hear back soon which bank it was...

Seems the banks offering the highest deposit rates last year were Anglo & Irish Nationwide. In hindsight probably an indicator of trouble ahead...

[monutdfc]

Heard a story recently where someone transferred funds to Irish bank when moving back to Ireland but when tried to withdraw later the bank did not have or did not want to pay the cash. The bank tried to offer 3 houses as alternative payment. Might hear back soon which bank it was...

I'd be amazed if that was anything other than complete BS. Or is 2 stories mixed up (I've heard more than one of developers offering creditors houses in lieu of unpaid debts).

[OneRedArmy]

Heard a story recently where someone transferred funds to Irish bank when moving back to Ireland but when tried to withdraw later the bank did not have or did not want to pay the cash. The bank tried to offer 3 houses as alternative payment. Might hear back soon which bank it was

Banks can't stop you from withdrawing your money Pete, unless of course the person had defaulted on another loan.

Very usual in the current environment that property developers and investors offer houses rather than repayments.

[pete]

Banks can't stop you from withdrawing your money Pete, unless of course the person had defaulted on another loan.

Story was only second hand as opposed to 5th or 6th which is why I took notice. I think the bank were trying to suggest the person accept houses instead of cash. Sum involved was less than 500k. Even if I did hear which bank it was would be unfair for me to mention given no proof.

[strangeirish]

Gotta love Larry Flynt

[Macy]

Heard a story recently where someone transferred funds to Irish bank when moving back to Ireland but when tried to withdraw later the bank did not have or did not want to pay the cash. The bank tried to offer 3 houses as alternative payment. Might hear back soon which bank it was...

That story's doing the rounds - heard it in the pub over the wend, but was told as if though it was a friend of a friend, so unless it's been on the radio then it's an urban myth in the making (or a small world I suppose). Version I heard was that it was 4 €100,000 darfts that he wanted to give to his kids, bank begged him not to, and offered him 3 houses, he said he had 4 children, so they gave him 4 houses...