posted the whole articles for handiness. Good on DMW for staying the course and he’ll be proved right on this one too. Pretty grim reading though
Not yet. Ahead of the game as usual. It will take actual banking collapses to cause panic and even then it will take two of them. The first one will be, IMO (and I am not an analyst of any kind, solely an amateur), a building society and it will be written off in the public mind as Ireland’s Northern Rock. Depositors will be bailed out by the gov and we will see the same scramble to retain voters as we say in the UK. The second one will be the big one that will cause panic.
All opinion, don’t bet on it, just tea leaves, if you read this and just believe it (without doing independent thinking) I have the deeds for the Dundrum Luas bridge that I’d like to sell to you.
I think the same advice with regard to any bank holds true as has held true for the last year - don’t have more than the deposit protection limit (€22,222.22 per depositor) in any institution (different limits apply for Northern Rock, Rabo, NIB, ISTC - make sure you know what limit applies to your money). If you are really quite scared, get a post office account, but not one of the Fortis/Postbank ones. If 2pack is correct and DIRT is going to the marginal tax limit, the NTMA tax free accounts will provide the best return anyway!
So really, nothing has changed from a year ago except the media have largely accepted that there is a problem in the banking system. Those of us who have been looking at bank share prices and implied credit ratings of Irish bank credit default swaps already knew this.
As I say, this is not about second guessing which particular bank or building society is going to go first so as to start a run on it. It is about figuring out the best way to protect you deposits against risk. As a rule of thumb in the US, those institutions offering the highest interest rates are most stressed for cash.
Having said all this, the INBS story that Reuters put out about them trying to stave off liquidation is totally irresponsible. There is a move in the media to try and be the first to land the killer blow on a particular bank. The pen is mightier than the CDS! As banks really are reliant on confidence, no bank will survive a run on it. In my view, the Reuters story was an attempt to start a run. The source of the story can only have been someone who stands to materially gain from the collapse of INBS - either through a firesale of the assets or having bet against its survival. Expect to see a lot more malinformed stories like this!
Just to add you must also consider the practical aspect of a bank failure whether you are a customer or run a business you should have a contingency plan in place to minimise disruption in event of a bank failure in Ireland, after all you still have fixed costs to pay like mortgages, rent, electricity, heating, food etc. How long can you cope if you only deal with one bank and it ceases to function? The cash machine gets switched off, so you won’t even be able to withdraw cash to put petrol in the car.
Also the maximum you will get back out of the bank in event of failure is 90% of your cash to a limit of €22,222 (€20,000), but the financial regulator does not say when you will get it back.
For those that owe money to the bank that fails, your debt gets sold to another institution, so you don’t get off lightly either.
Some Credit Unions may also be affected as their cash is usually held by the banks. (not sure what protection is there)
The International Herald Tribune have withdrawn the story about INBS. Check it out here
all these stories smell of the fumes of petrol on the bonfire that is the irish banking sector, i wonder who will finally provide the spark to set it off. i’m not looking forward to this, i have relations in the banks. one of them hinted as far back as jan 2007 that turbulence was ahead, at the time i didn’t get their meaning but looking back i think this is what they meant. they also were of the few who weren’t concerned about our renting status. i hope they parked funds in a safe place.
when that spark takes off, then we’ll see public panic.
This is the IHT withdrawal but its actually a Reuters withdrawal . The story unfolded on Friday evening after the Irish markets closed .
The original stories are still in the Google cache . They are incorrect in some if not in all material aspects you will all note . Reuters have withdrawn their assertions in full and have apologised for what they said in both articles.
Reuters then managed to contact INBS and issued a second story thereafter.
That second report has also been withdrawn.
INBS have informed the Indo that
If the 2 stories published by Reuters had no basis in fact then they are indeed malicious to my mind . It could be that the ‘source’ Reuters had was the malicious component .
The Indo article is pretty long and worthy of a read . There were lights on on the top floor of the Central Bank on friday evening …we dicussed what that means recently around here
And thats that, move along there please .
The “source” could easily have been a banker, who never miss a chance to undermine building societies and credit unions.
Never underestimate the deviousness and wickedness of the banking fraternity.
Absolutely Mercantalist, many ‘senior bankers’ are pure scum . Happily none of the scum work for the INBS because its not a bank is it ??
Getting back to the original article, it ties in nicely with the debate on the radio yesterday between DMcW, Brendan Keenan of the Indo, Brian Lenihan and Richard Bruton. Towards the end, David brought up the issue of their being real potential for a financial institution to collapse. All the other panellists rubbished this notion. Brian Lenihan talked about how the Central Bank has stress tested the banks, and how they are well able to survive any shock.
What David didn’t say there, and what he seems to be alluding to here, is that the CB’s stress test methodology is out of date. As things change, it’s effectiveness is a bit like the Maginot Line, designed to protect France from Germany based on WW1 tactics but useless for WW2.
Some might even argue that that’s a charitable view, and the CB’s stress test methodology was never much use. Can’t say myself, as I’ve never seen it. Does anyone know whether the CB actually publishes the tests it carried out in order to make such a pronouncement about the soundness of Irish banks?
Edit: Actually in fairness to Richard Bruton, he did also sort of address the issue on the radio. At the end of this INBS story he is quoted as follows
Hurley referred to it in outline in July starting here .
Interesting, Plausible deniability is the phrase that springs to mind when listening to John Hurley.
I for one was in National Irish Bank on Monday last to open a back-up current account, both myself and Mrs G prevoiusly only had current accounts with BoI.
Felt it was a prudent step to have sufficent funds for a couple of months living expenses in more than one bank.
It was telling that NIB had details of the Danish Guarantee Fund littered around the branch which guarantees 100% of deposits upto 300,000DKK approx. €40,000.
Savings account is of course with the Rock.
Have a look at the archive reports of the Financial Stability reports from the CB. From reading the additional papers and references, it would seem that the CB methodology is comparatively up to date and well researched. In particular, take a look at the credit risk stress tests. Is a sixfold increase in non-performing loans a severe stress test?
All the same, it’s just a modelling exercise. I imagine that the risk modelling at Bear Stearns was state of the art too. There’s a good article in the NY Times from yesterday on Long Term Capital Management which mentions their risk modelling.
I’m not sure McWilliams thinks that the stress test methodology is out of date. I think he has a simpler view. He stated during the radio show that in every other major housing bust (and not just in the OECD), there was a major bank failure. We’re in a major housing bust, therefore a bank will fail irrespective of modelling exercises. Keenan disagreed by intimating that this isn’t a major housing bust because the property was way undervalued at the start of the bubble.
As Dylan says, you don’t need a weatherman to know which way the wind blows.
Central Bank reports here on methodology used up to at least 2006 -
Gilroy, I think the six times current default levels is, like the residential borrower stress test of ECB +2.75%, totally inadequate. The problem is that defaults are at historical lows (in the same way that an ECB rate of 2% is at historical lows). Six times a low number would probably only take the banks up to their historical average - although I don’t know for sure.
To my mind, the CB should have x * y, with x having a minimum value or the current value whichever is higher, so 5% should be the stress test for residential borrowers or ECB + 2.75% whichever is higher. The same sort of test should be true for loan default ratios.
YM, unfortunately I’m more pessimistic than you here I think. I can’t see how even with the figures that the Central Bank has stress tested to, that the banks can survive without raising extra capital.
Very simplistic calculations follow using BOI results and I’m sure that BOI is not in the worst position of the banks by far…
Roughly a 6x increase in non-performing loans with a 75% loss given default would be about a loss of about 4% of total outstanding credit. For BOI, 4% of €135billion would be just over €5billion. At end March 2008, BOI had €6.5billion of stockholders equity. Profits were €1.5 billion in 2007. Assume this figure reduces dramatically. The CB assumes no profits available to offset losses, but thats not entirely fair. But even with profits, if the bank had to absorb these losses over a couple of years, then their capital base would be hit hard.
In reality, as the losses mounted, the capital would be eroded and this would restrict lending and even trigger selling of existing loans, reducing income etc…and spiral downwards we would go. The bank would have to seek fresh capital.
Perhaps someone with more knowledge of these things could elaborate.
I tried before to find figures for non-performing loans and losses during the UK 90s crash and the Scandinavian crashes but could find nothing I’d quote. But figures well in excess of 4% were indicated. I can’t find the reference but was it recently posted that 9% of mortgages in the US are in default?
See here for info about Sweden. The peak loss rate went from 0.2-0.5% range to 5%.
In Ireland a few years ago, the banks were crowing about their 0.2% loss rate. This multiplied by 6 gives a worst case loss rate of 1.2% under the central banks stress test. My argument is that at the time when the banks were giving out their riskiest loans, their loss rates were at their lowest. Therefore the stress test is totally pointless if it is based on current loss rates. At worse it should be based on average loss rates times a multiple, at worst it should be based on a fixed possible damaging percentage. We are, I think, agreeing that the stress testing has been inadequate in the past (allowing the size of the loan book to increase well beyond reserves) and that in the current situation, the same stress test shows the banks to be way undercapitalised.
In essence, the Central Bank are lying about the current state of the Irish banks. (Either that, or they haven’t bothered stress testing them for a while - “ah sure they were grand when we looked a couple of years ago”).
I think the 9% in the US is the number of mortgages that are in negative equity. I believe 20% of sub-prime loans are in default and 9 or 10 percent of Alt-A (but rising fast) with prime rates low, but rising. The info should be on Calculated Risk, but I am too knackered (from cutting the grass on the last dry day for a week) to find it just now!
The CB stress testing methodology was discussed here:
For credit risk, the critical thresholds where one or more institutions breach the capital adequacy rules were: LGV (% loss given default) of 25% and NPA (% non performing loans) > 2%.
As I noted already last July, it is incredible that we have not already passed of these thresholds.
Faced with this situation the banks are refusing to classify bad loans as “non-performing”. When a developer misses a payment they bank simply refinances; now the loan can be said to be “performing” again. This pushes forward the date at which the NPA loss can be said to have occurred.
Why do they think this is an acceptable strategy? Because they think the market will recover? No.
Or because they think that government may bail out the developers? Possibly, yes.
It must be that CB is playing along, as DMcW says.