State Injection could be good value - Times

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another article in the times today by the same team of academics as last week…

irishtimes.com/newspaper/opi … 86900.html

The Government could seek adequate remuneration for the risk it takes in buying bank shares. For example, if it was to buy preference shares, it could demand a dividend likely to be in excess of 10 per cent per annum (the figure for similar transactions in the UK is about 12 per cent) and the option to convert into ordinary equity so the taxpayer benefits from any recovery in bank share prices. Contrast that with the high teen returns that are required typically from private equity funds, an increased return that can only come from rationalisation of banks and from increased profit margins at the expense of an already deflating economy.

As the Japanese and Swedish experiences show, if this is done well, it could turn the economy around and end up as a good deal for the taxpayer. The Japanese economy recovered from the decade-long depression that followed the burst of the property bubble in the 1980s only after the Japanese government recapitalised troubled banks by subscribing substantial amounts of preference shares. This injection of equity capital started in 1998 and picked up momentum in 1999, when the Japanese government recapitalised over 30 banks.

The recapitalisation of troubled banks lifted Japan out of the long depression and turned out to be a profitable investment. A number of banks turned around early and bought back the shares faster than anticipated, at a large profit for the Japanese government.

More importantly, the injection of capital allowed banks to clean up their balance sheet. This was essential to restore confidence, while avoiding the credit squeeze that would have occurred if the clean-up exercise had taken place in the absence of recapitalisation.

In the Swedish case, the banks were recapitalised with government monies and again the government was able to eventually recoup a very large amount of the monies invested.

and

Banks are reluctant to accept new capital and thereby dilute the claims of existing shareholders. The banks’ preferred strategy is to rapidly reduce loans to Irish business to lower the loan-to-deposit ratio, and not accept any new capital injections. From a macro-economic perspective, we need to recapitalise banks, allowing for an orderly and minimally disruptive process so that banks can slowly decrease outstanding loans rather than engaging in a panic reduction.