Consensus about bank guarantee is wrong on so many levels

Why was the management of Anglo Irish Bank not removed as a condition of granting the September 30th, 2008, liabilities guarantee given that the bank had clearly failed? Why was Anglo not immediately folded into AIB, as was expected at the time? Did its executives, over the following four months until the bank was nationalised in January 2009, destroy evidence that might have incriminated them and what did the authorities do to prevent possible evidence destruction? How did the Financial Regulator change its assessment of the risks associated with the swelling of Anglo's balance sheet over the decade to 2008?

These questions have long been among the most difficult to answer in the sorry saga of Irish banking over the past decade and the State’s role therein. When they are put to anyone on the government/public service side who was involved in making decisions at that time, not much effort is made to answer. Some shrug contritely and others say rhetorically “that is a good question”. From their reactions, they appear to recognise the errors they made collectively in relation to Anglo for a long period up to the time of its nationalisation.

But the full sequence of events must be established, not least to establish that it was nothing more malign than mistakes which led to the wrong decisions being made. More widely, the need for a full and rigorous inquiry into the role of institutions – public and private – and all the main players is needed for reasons of accountability, international reputation and justice.

But if such an inquiry is held, it is important it does not focus excessively on the events of a single night and neglect events and decisions taken over extended periods before and after September 2008.

There is a real risk of that happening. We Irish have a habit of arriving at a consensus and then closing down debate. Unfortunately, "the bank guarantee cost us €64 billion" narrative has become one such consensus. It may be satisfying to believe a single decision made at one precise moment in time caused all our woes. But it is wrong on so many levels; most notably in that it assumes there was another entirely costless option, which there was not, as both Iceland and Cyprus have amply demonstrated.

Balance of risks

Consider the situation at the time. During September 2008, the sort of scenario which has subsequently played out in Cyprus – with banks shut for weeks, controls on movement of money out of the jurisdiction and depositors facing losses – appeared increasingly imminent.

By September 29th, the choice was between a near certain immediate bank collapse (earlier that day the first of Iceland's banks had been nationalised) and a possible future bill if a guarantee was given. The balance of risks seemed very clear – in part because of what had happened in Sweden the previous decade.

The Swedish government had introduced an identical blanket guarantee for all bank creditors other than shareholders in September 1992. Because that guarantee proved successful, it was seen as an example to follow (why the other actions of the Swedes – a ruthless cull of banks' management and a radical restructuring of the system – was not also repeated in Ireland is yet another question for which answers are needed).

What about assessments at the time of liquidity versus solvency? Given the chaos of those weeks in the US and Europe, nobody questions that Irish banks were facing a severe liquidity problem.

It is often now claimed the entire system was also insolvent at that point. It wasn’t.

Irish banks assets were overwhelmingly linked to property. In September 2008, residential property prices were only 8 per cent below their peak 12 months earlier and back to levels of 2006. Commercial property prices were down by almost 30 per cent on their peak four quarters earlier and back at 2005 levels.

In both residential and commercial property markets the bulk of the price declines had yet to happen. As such, it is hard to say that the banking system as a whole was then insolvent, even if there was a clear risk that it would become insolvent in the event prices crashed further.

By far the greatest policy error was to allow the property boom to continue while ignoring the risks. By late September 2008 there were only bad choices available. A guarantee was the only real option. A full inquiry into the banking fiasco might establish that, and much else besides.