Stop worrying, our bank deposits are safe
Boomtime profits have ensured Irish banks are well equipped to deal with the slump, says Alan Ahearne
WHAT are the chances of you losing some or all of your deposit at an Irish bank? About the same as dying in an airplane crash, I reckon. This might seem like a strange thing to say in a week that saw turmoil in global markets, the largest bankruptcy filing in US history by investment bank Lehman Brothers, forced bank mergers on both sides of the Atlantic, and a last-ditch US government rescue of the world's biggest insurance company.
It may also appear odd not to be concerned about the safety of deposits given the exposure of Irish banks to the slumping property market, and panic among people expressed on Joe Duffy's Liveline programme on Thursday. Some portion of the more than €100bn in bank loans to the construction industry will undoubtedly turn sour. Banks' profits and balance sheets will take a pounding.
But to go from that observation to a scenario where ordinary depositors lose their savings is a leap of gigantic proportions. Let's consider the number of 'ifs' that such a scenario would require.
For starters, Irish banks were very profitable during the boom years and accumulated large reserves. They come into the property bust well capitalised. If the hit to their capital positions from writing off dud loans is large, as it may be, then the banks can ask existing shareholders for more money via a rights issue. Of course, given the plunge in bank shares over the past year, shareholders may be nervous about throwing good money after bad.
If a rights issue to existing shareholders won't work, new shares could be sold to other investors, either at home or abroad, to boost the banks' capital. Global banking giants Citigroup and UBS have gone down this route, receiving capital injections from sovereign wealth funds in the Middle East and Asia. With all the talk of liquidity crises, it is worth remembering that there are plenty of cash-rich investors lurking in the high grass waiting to buy assets when the price is right.
If new equity is not forthcoming, then a takeover by a stronger bank is possible. This week saw Lloyds TSB's buyout of HBOS as well as Bank of America's acquisition of Merrill Lynch. These mergers are a necessary part of the consolidation of the financial services industries in the UK and the US. Many of the activities and financial products of the boom years are now a thing of the past, so consolidation is inevitable.
It would be amazing if we were not to see similar consolidations in this country. In fact, Friday's newspapers carried a story that Anglo Irish Bank is considering making a bid for Irish Nationwide. Whether merging two banks proves to be successful is another question, especially if the two banks are deeply troubled. Japanese policymakers for years tried to hide the problems in their banking sector by forcing weak banks to merge, without properly restructuring or convincingly dealing with bad debts. As one of my former Fed colleagues used to say: "If you combine two turkeys, all you get is one big turkey." There have also been cases where a strong bank has taken over a smaller struggling institution, only to find out later that it had bought a Trojan horse.
From the depositors' perspective, what matters is that banks mergers don't in any way threaten the safety of their deposits.
If private money is not available to save a faltering bank, then State funds can come to the rescue. In the US, the Treasury and the Fed are working on a giant government-sponsored vehicle to take bad assets off the balance sheets of financial institutions, similar to the Resolution Trust Company that was used to clean up the mess after the savings and loan crisis of the 1980s. Whatever about the moral arguments against what is effectively a bailout of the entire financial sector, the point is that financial stability will eventually be restored if the taxpayer is prepared to swallow enough of the losses.
Even if the Government decides to let a bank go into receivership, depositors' money is guaranteed by the State.
Guarantee limits on bank deposits (currently, 90 per cent up to €20,000) usually go out the window when push comes to shove. Witness the introduction of a blanket guarantee on deposits at Northern Rock. Only if the Government turns a blind eye would depositors take a hit.
I don't know about you, but that is one too many 'ifs' for me. Our deposits are safe.
- Alan Ahearne
