Tuesday 17 October 2017

Time we cut our banking cloth to fit our measure

The Irish banking system has historically been totally unfit for purpose

European Central Bank President Mario Draghi
European Central Bank President Mario Draghi
Colm McCarthy

Colm McCarthy

Since the liquidity crisis at Anglo Irish Bank in September 2008 was resolved (temporarily) through the ill-advised blanket bank guarantee, the Irish authorities have been fire-fighting the collapse of the Irish banking system.

Notwithstanding the prodigious quantities sprayed (of money rather than water) on the inferno, several banks have been consumed in the flames and are no more. The few still standing have seen their shareholders wiped out and are still repairing their balance sheets. In the belief that the worst may be over, it is now time to survey what is left of the Irish banking system, and to consider whether it will prove an adequate support to economic recovery. If all goes to plan, Ireland will need a solvent and competitive banking system focused on serving the retail customer, particularly the household, farming and small business sectors which cannot access external banking markets.

For a small country committed (or condemned) to membership of the eurozone common currency area, the ideal is a domestic banking system big enough to support the real economy but small enough to avoid exposing state finances to excessive bank bailout costs. Whether small countries should seek to host large offshore banking centres is a separate question. If the host must bear direct or indirect exposure to rescue costs, the attractions are seriously diminished.

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