Business Banking Inquiry

Tuesday 12 December 2017

The €35bn cost of Anglo and Nationwide recap was 'low', Ahearne tells banking inquiry

FILE PICS: Dr Alan Ahearne Photo: Leon Farrell Photocall Ireland.
FILE PICS: Dr Alan Ahearne Photo: Leon Farrell Photocall Ireland.

Clodagh Sheehy

The €35bn cost of recapitalising Anglo Irish Bank and Irish Nationwide Building Society was relatively low, a former advisor to the late Finance Minister Brian Lenihan has told the Banking Inquiry.

Alan Ahearne said  although the cost had “added markedly to measured government debt” the cost of servicing the debt was relatively low because it was largely held by the State, was long term and could be refinanced at very low interest rates.

He said Minister Lenihan had an “open mind as to whether a small good bank” could be carved out of Anglo Irish Bank at the time.

“The priority was deleverage and de-risk the bank without damaging the rest of the banking system,” he explained.

Mr Ahearne was advisor to the Minister from March 2009 to March 2011 and was involved in three budgets which made €15bn in financial adjustments, which, he stressed, were “aimed at reducing structural deficit”.

These budgets, he said, were progressive “in that the highest losses in income as a result of the budgets fell on those households in the upper income deciles”.

The cost of recapitalising the banks were large by international standards - €64bn- but the Minister was confident that the State would recoup some of the outlays and wanted to spread the cost over as long a period as possible.

Mr Ahearne said the establishment of NAMA had played a critical role in restoring financial stability in Ireland but it was not and could not be expected to be  “a magic bullet to restore damaged banks to full health”.

No single policy measure on its own, he added, could resolve a severe banking crisis.

“NAMA was part of a set of policies that together have helped to stabilise and restructure the Irish banking system and thereby have contributed to the recovery in the Irish economy.”

According to Mr Ahearne, Mr Lenihan had regarded the two main banks, Allied Irish Banks and Bank of Ireland, as core retail banks that would play important roles in Ireland’s economic future.

He wanted to minimise the burden on the State of ensuring that both banks were well  capitalised and for that reason had afforded them the opportunity to raise private capital.

“Ultimately, Bank of Ireland was successful in finding private sector solutions. AIB, however, was not able to attract capital from the private sector” and therefore the government had to inject public capital.

“The scale of these equity injections meant that the State ended up owning 99.8pc of the bank.”

Mr Ahearne also said that while the ECB and the Central Bank of Ireland provided invaluable liquidity assistance to the Irish banking system he believed the ECB had “misjudged the systemic nature of the crisis”.

“The ECB was overly anxious in the latter part of 2010 to reduce the amount of emergency loans that the Eurosystem had extended to the Irish banking system.

“There are also question marks about the ECB’s communications with markets about individual Member States”, he said.

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