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Fully privatised bank sector risks worsening crashes – ECB

Researchers argue retaining a mix of public and private banks is a safer policy

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Finance Minister Paschal Donohoe has launched a long awaited review of the retail banking sector. Photograph: Paulo Nunes dos Santos/Bloomberg

Finance Minister Paschal Donohoe has launched a long awaited review of the retail banking sector. Photograph: Paulo Nunes dos Santos/Bloomberg

Finance Minister Paschal Donohoe has launched a long awaited review of the retail banking sector. Photograph: Paulo Nunes dos Santos/Bloomberg

The Irish Government policy of re-privatising the banking sector by selling AIB and eventually Permanent TSB risks worsening any future financial crisis, an ECB working paper has warned.

The research flies in the face of decades of policy not only in Ireland but across the developed world that pushed liberalisation of the banking sector. and other areas of the economy, from direct state control in order to foster a competitive and more dynamic economy.

However, the ECB paper published this week on ‘state-owned banks and international shock transmission’ cites evidence that foreign-owned and private banks may be more dynamic as lenders in normal times but are also more likely to worsen an economic downturn by cutting lending once a crisis starts than publicly owned banks.

Retaining a mix of public and private banks is a safer policy, researchers argue.

“One key takeaway is that substantial heterogeneity exists across domestic and foreign banks, countries, and time. The result is important from a policy perspective, as we illustrated that within the banking sector, a mixed composition consisting of foreign and domestic-owned banks that are controlled by the state and private owners is advisable.”

Policy here is heavily weighted to reprivatisation of the remaining banks that were fully or partially nationalised a decade ago as a condition of their taxpayer funded bailouts. 

Finance Minister Paschal Donohoe launched a long-awaited review of the retail banking sector earlier this week in the wake of the planned closures of Ulster Bank and KBC Ireland, although the bank ownership model is not expected to be a big part of that work.

The Government is currently part way through a process of selling off bank stakes acquired as a result of bailouts and bank rescues more than a decade ago.

A once substantial minority shareholding in Bank of Ireland is now below the 4pc level and it is likely to be sold entirely within months. 

The bigger, majority stake in AIB is also being cut by selling of small numbers of shares through the stock market, though that process is a long way behind Bank of Ireland. 

A sale of Permanent TSB stock is further out, although the Government stake in the smaller bank will be reduced in favour of Ulster Bank’s British lender Royal Bank of Scotland as part of an agreed deal to take over the departing bank’s loans.

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In their paper, ECB researchers Marcin Borsuk, Oskar Kowalewski, Pawel Pisany examined links between bank ownership and lending growth during the 1996–2019 period.

They found evidence that lending did differ depending on bank’s ownership model – although bank specific factors played a bigger part during the global financial crisis of 2008.

In normal times the evidence suggests privately owned banks and foreign-owned banks lend more than government-owned rivals, but that reverses once a crisis strikes.

That fits with some of the experience here after the financial crisis, when foreign-owned lenders like Rabobank, Bank of Scotland (Ireland) and Danske exited the Irish market in the wake of the crash.


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