Friday 19 January 2018

Recession a product of lax bank controls -- academics

But tight regulation might have stymied growth of boom years

Brendan Keenan

Brendan Keenan

A few simple regulatory controls would almost certainly have prevented the 2008 collapse of the domestic banking sector and the consequent deep Irish recession, an analysis presented to the Kenmare conference finds.

But the economy might be no bigger than it is now, because stricter banking rules would have prevented the huge foreign borrowing that contributed much of the growth after 2001.

The paper, by professors Gregory Connor of NUI, Maynooth and Brian O'Kelly of Dublin City University, uses the somewhat unusual technique of comparing actual specific policy decisions with credible alternatives that could have been applied.

In this case, they attempt to measure the differences in banking-sector stability and national income with what would have occurred had the stricter regulatory regime imposed in 2009 been in place six years earlier.

"A few simple, reasonable, but prudent constraints on bank risk-taking could have prevented the Irish banking collapse," the paper concludes.

The alternative banking regime set out in the paper is one where lending to the property development industry never exceeded 20pc of the banks' domestic deposit base, and net foreign borrowing by the banks never exceeded 10pc of their domestic deposit base.

"The banking sector in the simulated history is not conservatively run -- retail mortgages grow by 19pc per annum over this five-year period; and total assets also by 19pc per annum -- but it is not vulnerable to a credit crisis," the paper says.

"From a macroeconomic perspective, somewhat surprisingly, the 'costs' of the policy error in terms of lost Irish national income are not that large."

The economy may even have gained overall, they say.

"The impact of the foreign capital inflow. . . played a big role in generating the 44.4pc increase in real GDP between 2003 and 2007.

"Even after accounting for bank bailout costs and future costs of fiscal re-adjustment, the banking policy error leads to a net cumulative effect on national income that is difficult to measure and may even be positive," the paper says.

It follows that unemployment would have been higher, and income growth slower in the 2000s than was the case during the boom, had policy been stricter.

"The enormous social costs associated with the boom-bust cycle. . . including the recent period of high unemployment, business distress, and labour force dislocation, are better captured by differences in the volatility of GDP growth, rather than by differences in its cumulative level," it says.

"Over the 2003-2010 period, the real GDP growth rate had a per-annum volatility of 7.39pc; whereas under the base-case prudent regime this falls to 6.8pc," the paper says.

Irish Independent

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