Friday 23 February 2018

Haul those responsible in front of the cameras

The public deserves to know who the villains and heroes of the banking crash are, writes Colm McCarthy

Credit bubbles occur frequently around the world and the conditions which might give rise to bubbles are common. But not all incipient bubbles turn into real ones, and hardly any into the super-bubble Ireland experienced. The essential pre-condition for a credit bubble is a period of decent economic growth and a general improvement in business and consumer confidence.

Just about every economy in the world, apart from North Korea, experiences conditions like these from time to time. But the enhanced willingness to borrow usually runs into an unwillingness to lend, and the baby bubble gets snuffed out. The unwillingness to lend can come from the banks themselves or, failing that, from the regulators. If the banks are able and willing to lend into the bubble, and the regulators are complacent, the incipient bubble turns into a real one. It is unusual for an incipient bubble to be halted through the exercise of self-discipline by borrowers, of which there tends to be a plentiful supply in any buoyant economy.

The first line of defence against excessive credit growth is thus the commercial banking system itself. Banks are not providers of risk capital, which is the business of equity markets. They concentrate instead on well-secured lending designed to deliver low incidence of non-recovery.

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