Nyberg Banking Report
During the Celtic Tiger and the run up to the crisis, Ireland saw an increase in liquidity and low risk premia. Financial integration in the euro area was deepening, and banks in Ireland had unprecedented access to cross-border funding. This put pressure on bank margins in Ireland. The report investigated the handling of the banking crisis and found that the crisis was essentially “home grown”. It was a result of domestic Irish decisions and actions, and not international developments. The efficient market hypothesis further created a sense of stability, and the need for regulation became less important in the eyes of those in control, such as the Financial Regulator, the Central Bank and the Department of finance. Without questioning, herding and groupthink were huge contributing factors to the demise of the Irish banking system. Herding refers to the willingness of investors and banks to simultaneously invest in, lend to and own the same type of assets accompanied by insufficient information gathering and processing. In essence, banks behave in this manner to retain market share by competing with other banks. By doing so, banks can justify their actions as their competitors are operating in the same manner. However, the banks do not simply mimic each other. They take part in herding due to important externalities that effect the optimal decision making process. AIB and BOI were encouraged to operate in a similar manner to Anglo and INBS by various financial bodies such as The Financial Regulator and The Central bank and Department of Finance. This leads to what is commonly known as the bandwagon effect or Groupthink. Groupthink occurs when a group of decision makers decides on a course of action without questioning underlying assumptions. As the period of prosperity continued, executives took more and more financial risks based on prior judgments. As these financial risks paid off, the public, the media and political parties took a supportive stance. However, this led to a reduction in the assessment of risks, and individuals within the banks who pointed this out were quickly hushed resulting in conformity within the banking sector. A number of people stated that had they implemented or consistently supported contrarian policies they may have ultimately have lost their jobs. Ultimately, along with other unethical behaviours, herding and groupthink played a large role in preventing the diagnoses of underlying issues that would lead to the detriment to the Irish banking system. The magnitude to which the banks granted loans in order to achieve market value uplifts majorly contributed to the breakdown of the banks. Between the years 2000 and 2007, lending stocks rose from €120 billion to €400 billion. Total loans and advances to customers stood over twice GDP, up 1.1 times GDP in 2000. Both Anglo and INBS reported substantial profits though-out this period. This increase in profit boosted share price and market capitalisation. Anglos market capitalisation remarkably grew over 2000% from €0.6 billion to €13.3 billion. During this period, 80% of loans were granted to property related segments, considerably outpacing growth in all other sectors combined. However, as lending increased so rapidly, retail and corporate deposits couldn’t provide adequate funding. This resulted in the domestic banks borrowing from foreign banks that entered the market. Foreign banks that entered the market competed aggressively by offering more attractive terms to customers to gain market share and attract potential customers. Ultimately, it was this course of action that led to the systematic failing of the banks. Anglo concentrated its clientele based mainly on a small number of property developers. Anglo had a “relationship” based banking model. In 2005 Anglo underwent a change in leadership which coincided with a number of key long term experienced executives leaving the company....
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