The Financial Fog is Clearing

Comment: Sunday Tribune

By Colm McCarthy

….The government needs to do more than ensure bank recapitalisation. It needs a full exit strategy, which includes the ultimate withdrawal of the liability guarantee regime, presumably to be replaced by some more limited form of insurance for depositors. If regulation and supervision are strengthened, the risk of a future banking collapse is reduced – but never eliminated.

So there also needs to be bank resolution legislation, which would empower the Central Bank to take over the management of any bank deemed in danger of failure, and to restructure or wind down the institution.

Creditors other than insured depositors would see their claims satisfied to the extent feasible given the bank’s financial condition…

Resolution Regime

from The Irish Economy by John McHale

…I believe the more pressing issue is to have a resolution regime in place for the period after the current guarantee expires and before existing subordinated bonds mature. If the banks are insolvent, or at least incapable of reaching minimum capital adequacy requirements on their own, there should be a willingness to impose these losses on creditors, most likely as part of the debt-equity swap long advocated by Karl Whelan.

Finding Foreign Capital for Irish Domestic Banks

…It is obvious that the Irish banks will need very large amounts of new equity capital in the near future, given their NAMA-related loss crystallisation, along with prospective losses on their retained loan portfolios. This confirms the year-ago forecasts of Brian Lucey, Karl Whelen and others, and contradicts the contemporaneous claims of bank and government spokespersons that there would be no need for additional equity capital. It seems clear that the amount of new equity capital needed is equivalent to majority ownership (Lucey was quoted on Frontline stating that the newly issued equity might constitute 95% of total equity after issuance).

There are three ways to inject new equity capital into the two surviving[1] banks: 1) the government directly purchases more equity shares from the banks, 2) the banks try to raise the equity from existing shareholders using a rights offering, or 3) the banks accept a big block acquisition of equity capital from a large foreign institution probably a foreign bank. The Central Bank and Department of Finance should be pushing hard on the banks to use method 3, since this method is in the best interest of the Irish taxpayer and Irish economy…