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The Banking Crisis

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There are clear signs that the proposed recapitalisation of the main banks will prove inadequate and that further support will be required from the Government in line with its minimalist "drip drip" strategy.

To protect the economy and banking system as distinct from banks and bankers, the Government should change tack before being forced to do so and withdraw their proposal in favour of the following variation on the "bad" bank approach. This would buy time and ensure that state funding is used exclusively for productive purposes. In addition, it would be less risky and costly for the taxpayer, eliminate the need for bad debt insurance, and remove pressures on the banks to withhold credit or hoard resources to cover future bad debts.

Here are some suggestions:

  1. AIB and Bank of Ireland (combined market value of €0.86 billion) should be nationalised and their existing shareholders compensated mainly by options to acquire substantial new equity stakes when the two banks are eventually re-privatised.

  2. Each nationalised bank should be divided into good and bad banks with new boards and senior management teams working exclusively in the public interest and insulated from political interference. The good banks should receive capital injections from the state to improve liquidity and operate using existing staff, premises etc. These banks could be very profitable as all their problematic loans would have been shunted into their bad banks.

  3. The two bad banks should undertake no new business and, having secured minimal working capital from the state, would effectively operate as high-powered debt collectors. They would pursue borrowers for repayments and where necessary call in securities and, rather than engage in fire sales, accumulate such assets for sale once economic growth resumes. Repayments should be passed back to good banks to further enhance liquidity.

  4. Once the crisis has passed, the final deficits attributable to the bad banks will be clear. These should be absorbed by the good banks which could then be refloated on the stock market to repay the state, grant equity to option holders and raise new capital.

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This page contains a single entry by Brian published on February 17, 2009 3:57 PM.

Proposals on Crisis was the previous entry in this blog.

Banks & Ictu Advertisements is the next entry in this blog.

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