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Irish Banking Crisis Essay

2284 words - 10 pages

Introduction
Towards the end of the 1990’s, the Irish economy was booming, unemployment rate fell to around 4% and productivity was continuingly to grow. However, from 2002 onwards, the nature of the boom started to alternate. Labour output was no longer increasing, inflation was excessive and progression in gross domestic product (GDP) increasingly became related to the housing market. By 2006, although the public finances still seemed strong, this was misleading; the Irish economy was heavily dependent on the housing boom. The covered banks accounted for over 65% of the overall growth in property- related lending in Ireland (including 100% mortgages and tracker mortgages) and over lending to developers in Ireland, further highlighting the bankers’ greed.
Firstly, the main reason for the systematic failure, according to the report was the expansion of the property bubble financed by the banks. Between 2002 and 2008 bankers demonstrated high levels of greed combined with disregard for the risks and gross misjudgement which few bankers’ could disagree with. This was evident from the surge in lending between sectors which was very uneven. Residential mortgage lending and lending to the construction and property sector considerably out-paced growth in all the other sectors combined (see Fig1 15). For instance, lending to this sector increased at an annual rate of almost 45%. This effectively created a property bubble and like all bubbles, they burst, and this heavily influenced Irelands’ financial crisis. This tied with the world- wide economic crisis heavily increased the rate of the crisis.
With the introduction of the Euro Zone allowed the Anglo and INBS to compete in the Irish market. Unfortunately, this resulted in the willingness of the banks to issue excessive sized loans for risky commercial property and offering new financial products in futile attempts to keep up with the rapid development of Anglo Irish Bank and Irish Nationwide Building Society and effectively
By 2005, the Anglo Irish Bank (AIB) and Irish Nationwide Building Society (INBS) were developing robustly (see Fig 2) on the origin of relationship banking, offering loans to a limited quantity of entrepreneurs operating in the riskier parts of the property market. Ironically, Anglo in particular was seen as “the good guy” and was commonly praised by many investors, analysts, and the media as a role model for other Irish banks to emulate both here in Ireland and abroad.

Due to this competition, other big banks then found themselves under pressure to adopt similar lending strategies or face losing established customers, diminishing bank worth, potential takeover and a loss of professional admiration. Herding was instigated by equivalent banks having witnessed the rewards to be attained in the construction and property lending market by Anglo Irish Bank (Anglo) and INBS.
The report leads us onto the culture in the banks. There was no direction, guidelines or structures in place. ...

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