Irish Banks - do they need to be recapitalised?

Do the Irish banks actually need recapitalisation? Do we really need consolidation in the financial services market in Ireland?

In Friday’s (5th) Irish Times, Michael Casey, former chief economist with the Central Bank and a former member of the board of the International Monetary Fund, wrote an interesting opinion piece.

http://www.irishtimes.com/newspaper/opinion/2008/1205/1228337449605.html

Casey basically posed the questions outlined above. He pointed out that PWC inspectors had done a detailed examination of the loans books of each bank and given their individual capital adequacy levels a clean bill of health under current levels of loan impairment and, indeed, under a number of increased stress tests – albeit the levels of additional stress have not been publicly quantified.

He also pointed out that capital adequacy will, or should, not lead banks to make bad loans to companies struggling in a recession. The UK banks have been significantly recapitalised by the UK taxpayer, yet the SME & mortgage markets there continue to complain about the willingness of banks to lend.

Casey poses the question: “Is it conceivable that the Government wants the banks' capital to be more than adequate, as is now the case in the UK? What does "more than adequate" even mean? Is there a belief that additional - and unnecessary - capital is required to restore investor confidence in the banks?” This appears to be the perceived wisdom among the business commentariat in our media (much of which is woefully underqualified to comment).

He also concludes with, what I regard as, a perceptive comment: “In short, the consultants, Central Bank, Financial Regulator and the entire establishment, including the banks themselves, have now told us that there are no problems of liquidity or of capital. Why then are the meetings with the Government continuing? Either the good news is not quite so good or is there something else we are not being told about? It may all simply reflect a natural human desire to be seen to be doing something.”

Co-incidentally, (also on Friday 5th Dec) Goodbody Stockbrokers published a briefing note which reported that Standard & Poors (S&P), one of the major international rating agencies, “produced a report, which highlights “significant inconsistencies” in how banks account for risks and how much capital they hold under Basel II, making it very difficult to compare banks capital adequacy levels.”

http://www.goodbody.ie/news/morn.html

It seems that S&P surveyed c.50 European banks and found that various interpretations of the Basel rules regarding capital adequacy can produce “four-fold differences in risk weights for the same underlying risks”. In other words, banks in the UK, Spain and some Nordic countries have used less conservative estimates of risk than those applied by the Irish banks and a direct comparison between stated Irish and UK capital adequacy ratios is probably invalid.

The Goodbody briefing note concludes that “although the market undoubtedly now requires banks to hold a higher level of capital, it seems unfair that they would also be expected to increase their capital ratios to the same extent as their UK peers.”

Meanwhile, the private equity sharks are cruising while the politicians, the media and the populace are all demanding that the bankers get in the water. (Indeed, the politicians are delighted to have the bankers as a lightning rod to deflect blame for our current economic problems. No mention is ever made of the fact that every budget is the past 10-15 years has contained measures to encourage developers, investors and, particularly, first time buyers to get into the property market.)

Perceived wisdom can be the most dangerous, least informed thought process with the greatest capacity for long-term, perhaps terminal, damage.

If the Irish banks are, in haste,
(a) forced into the arms of private equity at knock-down prices, or
(b) forced into unnecessary consolidations which make the market less competitive
we may all live to regret it at leisure.