Waiting for a new dawn

Amidst the acres of newsprint devoted to coverage of the most serious financial crisis since the Wall Street Crash of 1929 over the past week, a few stark figures stand out which go some way to explaining why Ireland"s banking system, in particular, was especially vulnerable to the raging economic storm now scything its way across the globe. These statistics revealed that half of all the loans advanced by the country"s two main banks for property development were given to just 40 borrowers. It is as stark an illustration as possible of just how perilous the imbalance of these banks" lending portfolios had become, and why Irish banks ended up staring into the abyss early last week before the Minister for Finance Brian Lenihan rode to their rescue with a State guarantee to prop up the ailing system which, we are told, was just hours from collapse. The result of property and construction loans making up so much of Irish banks" loan books - many of which are now considered risky given the collapse of the property market and house prices - was that Irish banks could not access funds on international markets as foreign banks were wary of lending to them, fearing they would never see their money again. With credit markets already frozen around the world, the banks" liquidity was fast drying up and something drastic had to be done to prevent a collapse of the system in Ireland. Mr Lenihan"s move last week was a bold - some would even say inspired - one. Despite the criticism that has been levelled at the Government for putting the taxpayer in the position of having to go guarantor for hundreds of billions of euro, it was also a necessary one and now appears to be a template that is being used in other jurisdictions as other European governments grapple with the fallout from the credit crunch. Saving our banking system from collapse was crucial to safeguard our economy. Doing nothing was simply not an option. Of course, the banks have been the architects of their own undoing, and few will have much sympathy for them, having helped to fuel an enormous property bubble in this country that has now burst in a spectacular way and left many paying 100 per cent mortgages on homes now worth much less than what they paid for them. The Government"s rescue plan buys the banks some time and will allow them to access credit on international markets to keep cash flowing in and out. However, the banks will need to be recapitalised by raising fresh money from the markets to prop up their balance sheets so that they will be positioned to absorb the losses coming down the line from builders" and developers" bad debts. It is not going to be pretty, but the financial institutions which got themselves into this mess in the first place by courting developers who were paying crazy numbers for overpriced land now need to be able to withstand the hits which are inevitably coming. The new era that is about to dawn in banking globally will require much tougher regulation and new leadership qualities to restore confidence in a battered and bruised financial sector. The reckless lending practices which have characterised banking from Idaho to Ireland, driven by greed and rapacity, must end. Good governance and tight regulation will be required to boost confidence and the obscene excesses which have gone with bank CEOs" remuneration have to be curtailed. The banks in Ireland must learn to stand on their own two feet again once they emerge from under the coat-tails of the Government. For the public in Ireland to once again have faith in their banks, failures should be punished, senior managers held to account and some humility needs to be shown rather than the arrogance that remains in evidence within some quarters of the sector. Public oversight of banking activities needs to be rigorous and investor confidence restored if a robust financial system is once again to play its part in driving Ireland"s economy forward when the world eventually turns the corner after this storm blows itself out. Continuing market instability and the lack of a coherent and co-ordinated strategy among European governments to tackle head-on the worsening effects of the credit crisis also needs to happen quickly if an already very difficult 2008 is not to turn into an even more depressing 2009.