Ireland Banking System - looking forward
Ireland was one of the countries most affected during both the Global Financial Crisis and the Eurozone crisis. This paper discusses Ireland's recovery, the importance of its financial systems and the implications of regulatory reforms and potential banking union within the Eurozone.
Ireland has endured one of the most severe banking crises in its history, being one of the countries most affected during both the Global Financial Crisis and the Eurozone crisis. Only Latvia experienced a higher economic cost, as measured by foregone output.
What caused the crisis? A climate of low interest rates Euro triggered a house price and mortgage credit bubble, with a lenient regulatory regime encouraging aggressive risk taking. Regulators mis-diagnosed problems at the start of the crisis. The Irish government proceeded to guarantee almost all bank liabilities. This added substantially to government debt when supposed liquidity problems turned out to be solvency problems and ultimately the country had to submit to the controls of the EU-IMF Troika.
Ireland exited the bailout programme in late 2013. However doubts remain about sovereign debt sustainability, given uncertain growth perspectives of the export-oriented Irish economy and possible additional recapitalisation needs of Irish banks after the European asset quality review and stress test results to be published later in 2014. High household debt and negative equity experienced by many mortgage holders may still lead to fresh fragility.
The crisis experience and subsequent Troika program raises questions about the future role and structure of the Irish banking system. What role can we expect from the financial sector in the recovery phase and in the medium- to long-term future? What is the optimal structure of Irish banking, in terms of ownership and types of banks and integration with international financial markets? What impact will global and European regulatory reforms have on Irish banks and what should the focus be on the national level? Importantly, what impact will the ultimate shape of the European banking union have on the Irish banking system?
This paper takes a forward looking perspective on the Irish financial system, comparing the size and efficiency of the Irish banking systems internationally. It discusses the importance of the financial system for the Irish economy, relating both to the academic literature and the recent Irish experience. The paper also gauges the potential impact of recent regulatory reforms and the banking union currently under discussion within the Eurozone. The research finds that the Irish banking system is slowly recovering from the crisis and its aftermath, but lessons remain to be heeded. There should be a stronger focus on enterprise over household credit and on financial services for the local economy rather than the Irish Financial Services Centre (IFSC). This requires further and extensive reform of banking regulations, policies and systems. All future financial sector policy decisions will need to be made with an eye towards Europe, both in the absence of banking union and with the potential for it to occur.
The research paper is available to download in full at the link below.