Ireland ‘closer to full recovery’ from bank crisis than Euro counterparts

IRELAND is nearer a full recovery from the crisis in its banking sector than some of its European counterparts, a Dáil committee heard yesterday.

Bo Lundgren – the director general of Sweden’s National Debt Office – was answering questions on what lessons could be learned here from how the Swedish government handled its major banking sector collapse in the 1990s.

Asked how long Ireland might need to get back to a solid banking system, he said it was difficult to judge and the timeframe would differ from country to country.

However, he said that as Ireland’s property market had probably bottomed out, the banking system should be in order within a year or two. He said that Ireland is roughly now where Sweden was in 1993. By that stage, Sweden was nearing the end of its financial crisis, as its banks returned to profitability a year later.

The main challenges to meet in order to minimise a credit crunch emerging from a banking crisis, according to Mr Lundgren, are the maintenance of liquidity and the restoration of confidence both in investors and bank management.

He said that the collapse of Lehman Brothers last year showed what can happen if confidence erodes.

He added that restoring a capital base – to what’s needed at the time, even though it might not be to original levels – is vital.

“A lack of credit flow is the main reason for any government to be involved.

“A certain capital base level has to be maintained – not necessarily from existing financial institutions. They can be replaced by newer institutions, but you need the capital base to be in place, whatever the institution,” he said.

Sweden’s banking sector collapse – which lasted from late 1991 to the middle of 1996 – although smaller than what Ireland has been experiencing, resulted in a mix of mergers between banks, nationalisations, liquidations and two bad banks being established. The end result, however, was that most of the value of lost loans was recovered.

To that end, Mr Lundgren said that bad banks – like the proposed National Asset Management Agency – should not be closed as soon as the sector recovers but should be kept in place for a few years in order to attempt to recover as many bad assets as possible.

He added that transparency on bad debt levels at the banks was key to a quick recovery and said he was in favour of a separate role for financial regulators and Central Banks.