Report: Saving Anglo was right thing to do

ONE of the reports into the banking crisis concludes that saving Anglo Irish Bank was the right thing to do.

In his assessment of the crisis Central Bank Governor Patrick Honohan insists that the Government decision not to let Anglo go to the wall was the correct one given the enormous uncertainty surrounding the global banking sector at the time.

In his report the governor notes that the debate about Anglo has been “the subject of considerable discussion” in the wake of the guarantee to all of the five Irish banks given in late September 2008.

Given the international climate at the time and taking into account the huge impact caused by the collapse of Lehman’s any bank of size was regarded as “systemically important”.

The Central Bank governor said after the Lehman’s debacle in the US, the failure of almost any bank began to be seen by European policymakers as something to be avoided at almost all costs.

Given that background, if Anglo had been allowed to fail in a “disorderly bankruptcy” the impact on the rest of the Irish banking system could have been catastrophic.

In the heady environment that was pervasive in Europe and US banking at the time there can be little doubt that a disorderly failure of Anglo would, in the absence of any other protective action, have had a devastating effect on the remainder of the Irish banks, he said.

And given that the other banks relied on the willingness of depositors and other lenders not to withdraw funds, Anglo was of “systemic importance to the Irish banking system in those circumstances”, he said.

Had Anglo been allowed to collapse it would have raised serious doubts about the rest of the banks at the time “and in all likelihood the main banks would have run out of cash within days”, he said.

Post-Lehman, the issue was one of confidence and the report makes clear that on the basis of evidence in other markets, letting Anglo go might have plunged the entire Irish banking sector into total meltdown.

The report goes on to say that closure of all or a large part of the banking system would have “entailed a catastrophic immediate and sustained economy-wide disruption” of the social and economic environment in Ireland.

It would have been extremely difficult to quantify, but in effect, it could have totally undermined the payments system in a modern economy, he concluded.

Such an outcome would have added to the problems that the downturn itself has already wreaked on the Irish economy.

He added however that the guarantee given to the banks by the state will cost in excess of 15% of GDP, and that cost should not be dismissed lightly, he said.