Bank shares - Investors approve of NAMA plan

TAOISEACH Brian Cowen insisted that the National Asset Management Agency (NAMA) was not being set up to bail out the banks or the developers. Irrespective of the real aim, it would seem that the proposals have come to the rescue of the banks.

Shares in the two main banks – Allied Irish Banks and the Bank of Ireland – increased significantly on the New York Stock Exchange on Wednesday afternoon, and they soared in Dublin yesterday. AIB jumped by 28%, while Bank of Ireland shares increased by 18%.

This was in the midst of heavy trading. A total of over 57 million shares in Bank of Ireland and AIB were traded yesterday, in comparison with around 9 million on a normal day. This should be welcomed because it provides a much need boost for investor confidence, which has been greatly undermined in the past 12 months.

This does not mean the banking crisis is over. The Bank of Ireland was valued yesterday at €3.4bn in comparison with €11bn two years ago, whereas AIB was at €2.9bn in comparison with €14.3 in 2007.

Nevertheless, yesterday’s developments were an indication that the NAMA project, as outlined by Finance Minister Brian Lenihan, has ended months of uncertainty and boosted investor confidence. In this new climate of confidence the Bank of Ireland indicated yesterday that it was considering raising funds by issuing new shares.

As the Taoiseach stressed, of course, NAMA was not set up to bail out the banks. The main aim is to boost the economy by stimulating banking liquidity so that money could be lent to small businesses and to ordinary customers.

Legislators should ensure that the banks are not allowed to forget this. Over a number of decades Irish banking seemed to go from one extreme to another.

There was a time when Irish banks were notoriously conservative. Back in the 1950s bank managers frequently had a reputation for lending money only to those who were so solvent that they really did not need the credit. In that climate small businesses stagnated and initiative was stifled.

The more recent difficulties were generated by poor judgment on the part of bankers who facilitated and encouraged reckless speculation. There should be no question of the banks seeking to recover their loses on the backs of those who played no part in generating the toxic debts.

Taxpayers are being asked to take the biggest financial risk in this country’s history to stimulate the economy by injecting liquidity into the banks. The banks must make that credit available on a fair and rational basis.