Jim Power: Anglo sowed the seeds of Ireland's banking crash 

Under Seán FitzPatrick, Anglo Irish earned a reputation as a bank with which you could easily do business. The incumbent players were forced to respond, and we are still feeling the effects
Jim Power: Anglo sowed the seeds of Ireland's banking crash 

Then Anglo Irish Bank Group chief executive Mike Aynsley at the removal of signage from the bank's headquarters on St Stephen's Green, Dublin in April 2011. Picture: Gareth Chaney Collins

In order to move forward it is probably a sensible strategy to forget bad things that happened in the past, enjoy the present, and plan for the future. 

To a limited extent many of us, at this stage, have left behind the horrific events that occurred between 2008 and 2012.

However, it is to a limited extent, because the economic, financial, and social legacy of what happened during that period is still having a significant impact on all of our lives and will continue to do so for some time to come. 

We can primarily thank Anglo Irish Bank for that.

Economic research over the past century has generally concluded that when an economic recession is caused by a shock to the banking and financial system, the recession tends to be deeper, longer, and more difficult to emerge from.

That is in comparison to a recession caused by some other type of shock, such as a global pandemic, oil price shock, or a technology bubble bursting. 

What happened in the US after 2007 and which quickly spread its tentacles around the global economy was indeed a serious shock to the global banking system.

Many of us may like to criticise banks and bankers, and very often with very solid justification, but the reality is that a functioning and trustworthy banking system is an essential part of a functioning economy. 

Banks perform the role of financial intermediaries between savers and borrowers in a trustworthy way, and this is essential for businesses and consumers to operate. 

If, for some reason, trust is lost in the banking system and it loses its ability and/or willingness to act as an intermediary between savers and borrowers, then economic activity will come crashing down and it will prove costly and difficult to restore a functioning banking system. 

That certainly describes what happened in Ireland.

The implosion of the US subprime mortgage market from 2007 onwards created devastation in banking systems all over the world and it took some time and massive pain to come out the other end. 

Here in Ireland, we were particularly exposed and vulnerable, because our banking system had got totally carried away and created a vulnerability whose magnitude few appreciated at the time.

We now know that in the period up to 2007, the Irish banking system had lost the run of itself. Bankers showed a cavalier attitude towards lending and risk assessment and the financial regulator did not fulfil its function as a prudent regulator of the banking system.

Irish bankers created utterly ridiculous and ultimately disastrously unsustainable exposures to creditors, with lending to developers and personal mortgage clients the two segments that really stand out, but there were others. 

Basically, the banking elite forgot all of the rules of prudent lending as they got caught up in a greed- and hubris-driven circus.

It is very often the case that when a disruptor enters any market, the incumbent players are forced to react and follow or be left behind. On the mortgage side, the entry of Bank of Scotland to the Irish mortgage market in 1999 prompted a sharp decline in average mortgage rates; much more aggressive loan-to-value (LTV) loans; and the notorious tracker mortgage, which became a legendary part of the Irish vocabulary.

On the business lending side, the advent of Anglo Irish Bank radically changed the Irish banking landscape. 

Sean FitzPatrick: His passing this week has resurrected many of the memories of that dreadful period in Irish life that most of us would prefer to forget. Picture: Sam Boal/RollingNews.ie
Sean FitzPatrick: His passing this week has resurrected many of the memories of that dreadful period in Irish life that most of us would prefer to forget. Picture: Sam Boal/RollingNews.ie

Seán FitzPatrick became chief executive of what was to become Anglo Irish Bank in 1986 and over the next couple of decades, he transformed it into the third-largest bank in Ireland. It gained a reputation as a bank with which you could easily do business. 

The bank was aggressive, hungry, and prided itself on turning around lending proposals in a matter of hours. It gained a particularly strong niche in the property development segment of the market and quickly became a market leader.

As is often the case in such situations, the incumbent players are forced to respond, not least because shareholders demand it. AIB and Bank of Ireland were losing market share and their respective share performance was inferior to the aggressive upstart. 

Both banks eventually responded to the shareholder pressure and started to compete more aggressively. AIB reacted first, while the traditionally more conservative Bank of Ireland was slower to follow, but eventually did. This resulted in a situation where AIB was hurt much worse than Bank of Ireland and had to be fully nationalised, while Bank of Ireland did not require the same level of taxpayer intervention.

I prefer to call it taxpayer rather than government intervention because that is what it ultimately was. It is probably accurate to say that Anglo Irish Bank precipitated the eventually disastrous behaviour of AIB and Bank of Ireland, but one shouldn’t forget that AIB, in particular, created many problems for itself ever before Anglo became an influential player in the market. 

The reality is that bankers are generally incapable of behaving themselves and need to be closely controlled and regulated by a regulator with teeth.

The collapse of the banking system has destroyed the Irish banking model and we are now living in the type of banking market that those of us of a certain age grew up with, where two main players dominate the market and competitive forces are virtually non-existent. 

In such an environment of little competition, the customer is the ultimate loser. The current legacy created by Anglo includes significant government debt; a collapse in the housebuilding sector, which is now creating considerable pain for young people; an underfunded health service; and the second-highest mortgage rate in the eurozone.

The passing of FitzPatrick this week has resurrected many of the memories of that dreadful period in Irish life that most of us would prefer to forget and we are now back into a flurry of analysis paralysis of that dark period. 

Apart from the bad banking behaviour of the bank’s lenders, the Maple 10 and the balance sheet manipulation stand out as the legacy of the deceased that will not be forgotten. 

In summary, Anglo Irish Bank is still a blight on Irish life.

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