Wednesday, April 27, 2011

Thoughts on the Irish Banking Crisis and the Nyberg Report

I just got through reading “Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland.”  It’s a recently published report of the commission of investigation into the banking sector in Ireland and it was written by Peter Nyberg.

Mr. Nyberg is a Finnish economist with a background in financial regulation.

The Nyberg report paints a sobering picture of the Irish banking industry in the period under investigation from 2003 to 2009.

The crisis was caused by the unhindered expansion of a property bubble financed by the banks using wholesale market funding.

Investors considering investing in banks might want to take note of some salient conclusions:

“The Commission has…explained the crisis essentially as a consequence of applying a na├»ve version of the efficient market paradigm, supported by groupthink and herding. This helped create and strengthen a mania in the Irish property market. Professionals and non-professionals alike became convinced, and convinced each other, that financial markets were stable by themselves, despite historical evidence to the contrary.”

“The Commission has been widely assured by bank management, non-executive board members and others that the problems in banks' loan books came as a complete surprise. There is regret, incredulity and guilt among them at the lending and funding policies pursued and the lack, at the time, of any recognition of what was happening. The credibility of their assertions is increased by the fact that a number of them personally suffered substantial losses in the crisis, easily avoidable if advance warnings had been available and recognised.”

“Because the real reason for the crisis is the spread of an ultimately irrational point of view, regulations and watchdog institutions cannot be counted on to be efficient preventers of a systemic crisis. As has been seen in Ireland and other countries, central bankers and regulators embraced much the same paradigm as the market participants and adapted their policies to their convictions. The result, as shown by the crisis itself, was that no effective brake on risk-taking existed for years. It does not appear wholly unfair to propose that this is what may happen also in the future if and when another new financial or banking paradigm appears. Many of the very reforms that recently have been undertaken, at short notice, to shore up the functioning of the present financial system could turn out, once again, to be ineffective.”

To summarize, groupthink and herding behavior contributed to the crisis, bank management—the individuals most likely to be in position to understand what was going on—were clueless and regulations and watchdog institutions cannot be counted on to prevent future crises.

All in all the report serves as a cautionary tale for those considering taking debt or equity positions in the banking sector.


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Any person considering an investment should seek independent advice from an investment advisor on the suitability of the particular investment.  Blog postings are for educational purposes only and do not constitute a recommendation for the purchase or sale of any security. The information is not intended to provide investment or financial advice to any individual or organization and should not be relied upon for that purpose.