Government letting the two big banks off the hook on Nationwide issue (Irish Times)

04 November 2011

IRISH NATIONWIDE has found itself cast in the unenviable role of the problem child of Irish banking. And that is not a very good place to be in the middle of a global financial crisis.

But it does appear that the tag is not unjustified and Nationwide is the Irish bank that is most vulnerable to the pressures being exerted by the global credit squeeze.

Just how vulnerable the Irish banks are is hard to judge. The Central Bank may be confident about the health of all the Irish banks, but the market thought otherwise, as evidenced by the massive bounce in Irish bank shares last week as short positions had to be unwound following the banning of short-selling.

The Central Bank is clearly worried enough about the Irish Nationwide to be prepared to at least broker a deal to see it taken over by another institution, with behind-the-scenes talks having started several weeks ago when the Irish Nationwide had its credit rating cut.

But the problem is that the nice middle-class couple best placed to adopt this problem child, AIB and Bank of Ireland, do not seem to be interested.

It's understandable in a way. They have enough on their plates and announcing a takeover of the Irish Nationwide is not going to do anything for their share prices.

You can make all sorts of arguments about whether they should step up to the plate in the national interest. You could even say that it's the least they could do after the Government banned short-selling and said it would guarantee taxpayer money on deposit with them to the tune of €100,000. Never mind the 12.5 per cent tax rate they enjoy.

But as it stands, the two big banks would appear to have stood back and left it to Anglo Irish Bank to try and engineer a solution. Anyway why wouldn't they?

AIB and Bank of Ireland are well aware that Anglo has a very strong motive for seeing the Irish Nationwide issue resolved.

If Irish Nationwide was to get into serious trouble, there would be a double whammy for Anglo Irish. Not only would the resulting ripples cause very serious headaches for Anglo as they spread through the commercial property sector, the perception that Anglo Irish was the next weakest link in the chain would put them under even more pressure.

Hence Anglo's enthusiasm for seeing Irish Nationwide's future resolved. But they have made it clear to the Government that they are not going to do it on their own.

Various forms of financial support are being talked about at this point, ranging from lines of credit from the Central Bank to the Government buying some of the Irish Nationwide's loans off Anglo.

While some of these proposals could in the long run make money for the exchequer, in the short-term they are all bail-outs by the taxpayer. Compared to what was being engineered in the US over the weekend it's pretty small beer, but it still represents taxpayer support for a sector that filled its boots during the boom.

Arguably Anglo Irish Bank's initiative is deserving of taxpayer support because what it proposes is in the national interest and does resolve a problem for the Central Bank. The fact that Anglo Irish Bank may be acting out of enlightened self-interest does temper this somewhat, but they do appear to be the only show in town.

Perhaps the real issue for the Central Bank is that by facilitating a sub-optimal solution it is only storing up trouble in the future. The mere fact that Anglo Irish Bank is insisting on some sort of Government help to take over Irish Nationwide is an indicator that any such deal will stretch it financially at a time when, along with all the other banks, it is very stretched.

It would be wrong of the Government to help Anglo Irish Bank take over Irish Nationwide, possibly biting off more than it can chew, while AIB and Bank of Ireland look on.

They would benefit directly from a resolution of the Irish Nationwide issue, and unless they are misleading us as to their current financial health, are better placed that Anglo Irish to effect an intervention.

There may be issues of competition that would militate against a takeover of Irish Nationwide by one of the big two - even in these exceptional times - but that does not mean that they cannot contribute to the financing of it.

Using taxpayers' money to help finance the takeover of Irish Nationwide by Anglo Irish Bank may be looking more and more like a necessary evil in these exceptional times.

But it will be an act of political cowardice in the extreme if our two biggest and best-funded banks are not made play their part by the Government.