The Irish government’s policy of reprivatising the banking sector through the sale of AIB and eventually Permanent TSB risks exacerbating any future financial crisis, an ECB working paper warns.
The research is at odds with decades of policies that have driven liberalization of the banking sector not only in Ireland but throughout the developed world. and to free other sectors of the economy from direct state control in order to promote a competitive and more dynamic economy.
However, the ECB paper on “State-Owned Banks and the Transmission of International Shocks” released this week cites evidence that foreign and private banks could be more dynamic as lenders in normal times, but also more likely to worsen an economic downturn by restraining lending cut back as soon as a crisis begins than public banks.
Keeping a mix of public and private banks is a safer policy, researchers argue.
“An important finding is that there is significant heterogeneity between domestic and foreign banks, countries and time periods. The result is important from a policy point of view, as we have shown that within the banking sector, a mixed mix of foreign and domestic state-controlled banks and private ownership is advisable.”
Policy here is heavily weighted toward reprivatizing the remaining banks, which were nationalized in whole or in part a decade ago, as a condition of their taxpayer-funded bailouts.
Finance Minister Paschal Donohoe earlier this week launched a long-awaited review of the retail banking sector in the wake of the planned closures of Ulster Bank and KBC Ireland, although the banks’ ownership model is not expected to form a large part of this work.
The government is currently in the midst of a process of selling bank stakes acquired more than a decade ago as a result of bailouts and bank bailouts.
A once-sizable minority stake in Bank of Ireland is now below the 4 per cent mark and is likely to be sold outright within months.
The larger majority stake in AIB is also being reduced through the sale of a small number of shares through the stock exchange, although this process lags far behind the Bank of Ireland.
A sale of permanent TSB shares is pending, although the government’s stake in the smaller bank is being reduced in favor of Ulster Bank’s UK lender, the Royal Bank of Scotland, as part of an agreed deal to take over the exiting bank’s loans.
In their paper, ECB researchers Marcin Borsuk, Oskar Kowalewski and Pawel Pisany examined the links between bank ownership and credit growth over the period 1996-2019.
They found evidence that lending differed depending on the bank’s ownership model – although bank-specific factors played a greater role during the 2008 global financial crisis.
In normal times, the evidence suggests that privately owned and foreign-owned banks lend more than their state-owned peers, but this reverses once a crisis hits.
That fits with some experience here after the financial crisis, when foreign lenders like Rabobank, Bank of Scotland (Ireland) and Danske exited the Irish market after the crash.
https://www.independent.ie/business/irish/fully-privatised-bank-sector-risks-worsening-crashes-ecb-41672420.html Fully privatized banking sector risks worse collapses – ECB