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Compare the collapses of the Munster Bank in 1885 and that of Anglo-Irish Bank in 2008, paying attention to what caused the banks to fail and the impact of their failures on the economy

Compare the collapses of the Munster Bank in 1885 and that of Anglo-Irish Bank in 2008, paying attention to what caused the banks to fail and the impact of their failures on the economy

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An essay for the 2012 Undergraduate Awards Competition by Caroline Keiller. Originally submitted for Economics at University College Dublin, with lecturer Cormac O'Grada in the category of Business & Economics
An essay for the 2012 Undergraduate Awards Competition by Caroline Keiller. Originally submitted for Economics at University College Dublin, with lecturer Cormac O'Grada in the category of Business & Economics

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Published by: Undergraduate Awards on Aug 31, 2012
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01/12/2014

 
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Compare the collapses of the Munster Bank in 1885 and that of Anglo-Irish Bank in 2008, paying attention to what caused the banksto fail and the impact of their failures on the economy
AbstractMy essay is a comparison between the collapse of two banks: Munster Bank in 1885 and Anglo-Irish Bank in 2008. The essay is interesting to the reader in that the current Irish economy has beenmajorly affected by the banking crisis, particularly Anglo-Irish’s part in it as it has cost the taxpayer so much. By comparing the current crisis with a similar bank crisis that occurred 123 years previously, the reader questions whether anyone ever does learn anything from history. The essaycompares several main factors in both crises: both can be related back to a property bubble, a lack of regulation and the existence of insider lending. The comparison differs in the end as Anglo-Irish was bailed out by the central bank where as Munster bank was left to fail by the quasi-central bank of the time. In the end the Munster Bank collapse did very little economic damage where as it isapparent that Anglo-Irish Bank caused significant trouble. Would this have happened if the Bank of Ireland had made the same decision as it did in 1885 and let the bank fail? That’s for reader todecide.
This essay will be a comparison of the failures of the Munster Bank in 1885 to that of themodern day Anglo-Irish Bank (Anglo) crisis. The first section will look into the causes of thebanks' collapse. It will be a comparison of whether there were any of the same factors andwhat was different through looking at the ease the banks lent credit, regulation, insider lending and the role of the central or quasi-central bank in bailing them out or not. In thesecond part I will be assessing the impact the banks had on the economy at the time.Firstly, in both the Anglo-Irish and Munster Bank cases one cause can be linked back tothe banks lending credit too easily. In particular, customers sought loans based on realestate. This was mainly related to the economic climate at the time, which was, in bothcases, a property bubble. This meant that property prices were inflated so although theyappeared to be adequate security for the loan they backed, actually, once the bubble burst,it was apparent that the banks had been overgenerous with credit. The Irish government of today has described Ireland's banking exuberance as “a straightforward property bubble,compounded by exceptional concentrations of lending for real estate.”
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 At this point in time it is clear that Anglo was not alone in making such rash loan decisions.Many Irish banks were guilty of extending credit on the basis of being backed by inflatedproperty prices, however, Anglo-Irish Bank had the highest percent of loans based onconstruction and property of all banks at 80%
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of their total loans. This is what led thegovernment into pumping €1.5 billion
3
into Anglo when it was first nationalised. The
1
Commission into the investigation into the banking sector in Ireland. Cited 2011 11 15.p.41
2
Commission into the investigation into the banking sector in Ireland. Cited 2011 11 15. p.32
3
James, S. World Socialist Web Site. 2010 09 14.
 
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problem was further compounded by improper paperwork as well as an absence of supervision in the Banking system to prevent this from happening.In the Munster case, the failure can similarly be traced back to real estate. The Bankthrived at first but then continually gave out advances on land, buildings, freights,merchandise, villas and purchasing and leasing sites
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to an extent that loans were greater than deposits. This would not have been as problematic if the bank's customers had notbeen predominantly from the southern agricultural regions and were therefore mostlyfarmers. The chairman at the time said “it was a usual thing to have many of these billsunpaid when due”
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. These customers were particularly reliant on the agricultural market sodeposits would fall when there was a downturn in agriculture. The Bank was also accusedof holding inadequate reserves, which I will expand on in the next section, so this factor combined with insecure loans posed an even greater risk.Secondly, lax regulation meant there was no guideline for Banks to follow. Obviously theyshould be aware of their own financial stability but supervision over the entire bankingsector insures that if banks are tempted to act insensibly it won't be something the entiresector does that could have an affect on the economy as a whole.In the Anglo-Irish case, Simon Carswell, author of Anglo Republic, blames the IrishFinancial Service Regulatory Authority
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. This opinion is backed up by the government in areport that stated that supervisors were responsible for allowing the build up of macrofinancial risk in a way that was “opposite of hands on.
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” In my opinion this wasbecause they were scared to burst the property bubble which represents a failure by theCentral Bank.Carswell also refers to a particularly poignant case in his book concerning Se
án Quinn,an Anglo shareholder. Quinn controlled nearly 30% of the banks share capitalas well as having a €2.9 billion loan from the same bank that he could not payback. There should have been proper regulation in place to prohibit hisreceiving this loan.Along with these failures in regulation, the government also made acontroversial decision in 2008 when the Irish Financial Regulator stepped in toguarantee the banks. At the time only Anglo was in financial jeopardy, due toholding too little reserves, but the government feared systemic contagion if itwere to fail.
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Only is hindsight was this a risky idea but at the time thegovernment was concerned by the complex web of loans in the banking systemas developers had different loans in several banks secured by the samecollateral. In the Anglo case, nationalisation followed soon after a capital inputfailed to stabilise the situation.
4
O Grada, C.
The last major Irish bank failure : lessons for today?
University College Dublin. School of Economics;2010-11.p.3
5
O Grada, C.
The last major Irish bank failure : lessons for today?
University College Dublin. School of Economics;2010-11. p.5
6
Carswell, Simon.
 Anglo Republic.
Ireland: Penguin; 2011.
7
Commission into the investigation into the banking sector in Ireland. Cited 2011 11 15.
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The Irish Economy. Cited 2011 11 15.
 
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It can be argued that lax regulation also helped lead to the Munster Bankcollapse. Although it was harder to impose regulation in the 1800s than today,there was still ability for the government to do so and this was ignored. From1876,
The Irish Banker 
accused the Bank of over-extending credit and havinginadequate reserves
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along with foolhardy and careless lending which leftMunster with “too little margin of safety”
despite the lesson they should havelearnt from the downturn in agriculture. Therefore, there should have been aregulation to ensure Munster had adequate reserves to cope with a crisis. Thisis a direct similarity to the Anglo case which was in the same situation: bothbanks and regulators had been foolish in allowing loans to far outweighdeposits which meant that when a downturn arrived they were unable to repaydepositors. The difference in the two is how the central or quasi-central bankreacted to the situation.My third comparison is the prevalence of insider lending and the scandal thatensued in both cases. This argument follows on from my previous commentabout the lack of regulation as insider lending is another instance when thereshould have been supervision.Anglo's chairman and central figure in the scandal, Sean Fitzpatrick, did notdisclose €87 million of personal loans. Although Fitzpatrick took the largestamount of loans, altogether the total for directors loans altogether hit €150million. It can now be seen that for 8 years the chairman along with otherdirectors were all accusable of temporarily transferring loans to other banksbefore the end of year accounts and then afterwards immediately receivingthem back again
. After the scandal came out, CEO (Drumm), Chairman(Fitzpatrick) and Finance Director (McAteer) all resigned for being mostcomplicit. The Munster Bank case was a very similar if not exactly the same story. In 1882rumours began that directors had been breaching the bank's rules andreceiving loans on inadequate security
, despite the chairman, Shaw's,insistence that 'no director is to get an advance...on his mere personal security'when in fact it turned out that Shaw's borrowing was more than double that of the other directors combined. The Shareholder's committee became moresuspicious when they received a letter from the directors which requested theremoval of a clause that prevented directors receiving loans based on justpersonal security. This led to a critical injunction in the Vice-Chancellor's courtthat found the directors guilty of insider lending on a grand scale
. This
9
O Grada, C.
 Moral hazard and quasi-central banking : should the Munster Bank have been allowed to fail.
LilliputPress; 2003. p.319
10
LR & TV, 17 July 1885; Cullen, 'Germination and Growth', p.43 as cited in O Grada, C.
 Moral hazard and quasi-central banking : should the Munster Bank have been allowed to fail,
(2003) Lilliput Press.
11
Connor G, Flavin T, O'Kelly B.
The U.S. and Irish Credit Crises: Their Distinctive Differences and CommonFeatures.
2010 3.
12
O Grada, C.
 Moral hazard and quasi-central banking : should the Munster Bank have been allowed to fail.
LilliputPress; 2003. p.321
13
O Grada, C.
 Moral hazard and quasi-central banking : should the Munster Bank have been allowed to fail.
LilliputPress; 2003. p.321

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