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FINANCIAL FRAGILITY
IN IRELAND




          Dr Stephen Kinsella
          stephen.kinsella@ul.ie
          stephenkinsell...
Changes in real GDP for Ireland, 1971–2008.
Source: Central Statistics Office, Economic and Social Research Institute, and ...
LAST TIME.
                 Iceland vs. Ireland: History Matters
We’re not like Iceland really: our history is different, ...
NOW.
Corporate Governance & Financial Fragility in Ireland
  We should have made the rules tighter years ago.
WHAT I WANT YOU TO
              LEARN
1.Definition of Governance

2.History of Crises

3.Answer to Question: “Who does and...
RECALL:
         Minsky theory of the credit cycle
cf. Minsky, Stabilising an Unstable Economy, (1986)
MINSKY MOMENTS
1.Idea: Credit markets will breed their own reversal

2.How?

  1.Cheap interest rates lead to increased le...
CORPORATE GOVERNANCE
WHAT IS GOVERNANCE?
Defini-
Governance concerns the exercise of power
through policies enacted by self- interested




 tion
agents working wit...
ALL THIS HAS HAPPENED
BEFORE, AND WILL HAPPEN
          AGAIN
1980 - 2008
                                  ist of Crises
   Latin American debt crisis l lthe 1980’s,
                 ...
CAUTION
Banking is risky, must be regulated
BY WHOM?
 • Since 2003, Financial Intermediaries licenced licensed in Ireland
   by the Financial Services Regulatory Auth...
WHO SHOULD LEND, AND
        WHY?
 Lending by banks, for the most part, should be for
productive, profit making activities
...
GOVERNANCE &
               REMUNERATION



•A   Clear Principal-Agent Problem
GOVERNANCE &
                        REMUNERATION
 • “...thewave of corporate scandals that began in late 2001
   shook co...
US SUBPRIME LOANS



• Issued   by FDIC
MINSKY CYCLE

Five stages in Minsky’s model of the credit cycle:

1.displacement,

2.boom,

3.euphoria,

4.profit taking, a...
RECOMMENDATIONS FOR
          REFORM

• Speed    up structural change

• Sponsor    focused job creation programmes.

• Na...
NEXT TIME



• The European Central Bank & Investor Behaviour. Reading:
 Buiter, W: Why the United Kingdom Should Join the...
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Financial Economics Lecture 15: Governance & Financial Fragility in Ireland

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A lecture on corporate and financial fragility in Ireland.

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Transcript of "Financial Economics Lecture 15: Governance & Financial Fragility in Ireland"

  1. 1. FINANCIAL FRAGILITY IN IRELAND Dr Stephen Kinsella stephen.kinsella@ul.ie stephenkinsella.net
  2. 2. Changes in real GDP for Ireland, 1971–2008. Source: Central Statistics Office, Economic and Social Research Institute, and author's calculations. Note: 2007 and 2008 are estimates.
  3. 3. LAST TIME. Iceland vs. Ireland: History Matters We’re not like Iceland really: our history is different, so our future will be different
  4. 4. NOW. Corporate Governance & Financial Fragility in Ireland We should have made the rules tighter years ago.
  5. 5. WHAT I WANT YOU TO LEARN 1.Definition of Governance 2.History of Crises 3.Answer to Question: “Who does and who should regulate banks and financial intermediaries?” 4.History of Governance Structures in Ireland 5.Able to form an opinion about what went wrong wrt regulation.
  6. 6. RECALL: Minsky theory of the credit cycle cf. Minsky, Stabilising an Unstable Economy, (1986)
  7. 7. MINSKY MOMENTS 1.Idea: Credit markets will breed their own reversal 2.How? 1.Cheap interest rates lead to increased lending. 2.This leads to increases in leverage (L/D ratio). 3.Perverse incentives breed dodgy lending via financial innovations (Junk bonds/CDOS) ensues. 4.Something changes, dodgy loans default, banks fail, unless they get bailed out by Big Bank/Big Govt.
  8. 8. CORPORATE GOVERNANCE
  9. 9. WHAT IS GOVERNANCE?
  10. 10. Defini- Governance concerns the exercise of power through policies enacted by self- interested tion agents working within institutions
  11. 11. ALL THIS HAS HAPPENED BEFORE, AND WILL HAPPEN AGAIN
  12. 12. 1980 - 2008 ist of Crises Latin American debt crisis l lthe 1980’s, Pa rtia of US stock market crash of 1987, Japanese real estate and stock market crisis (and ensuing liquidity trap) in the 1990’s, UK housing crash in 1991 and 1992, Mexican Peso crisis of 1994, Long-running Russian crisis of the mid-90s, East-Asian crisis of 1997/8, Bursting of the `dot com’ bubble in the US in 2000, Worldwide recession following the terrorist attacks of 9/11 in 2001, Argentinean currency crisis in 2002, Sub-prime crisis which began in the US in August 2007
  13. 13. CAUTION Banking is risky, must be regulated
  14. 14. BY WHOM? • Since 2003, Financial Intermediaries licenced licensed in Ireland by the Financial Services Regulatory Authority (FSAI) “Remit of the FSAI since its inception in May 2003 has been to license, liase with, and monitor the activities of licensed agents in the financial services sector, to ensure they act in the public interest according to legal strictures.”
  15. 15. WHO SHOULD LEND, AND WHY? Lending by banks, for the most part, should be for productive, profit making activities It is not clear that the practice of lending for investment in property, based on an expectation of ever-higher price increases in the value of that property, could be considered a productive activity. It was, instead, a redistributive activity, where the future incomes of borrowers were transferred to the present to finance loans for mortgages on residential and commercial properties.
  16. 16. GOVERNANCE & REMUNERATION •A Clear Principal-Agent Problem
  17. 17. GOVERNANCE & REMUNERATION • “...thewave of corporate scandals that began in late 2001 shook confidence in the performance of public company boards and drew attention to potential flaws in their executive compensation packages. There is now recognition that many boards have employed compensation arrangements that do not service shareholders’ interests. But there is still substantial disagreement about the scope of such problems and, not surprisingly, how to address them. “ Bebchuk, L. and Fried, J. Pay without Performance: The Unfulfilled Promise of Executive Compensation, (Harvard University Press, Boston, 2004), p. ix.
  18. 18. US SUBPRIME LOANS • Issued by FDIC
  19. 19. MINSKY CYCLE Five stages in Minsky’s model of the credit cycle: 1.displacement, 2.boom, 3.euphoria, 4.profit taking, and 5.panic.
  20. 20. RECOMMENDATIONS FOR REFORM • Speed up structural change • Sponsor focused job creation programmes. • Nationalise wayward Irish banks. • Foster less procyclical leveraging • Transparency.
  21. 21. NEXT TIME • The European Central Bank & Investor Behaviour. Reading: Buiter, W: Why the United Kingdom Should Join the Eurozone
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