Financial Economics Lecture 15: Governance & Financial Fragility in Ireland
Dr Stephen Kinsella
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.
Iceland vs. Ireland: History Matters
We’re not like Iceland really: our history is different, so our future will
Corporate Governance & Financial Fragility in Ireland
We should have made the rules tighter years ago.
WHAT I WANT YOU TO
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
Minsky theory of the credit cycle
cf. Minsky, Stabilising an Unstable Economy, (1986)
1.Idea: Credit markets will breed their own reversal
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.
Governance concerns the exercise of power
through policies enacted by self- interested
agents working within institutions
ALL THIS HAS HAPPENED
BEFORE, AND WILL HAPPEN
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
Argentinean currency crisis in 2002,
Sub-prime crisis which began in the US in August 2007
• 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.”
WHO SHOULD LEND, AND
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
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
•A Clear Principal-Agent Problem
• “...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.