The Irish Banking Crisis


Declan McDonagh discusses the Irish banking crisis from its precipitating events through current recovery efforts. McDonagh, a former consultant at the Institute of Public Administration in Ireland, begins with an overview of the Irish economy and its impressive growth after joining the EU. He describes the banking system and its significant reforms during the 1960s. Specifically, McDonagh discusses increased competition in the banking services sector, the creation of the International Financial Services Center (IFSC), and the overall expansion of financial products and conglomerates worldwide due to reduced regulation. McDonagh next describes how the financial crisis developed. High GDP growth from 1990-2007 was largely attributable to U.S. multinational corporations establishing manufacturing and service bases in Ireland, but following the 2002 adoption of the euro Ireland’s growth surged due to a partially government-aided property boom. Too much mortgage lending financed by banks’ heavy borrowing led to an unsustainable bubble. Finally, the global impact of the U.S. subprime mortgage crisis in 2008 led the Irish property market to collapse. This led to a banking crisis because banks’ solvency was threatened. Money they had lent was secured against properties whose value had disappeared. After Lehman Brothers collapsed, the Irish government implemented a 400 billion euro bank guarantee and established the National Asset Management Agency (NAMA) to buy property loans back from banks at a discount. Ultimately, the five Irish banks guaranteed by the government were recapitalized, and the Anglo Irish Bank was nationalized.McDonagh also discusses the failure of financial regulation and corporate governance during the crisis; provides an overview of Ireland’s current economic indicators; and describes the government’s response to budgetary matters and economic planning following the crisis, including the joint EU/International Monetary Fund Rescue Package.