Wednesday, November 24, 2010

Is 100 Billion Euros Enough to Solve the Irish Crisis? Part III

Patrick Honohan, governor of the Irish central bank, came out in support of both the analysis and solution presented in this blog to solving the Irish crisis.  The analysis and solution were originally discussed on this blog in the Irish Choice:  Inexpensive Cure or Expensive Bailout.

Part I and Part II of this series presented the idea that investors adopted a worse case assumption about the performance of the assets in the banking sector after the Irish government confirmed by asking for a bailout that its valuation of these assets was not credible.  The series then presented the solution to the crisis: provide investors with the asset-level performance information they needed to independently analyze and value the assets themselves.

As reported by GFSNews, Mr. Honohan said [emphasis added]:

"As fears grew that the crisis affecting Ireland might spread to more indebted Eurozone nations, the governor of the country's central bank launched an incendiary attack today on credit analysts who he said 'assume the worst' about the country's banking sector.

Governor Patrick Honohan, in an address to a conference of chartered accountants in Dublin, argued that credit analysts do not have enough information about the health of the Irish banking sector and should undergo 'euthanasia'.

Honohan said: 'If there is no information, the credit analyst tends to assume the worst. They think, 'if the actual situation were good, would the bank not have been at pains to disclose it. Since it is not disclosed, it must be bad'.

'As the information flow to the market improves both in quantity and quality, and especially when the economy improves and the news contained in the information is getting better, we will hopefully move towards the euthanasia of the Irish bank credit analyst - though not of course of the accountants!'....

He said that banks should try to boost confidence by disclosing more information to the market, such as on the ageing and migration of loans and status of residential mortgage books....

'Communicating more information to the market would not only enlist the expertise of market credit analysts in a way helpful to all, but could lower the cost of term borrowing as investors regain confidence.

'We plan to explore this aspect further with the banks - they have much to gain and formal regulation here may not be needed.'"

According to the Irish Independent, Mr. Honohan observed "Bottom line: the banks might do well to call in the leading credit analysts and find out what information would be of greatest use to them in identifying tail risks. And then provide it."

Hopefully, the banks will voluntarily provide the loan-level data that markets need.  However, given that the Irish government and its people have more to gain than the banks, it is highly likely that regulation will be required.

No comments: