The Credit Institutions (Financial Support) Act 2008, signed into the statute book on the 2nd October, initially covered six financial institutions. At the time of writing, the ink is hardly dry. A Website has been prepared to show all stages of the passage of the bill through the Dáil. However, the final version is not yet available online.

Of the six financial institutions covered, three could hardly be regarded as fundamentally important in the sense that their status while significant would not have had disastrous consequences for the state – unless they became the trigger for a domino collapse. The savers of these three smaller institutions were already covered by the €100,000 guarantee of a week earlier.

However, the remaining three financial institutions combined, AIB, Bank of Ireland and Anglo-Irish Bank, account for a large percentage of banking in the domestic Irish economy.

The Irish are massive savers. Throughout the years of the Celtic Tiger, even though they were spending large sums on Gucci and Prada, the Irish people were also funding the banks through savings, to a far greater extent than most countries. However, a tiger economy requires huge funding and so external funding was increasingly required to maintain liquidity. The availability of external funding is dependent on confidence and confidence is partly based upon actual figures, not only on perception.

Throughout the summer of 2008 the senior executives of the Irish banks fought hard in the meeting rooms of the various financial centres to persuade their counterparts in other institutions that the prevailing market perception was wrong. There was no hard evidence on the record at that point in time to show that Irish banks were unprofitable. However, the stock market seemed to fear the worst. This is the same stock market where massive profits had been made throughout the first eight months of 2008 by fund managers who had a vested interest in driving the prices down.

The Credit Institutions (Financial Support) Act 2008 is a short-term expedient. It is not a solution. My initial reaction was to ask why the guarantee should be put in place for 2 years. Why not two weeks? Why not two months? Either of those might have allowed some breathing space and might have caused lesser concern to our European partner countries. However, a short-term guarantee would only have allowed banks to raise very short-term funds. Even as things stand with a two-year guarantee it will not be long before we will again be dependent on short-term funding. If the crisis is still rumbling in a year or more, then the process of ending the guarantee will be far more difficult. As we approach the end-date lenders to Irish banks will prefer to lend on a very short-term basis.

The long-term solution is neither a national solution nor a European solution. It will require a world-wide initiative. There is an obvious need for effective world-wide regulation.
Further down the line again, the solution may be a national solution. There may be a great need to step back from global banking and global markets. In the future the catchphrase “Irish solutions for Irish problems” might become “Irish finance for Irish banking”. It might be a return to traditional banking and traditional economics principles. If this restricts the future development of the Irish economy, then so be it.