The Irish government’s policy of reprivatizing the banking sector by selling AIB and possibly Permanent TSB risks worsening any future financial crisis, an ECB working paper has warned.
esearch runs counter to decades of policy, not just in Ireland but across the developed world, that pushed for the liberalization of the banking sector. and other sectors of the economy, direct state control in order to foster a competitive and more dynamic economy.
However, the ECB’s paper released this week on “public banks and the transmission of international shocks” cites evidence that foreign and private banks may be more dynamic as lenders in normal times, but are also more likely to worsen an economic downturn by reducing lending. once a crisis erupts than public banks.
Keeping a mix of public and private banks is a safer policy, say the researchers.
“A key takeaway is that there is substantial heterogeneity between domestic and foreign banks, countries, and time. The result is important from a policy perspective, as we have illustrated that within In the banking sector, a mixed composition of state-controlled foreign and domestic banks and private owners is desirable.
The policy here is heavily focused on reprivatizing the remaining banks that were fully or partially nationalized a decade ago as a condition of their taxpayer-funded bailouts.
Finance Minister Paschal Donohoe launched a long-awaited review of the retail banking sector earlier this week following the planned closures of Ulster Bank and KBC Ireland, although the bank ownership model is not expected to play an important role in this work.
The government is currently in the middle of a process of selling off bank stakes acquired in bank bailouts and bailouts more than a decade ago.
A once substantial minority stake in Bank of Ireland is now below the 4% level and is likely to be fully sold within months.
The larger majority stake in AIB is also being reduced by selling a small number of shares on the stock market, although this process is lagging far behind Bank of Ireland.
A sale of shares in Permanent TSB is further away, although the government’s stake in the smaller bank will be reduced in favor of Ulster Bank’s UK lender, Royal Bank of Scotland, as part of a deal struck to take over loans from the outgoing bank.
In their article, ECB researchers Marcin Borsuk, Oskar Kowalewski and Pawel Pisany examined the links between bank ownership and loan growth over the period 1996-2019.
They found evidence that lending differed by bank ownership model – although bank-specific factors played a more important role during the 2008 global financial crisis.
In normal times, evidence suggests that private banks and foreign banks lend more than government-owned rivals, but that reverses once a crisis strikes.
This matches some of the experience here after the financial crisis, when foreign lenders like Rabobank, Bank of Scotland (Ireland) and Danske exited the Irish market following the crash.