Ireland’s retail banking crisis: lessons to learn and policy implications

Lessons have been learned since the Irish banking crisis, and important regulatory and supervisory actions have been taken both domestically and internationally. While, there exists an extensive body of research investigating the Irish banking crisis, a number of important questions remain unanswered in relation to whether the latent distress in the Irish retail banking system could have been recognised contemporaneously. To address these gaps, this thesis builds upon the existing literature in two ways. First, the main Irish banks are compared to a European sample of peers across a unique database of financial indicators using econometric analyses to see if the severe financial distress in which they found themselves could have been identified earlier. Secondly, using a case study approach, this thesis presents an original and detailed comparative analysis of the Canadian and Spanish retail banking systems to investigate whether any regulatory and supervisory lessons can be identified. These countries’ commercial retail banks provide a useful benchmark given their relative resilience during the Global Financial Crisis. The main findings from this research can be summarised as follows: (1) Statistical evidence is presented which shows structural differences in the lead up to the crisis between those banks that had to be bailed out and those that did not. In particular, funding structure was the most robust predictor of performance – banks with more depository funding experienced a lower probability of being bailed out. (2) In addition, robust funding models and vigorous liquidity management were identified as important determinants of banking performance. The Spanish case study found that Spanish banks were far more internationally diversified than their Irish peers – their balance sheets thus provided greater access to capital to cushion the problems they faced when the Spanish real estate sector collapsed. The Spanish banks’ unique use of countercyclical provisioning was also found to be a key differentiating factor. The Canadian case study showed that Canadian banks had higher capital levels, relied more heavily on equity and used more deposit-based funding structures compared to their Irish peers.