Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

The Funding of the Irish Domestic Banking System during the Boom?

Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

The Funding of the Irish Domestic Banking System during the Boom?

Article excerpt


The aim of this paper is to examine the funding of the domestic Irish banking system during the boom period (especially 2003-2008). While there has been considerable attention paid to the asset side of the balance sheets of these banks (in particular, the rapid and overly- concentrated growth in property-related loans), it is also important to examine in detail the funding sources that underpinned the extraordinary credit boom. While it is well understood that foreign funding inflows (both deposits and other sources of liabilities) played an important role in facilitating lending growth, a more comprehensive analysis of funding patterns is warranted.

Understanding the funding dynamics is important for several reasons. First, it may provide valuable lessons in terms of developing improved surveillance procedures in tracking systemic risk in the banking system. Second, funding runs can be the trigger for the onset of a banking crisis and it is important to probe the relative roles of solvency concerns versus liquidity concerns in run dynamics. Third, the liability structure is important in determining loss allocation in the event of a banking crisis.

In terms of data analysis, the Irish boom-bust cycle is especially challenging in view of the dominance of externally-orientated foreign-owned banks in the aggregate banking statistics. (2) Since 2010, the Central Bank of Ireland has published more detailed banking statistics (stretching back to 2003) that report data for the "domestic market" group (Irish banks plus the domestically-orientated subsidiaries of foreign-owned banks) and the more narrow "Irish-headquartered" group of local banks (the six banks in this category in relation to the boom period were Bank of Ireland, AIB Bank, Anglo-Irish Bank, Irish Life & Permanent, Irish Nationwide and Educational Building Society). (3) Our primary focus is on the latter group. In addition to the aggregate banking statistics, we also derive bank-level data from the annual reports of these institutions and the Bankscope database. In relation to bond funding, we also examine the bond issuance data contained in the Thomson One database. In relation to cross-border funding, we supplement the data available from the Bank of International Settlements with data from the Central Bank of Ireland and the Bundesbank.

This paper builds on a rapidly-growing related literature. In the Irish context, Coates and Everett (2013), Everett (2014), Everett et al (2014) and Coates et al (2015) analyse important dimensions of the funding dynamics of the Irish banking system. (4) The increase in the net foreign liabilities of the Irish banking system is also studied by Honohan (2006, 2009, 2010a), Connor and O'Kelly (2012), Connor et al (2012) and Lane (2014).

At an international level, Bruno and Shin (2015) analyse the interaction between global funding markets and credit dynamics in individual national economies, while Borio et al (2011), Calderon and Kubota (2012), Carvalho (2014), Errico et al (2014) and Lane and McQuade (2014) examine the interactions between international financial flows and domestic credit growth. The interest in this topic is elevated by the roles of credit growth and external liabilities as predictors of financial crises (Gourinchas and Obstfeld 2012, Catao and Milesi-Ferretti 2014). At a policy level, the conduct of macroprudential policies and the operation of the European Union's Macroeconomic Imbalances Procedure (MIP) may be informed by a deeper analysis of bank funding patterns.

The structure of the paper is as follows. Section 2 briefly outlines the nature of bank balance sheets. In Section 3, we examine bank-level data derived from annual reports. In Section 4, we focus on the money and banking statistics produced by the Central Bank of Ireland. In Section 5, we examine additional dimensions of crossborder bank funding by drawing on data newly assembled by the Central Bank of Ireland. …

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