Academic journal article Review of Business & Finance Studies

The Irish Banking Crisis: Teaching Notes

Academic journal article Review of Business & Finance Studies

The Irish Banking Crisis: Teaching Notes

Article excerpt

CASE DESCRIPTION

The 2007 financial crisis led to a steep decline in the supply of capital to organizations around the world. As liquidity dried up, countries such as Ireland with fragile and overextended credit environments, overpriced asset markets, and accommodative regulatory systems were vulnerable to the resulting shock waves. This case explores Ireland's economic and financial circumstances before and during the crisis, and its response to the crisis in the face of mounting pressure from the European Commission, the European Central Bank and the IMF for action that would help bring Ireland and other stressed euro zone countries back from the brink. At the close of 2010, Minister for Finance Brian Lenihan Jr. needed to decide whether to accept financial assistance from Europe and the IMF or have Ireland go it alone.

The case has a difficulty level appropriate for masters' level or upper level bachelors' students in finance or economics. It is most effectively taught to students who have been exposed to macroeconomics and introductory finance. The case is designed to be taught in 1.5-2 class hours and should require 2-4 hours of outside preparation by students.

GENERAL COMMENTS

The case can be taught in a course on International Economics, International Banking, International Monetary Economics, Money and Capital Markets or Money and Banking where the emphasis is on banking, central banking, and monetary policy and strategy. The case exposes students to important issues in economics and finance. It was prepared solely as a basis for class discussion and is not intended to serve as a source of primary data or to illustrate effective or ineffective management or leadership. Students should be able to understand, analyze and discuss:

1. The impact of the global financial crisis on a rapidly expanding developed country such as Ireland given its economic structure, and banking and financial system;

2. The implications of aggressively expanding banking credit, bank capital market funding, property bubbles, and a fiscal system dependent on the rise in property values;

3. The advantages and disadvantages of membership in a multi-country monetary system in a period of economic and financial distress;

4. Government decision-making under duress with economic, financial and political implications.

SOLUTIONS

Case Discussion Questions are provided below. They may or may not be assigned to students in advance of their discussion in class. Some or all of them can be assigned in advance as a student project to enhance the learning experience for students, particularly undergraduate students, or simply used as a guide to classroom discussion of key topics.

The case discussion questions are divided into two sections: section A refers to issues central to the financial crisis in Ireland, and section B refers to issues central to the decision in the case.

A. Issues Related to the Financial Crisis

Question 1A: What were the major factors that contributed to the financial crisis in Ireland?

Solution 1A: In the 1994-2000 period the Irish economy enjoyed high export-led growth, moderate wage and price inflation, and sound government finances. The post 2000 period up to the 2007 financial crisis saw significantly rising residential and commercial property prices. Coupled with aggressive bank lending and the government's favorable tax treatment of housing, this irrational exuberance fueled an unsustainable economic expansion. The construction boom led to a significant increase in the demand for labor and wages rose throughout the economy putting pressure on Ireland's wage competitiveness. The country's weak and deferential regulatory regime contributed to the emerging crisis. Ireland's growth model had changed and the country had become more susceptible to a global recession and poorly positioned to handle it when it arrived.

With the onset of the global financial crisis in 2007, housing prices and construction activity declined exerting a drag on wages and tax revenues. …

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