Bank guarantees followed by nationalisation and now recapitalisation.
Last September, the government announced the Bank Guarantee Scheme. Turmoil in the financial markets continued and now the government has decided on recapitalisation of the banks in the hope that they will continue lending again.
Under the initial recapitalisation plan, the government was to invest €2 billion each in Allied Irish Bank (AIB) and Bank of Ireland (BoI). The banks were to raise a further €1 billion each from investors. However, this never happened.
Professor Brian Lucey, School of Business at Trinity College Dublin, outlines why the banks now need financial assistance. The banks lost billions in advancing money on property loans and speculation. The value of those assets has been wiped out by the property crash.
Now the government plans to put €3.5 billion into AIB and BoI. Professor of Finance at NUI Maynooth Gregory Connor says that the investment is intended to free up more credit in the banking system. This will allow businesses to borrow money from banks more freely.
Recapitalisation transfers the financial risk to the taxpayer. Prof Lucey says that
Recapitalisation is not a magic bullet in terms of getting the banks lending again. There are other problems and of course the fact that the economy has hit the cliff is really the major one, the banks can't extend their borrowings and lendings when there's nobody to lend to.
An RTÉ News report broadcast on 11 February 2009. The reporter is Adrian Lydon.
