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It's All Circular - Funding Of Irish Banks During The Celtic Tiger


YouKnowWhatIMeanLike

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We had plenty of talk about the bank balance sheets in European banks here on p.ie and the possible sources for the reckless lending in the Irish economy during the Celtic tiger years. Last but not least to better understand the collapse of the Irish economy in 2008 and its aftermath.

We have discussed a number of possible sources for the wall of money that crashed into the country e.g. reckless eurozone banks flooding the domestic Irish banking system with cheap cash, bankers in the city of London on a drug induced predatory lending splurge and the complete mayhem unleashed by the introduction of subprime CDOs in the US combined with the complicity of rating agencies in creating the toxic debts packages.

After a couple of month following the threads on p.ie now it becomes clear that most of the money in Ireland actually came from Irish banks themselves by way of mortgage book expansions. So how did that work? You may ask. Well one has to understand that the loans made by the Irish banks were recorded as assets. But the money the banks have lent out to the developers, investors and mortgage holders never existed in Irish banks in the first place. They instead created the money out of thin air. These shenanigans could go on as long as the banks could find new customers for their ponzi scheme but once they had exhausted the lending market they were in deep deep trouble.

Now the question I have is can we quantify this credit expansion in Ireland? And how much of the €100bn+ in mortgage debt in Ireland was created or made up if you like in Irish banks? Is the promissory notes deal the price we have to accept for allowing the ship of fools to embark on this financial odyssey?
 
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Radix

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Banks are in the business of growth, but the problem in Ireland was unregulated growth due to greed and the link between politics and corruption in finance, banking, planning, etc.

The growth and stability pact we made with our neighbours to run a responsible economy was effectively ignored by everyone.

But that was okay, because our 'leaders' knew we could always write a note to future generations promising that they could help pay the bill for the stupidity and greed of their ancestors.
 

ManUnited

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We had plenty of talk about the bank balance sheets in European banks here on p.ie and the possible sources for the reckless lending in the Irish economy during the Celtic tiger years. Last but not least to better understand the collapse of the Irish economy in 2008 and its aftermath.

We have discussed a number of possible sources for the wall of money that crashed into the country e.g. reckless eurozone banks flooding the domestic Irish banking system with cheap cash, bankers in the city of London on a drug induced predatory lending splurge and the complete mayhem unleashed by the introduction of subprime CDOs in the US combined with the complicity of rating agencies in creating the toxic debts packages.

After a couple of month following the threads on p.ie now it becomes clear that most of the money in Ireland actually came from Irish banks themselves by way of mortgage book expansions. So how did that work? You may ask. Well one has to understand that the loans made by the Irish banks were recorded as assets. But the money the banks have lent out to the developers, investors and mortgage holders never existed in Irish banks in the first place. They instead created the money out of thin air. These shenanigans could go on as long as the banks could find new customers for their ponzi scheme but once they had exhausted the lending market they were in deep deep trouble.

Now the question I have is can we quantify this credit expansion in Ireland? And how much of the €100bn+ in mortgage debt in Ireland was created or made up if you like in Irish banks? Is the promissory notes deal the price we have to accept for allowing the ship of fools to embark on this financial odyssey?
Can you show us a bank balance sheet from the time with all this money created out of thin air?
 

ManUnited

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Anglo had a self-declared 125% deposit to lending ratio in 2008 (that's probably a euphemism, put a zero on the end he's a friend). Irish banks loan to deposit ration average was 180% in 2010 according to the department of finance ....
It shouldn't be so difficult to chose a bank, any bank, and show all the money created from thin air.
I can save you a bit of time if you like and tell you that you wont be able to, because it is not there.
Banks borrow from x and lend to y and pocket the difference in interest.
 

clearmurk

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We had plenty of talk about the bank balance sheets in European banks here on p.ie and the possible sources for the reckless lending in the Irish economy during the Celtic tiger years. Last but not least to better understand the collapse of the Irish economy in 2008 and its aftermath.

We have discussed a number of possible sources for the wall of money that crashed into the country e.g. reckless eurozone banks flooding the domestic Irish banking system with cheap cash, bankers in the city of London on a drug induced predatory lending splurge and the complete mayhem unleashed by the introduction of subprime CDOs in the US combined with the complicity of rating agencies in creating the toxic debts packages.

After a couple of month following the threads on p.ie now it becomes clear that most of the money in Ireland actually came from Irish banks themselves by way of mortgage book expansions. So how did that work? You may ask. Well one has to understand that the loans made by the Irish banks were recorded as assets. But the money the banks have lent out to the developers, investors and mortgage holders never existed in Irish banks in the first place. They instead created the money out of thin air. These shenanigans could go on as long as the banks could find new customers for their ponzi scheme but once they had exhausted the lending market they were in deep deep trouble.

Now the question I have is can we quantify this credit expansion in Ireland? And how much of the €100bn+ in mortgage debt in Ireland was created or made up if you like in Irish banks? Is the promissory notes deal the price we have to accept for allowing the ship of fools to embark on this financial odyssey?
The implication of what you are saying is that the Central Bank of Ireland, and by extension the ECB, lost complete control of the money supply in Ireland.
 

ibis

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It shouldn't be so difficult to chose a bank, any bank, and show all the money created from thin air.
I can save you a bit of time if you like and tell you that you wont be able to, because it is not there.
Banks borrow from x and lend to y and pocket the difference in interest.
That manages to sound like a zero-sum game. Given that the eurozone money supply has pretty much continually expanded, where is money being created there?
 

YouKnowWhatIMeanLike

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The implication of what you are saying is that the Central Bank of Ireland, and by extension the ECB, lost complete control of the money supply in Ireland.
unfortunately I can't counter your claim here at the moment. this is probably the reason why the new Oireachtas (Inquiries, Privileges and Procedures) Bill 2012 is currently being drafted to indemnify former and future office holders in Ireland from any kind of possible legal action.
 
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ManUnited

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That manages to sound like a zero-sum game. Given that the eurozone money supply has pretty much continually expanded, where is money being created there?
The banking system as a whole expands the 'money supply'.Central banks are the only actors who can create money.
If the OP is right, why did we need to bail anyone out? You could go further and ask why do governments insure deposits? Why do we have bank runs? All the money the Irish banks lent out came from somewhere real, not the ether.
 

YouKnowWhatIMeanLike

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The banking system as a whole expands the 'money supply'.Central banks are the only actors who can create money.
If the OP is right, why did we need to bail anyone out? You could go further and ask why do governments insure deposits? Why do we have bank runs? All the money the Irish banks lent out came from somewhere real, not the ether.
now let's take an example Fiona a lending manager at Anglo Irish Bank approves a multi-million loan in 2005 for a well known developer. Where does the money come from in your opinion?
 

ManUnited

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now let's take an example Fiona a lending manager at Anglo Irish Bank approves a multi-million loan in 2005 for a well known developer. Where does the money come from in your opinion?
Deposits or issuing a bond. (read bond to mean any kind of institutional borrowing)
 

ibis

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The banking system as a whole expands the 'money supply'.Central banks are the only actors who can create money.
If the OP is right, why did we need to bail anyone out? You could go further and ask why do governments insure deposits? Why do we have bank runs? All the money the Irish banks lent out came from somewhere real, not the ether.
Well, for a value of "somewhere real" that includes central bank ledgers!

I'm not convinced that only central banks can create money - it seems more likely that the commercial banks are also creating money, if not quite as simply or as directly as by wishing it into existence.

Money creation by the central banks on behalf of the commercial banks appears to be controlled by the requirement for acceptable collateral posted in exchange for reserve account money (that's the money created by central banks), while the commercial banks should only be able to lend (bank account) money out as long as they have adequate 'safe' collateral determined by capital adequacy ratios. But a lot depends on what constitutes adequate collateral in those two cases, and whether collateral can be multiply pledged. As far as I can see from reading around, during a boom, the amount of 'good' collateral around is increasing, while multiple pledging of collateral appears to be extremely common.

Taking an Irish context for this, if I have a house worth €200k in 2003, I can pledge that as collateral to the bank in return for, say, a €140k loan. But if the same house is valued at €400k in 2006, I can pledge it as collateral for a larger loan, and the bank, in turn, feels safe enough in doing so as long as it accepts the valuation of the house in each case. It can go back to the central bank and get more reserve account money created, because the creation is adequately backed by the collateral of the house.

In both cases that money goes into the economy, and while it might have been notional to begin with (it's created as an asset-liability pair), it has an effect beyond my bank balance as I spend the money into the economy. In 2003 I would spend €140k into the economy, in 2006 I'd spend twice that. That money will show up in other people's bank deposits, in company balance sheets (and thus their share prices), or go back into the property market, helping drive the price of property up further. In a boom (or bubble) the money I borrow from the bank based on my collateral is actually going to drive up the amount of collateral available in the economy, which, assuming there is enough appetite for credit, will in turn, lead to further collateral being pledge to the banks in exchange for further credit, and so on. Only at the point where there is a sudden doubt over the real value of the collateral does this start to unravel.

But what created the increased valuation of my house in the first place? The claim of the Irish government, if we recall, was that real 'sound' fundamentals were driving that increase, which would have meant that the value of my house - and thus the bank's collateral - was not subject to a sudden change. Unfortunately, it turned out that the value of houses was indeed subject to a sudden change, so that the banks suddenly had collateral of extremely uncertain value which could hardly be regarded as 'safe' or 'adequate' by the central banks.

So it seems that the central bank was incapable of controlling credit expansion during the boom/bubble, because the stock of collateral acceptable for the creation of central bank money was expanding rapidly - but once things began to contract, and some forms of collateral were rapidly falling in value, the requirement for good collateral did begin to bite into credit creation by the commercial banks, and bite hard, because the stock of good collateral was shrinking rapidly. Multiple pledging of collateral will have exacerbated that fall.

Which answers the question as to why the banks couldn't simply 'create' their way out of their problems they had run themselves and the economy into by creation - because to do so, they require decent collateral, and so they were caught in a spiral of falls in collateral value leading to restrictions on credit creation leading to falls in collateral value.

All of that assumes that a major source of collateral for credit expansion in the Irish bubble was property - whose value, in turn, was driven largely by the expansion in credit. Am I wrong? If so, where?
 
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ManUnited

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exactly now where did the deposit come from?
I know where you are going and it isn't going to help you. It doesn't matter where the deposit came from, it is on the liability side of the balance sheet. As I said, find one and look. Banks websites have their balance sheet there somewhere, they are not hard to find.
 
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ManUnited

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Well, for a value of "somewhere real" that includes central bank ledgers!

I'm not convinced that only central banks can create money - it seems more likely that the commercial banks are also creating money, if not quite as simply or as directly as by wishing it into existence.

Money creation by the central banks on behalf of the commercial banks appears to be controlled by the requirement for acceptable collateral posted in exchange for reserve account money (that's the money created by central banks), while the commercial banks should only be able to lend (bank account) money out as long as they have adequate 'safe' collateral determined by capital adequacy ratios. But a lot depends on what constitutes adequate collateral in those two cases, and whether collateral can be multiply pledged. As far as I can see from reading around, during a boom, the amount of 'good' collateral around is increasing, while multiple pledging of collateral appears to be extremely common.

Taking an Irish context for this, if I have a house worth €200k in 2003, I can pledge that as collateral to the bank in return for, say, a €200k loan. But if the same house is valued at €400k in 2006, I can pledge it as collateral for a larger loan, and the bank, in turn, feels safe enough in doing so as long as it accepts the valuation of the house in each case. It can go back to the central bank and get more reserve account money created, because the creation is adequately backed by the collateral of the house.

In both cases that money goes into the economy, and while it might have been notional to begin with (it's created as an asset-liability pair), it has an effect beyond my bank balance as I spend the money into the economy. In 2003 I would spend €200k into the economy, in 2006 I'd spend twice that. That money will show up in other people's bank deposits, in company balance sheets (and thus their share prices), or go back into the property market, helping drive the price of property up further. In a boom (or bubble) the money I borrow from the bank based on my collateral is actually going to drive up the amount of collateral available in the economy, which, assuming there is enough appetite for credit, will in turn, lead to further collateral being pledge to the banks in exchange for further credit, and so on. Only at the point where there is a sudden doubt over the real value of the collateral does this start to unravel.

But what created the increased valuation of my house in the first place? The claim of the Irish government, if we recall, was that real 'sound' fundamentals were driving that increase, which would have meant that the value of my house - and thus the bank's collateral - was not subject to a sudden change. Unfortunately, it turned out that the value of houses was indeed subject to a sudden change, so that the banks suddenly had collateral of extremely uncertain value which could hardly be regarded as 'safe' or 'adequate' by the central banks.

So it seems that the central bank was incapable of controlling credit expansion during the boom/bubble, because the stock of collateral acceptable for the creation of central bank money was expanding rapidly - but once things began to contract, and some forms of collateral were rapidly falling in value, the requirement for good collateral did begin to bite into credit creation by the commercial banks, and bite hard, because the stock of good collateral was shrinking rapidly. Multiple pledging of collateral will have exacerbated that fall.

Which answers the question as to why the banks couldn't simply 'create' their way out of their problems they had run themselves and the economy into by creation - because to do so, they require decent collateral, and so they were caught in a spiral of falls in collateral value leading to restrictions on credit creation leading to falls in collateral value.

All of that assumes that a major source of collateral for credit expansion in the Irish bubble was property - whose value, in turn, was driven largely by the expansion in credit. Am I wrong?
I think you are wrong. It is a confusing post. For a start the central banks operate as a lender of last resort, not first. Reserve accounts are there primarily for the central bank to operate its monetary policy. From the Central bank site:

"The ECB requires that credit institutions hold compulsory deposits on account with their local central bank, called minimum, or required, reserves. Reserve requirements have two functions:

Buffering; holding funds on account with the Bank provides a buffer against liquidity shocks

Create a liquidity deficit; reserve requirements increase the demand for central bank liquidity. In order to fulfil the higher reserve requirements, central banks have to provide the banking system with the necessary liquidity. It is deemed easier to influence money market rates when the banking system has a structural liquidity deficit vis-a vis the central bank.

In the Eurosystem, we principally use minimum reserves as buffers since the liquidity deficit in the Eurosystem is already quite extensive."


I doubt a bank can use something as collateral more than once.Banks are restricted by the amount of capital they have. If a bank is up to it's capital ratio limit, and I walk in and deposit 1,000,000 euro, it cant lend that out without raising more capital first. ('skin in the game ' is the expression I think, they leverage their capital)
In your example you haven't taken into account the repayment of the first loan.You will only be able to borrow another 200,000 for the new loan otherwise. The bank is then left with a 400,000 asset.
 

ibis

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I think you are wrong. It is a confusing post. For a start the central banks operate as a lender of last resort, not first. Reserve accounts are there primarily for the central bank to operate its monetary policy. From the Central bank site:

"The ECB requires that credit institutions hold compulsory deposits on account with their local central bank, called minimum, or required, reserves. Reserve requirements have two functions:

Buffering; holding funds on account with the Bank provides a buffer against liquidity shocks

Create a liquidity deficit; reserve requirements increase the demand for central bank liquidity. In order to fulfil the higher reserve requirements, central banks have to provide the banking system with the necessary liquidity. It is deemed easier to influence money market rates when the banking system has a structural liquidity deficit vis-a vis the central bank.

In the Eurosystem, we principally use minimum reserves as buffers since the liquidity deficit in the Eurosystem is already quite extensive."
I'm not sure that actually addresses the point of the post, which is the action of the money beyond the simple "liability plus asset = 0" view at the bank's balance sheet.

I doubt a bank can use something as collateral more than once.Banks are restricted by the amount of capital they have. If a bank is up to it's capital ratio limit, and I walk in and deposit 1,000,000 euro, it cant lend that out without raising more capital first. ('skin in the game ' is the expression I think, they leverage their capital)
That's kind of the point. The assets that the banks hold, and which determine their capital ratios, are assets - and in an expansionary scenario, assets rise. When asset values rise, the amount the banks can lend and still be in line with their CAR rises, which means credit expansion as long as there's an appetite for credit. Once credit is being used to invest in assets for the sake of return on assets, rather than credit being used for purposes that secondarily produce asset rises, you have a bubble.

In your example you haven't taken into account the repayment of the first loan.You will only be able to borrow another 200,000 for the new loan otherwise. The bank is then left with a 400,000 asset.
That's because I wasn't talking about two loans, but about the amount I could take out at two different times using the same collateral. In 2003 I could have borrowed €140k against the house and spent it into the economy, or in 2006 I could have borrowed €280k against the house and spent it into the economy. In both cases, the bank will create a matching asset-liability pair (loan:deposit), and so you'll say no money has been created - but in both cases the money does real work in the economy, increasing the value of other assets such as company shares and other properties, which can then be used to borrow money. And the greater the value of assets in the economy, the greater the value of loans that can be given against them, and the more money there is flowing around. So even though we can look at the bank's balance sheet - as you invited YKWIML to do - and not see any net money being created, that completely misses the point.

To use a physics analogy, say I have a source that creates electron-hole pairs. Their net charge is zero (electron +1, hole -1), so I am creating no charge. But if I separate them, and send the electron round a circuit, I can power a light bulb before the electron returns to match the hole and get annihilated. The faster I create electron-hole pairs, the more current, the brighter the bulb - but at no point do I actually create net charge. Even so, it's obviously not true to say that nothing is happening, because we have light where we wouldn't otherwise.

Now, if the increasing brightness of the bulb increases the rate of electron-hole pair creation, then we have a rough physical analogue for the banking circle. In a real system, we're prevented from having a perpetual motion machine by the efficiency losses through the circuit and bulb - in banking, that need not apply. In fact, the opposite can be the case, and faster rates of asset value growth can lead to greater acceptable leverage on assets.
 
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parentheses

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This man predicted the Irish bank bust as far back as 1998. Fractional reserve lending explained and well worth watching



[video=youtube;a37sRjkLtWw]https://www.youtube.com/watch?v=a37sRjkLtWw[/video]
 

parentheses

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what's Tom Prendeville up to these days?
I don't know. I only know the man from this video.

But he explained the process quite well, I thought.

Richard Douthwaite RIP also worth watching on the way banks create money by creating loans.

[video=youtube;FrOcOQuleeE]https://www.youtube.com/watch?v=FrOcOQuleeE[/video]
 

clearmurk

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Well, for a value of "somewhere real" that includes central bank ledgers!

I'm not convinced that only central banks can create money - it seems more likely that the commercial banks are also creating money, if not quite as simply or as directly as by wishing it into existence.

Money creation by the central banks on behalf of the commercial banks appears to be controlled by the requirement for acceptable collateral posted in exchange for reserve account money (that's the money created by central banks), while the commercial banks should only be able to lend (bank account) money out as long as they have adequate 'safe' collateral determined by capital adequacy ratios. But a lot depends on what constitutes adequate collateral in those two cases, and whether collateral can be multiply pledged. As far as I can see from reading around, during a boom, the amount of 'good' collateral around is increasing, while multiple pledging of collateral appears to be extremely common.

Taking an Irish context for this, if I have a house worth €200k in 2003, I can pledge that as collateral to the bank in return for, say, a €140k loan. But if the same house is valued at €400k in 2006, I can pledge it as collateral for a larger loan, and the bank, in turn, feels safe enough in doing so as long as it accepts the valuation of the house in each case. It can go back to the central bank and get more reserve account money created, because the creation is adequately backed by the collateral of the house.

In both cases that money goes into the economy, and while it might have been notional to begin with (it's created as an asset-liability pair), it has an effect beyond my bank balance as I spend the money into the economy. In 2003 I would spend €140k into the economy, in 2006 I'd spend twice that. That money will show up in other people's bank deposits, in company balance sheets (and thus their share prices), or go back into the property market, helping drive the price of property up further. In a boom (or bubble) the money I borrow from the bank based on my collateral is actually going to drive up the amount of collateral available in the economy, which, assuming there is enough appetite for credit, will in turn, lead to further collateral being pledge to the banks in exchange for further credit, and so on. Only at the point where there is a sudden doubt over the real value of the collateral does this start to unravel.

But what created the increased valuation of my house in the first place? The claim of the Irish government, if we recall, was that real 'sound' fundamentals were driving that increase, which would have meant that the value of my house - and thus the bank's collateral - was not subject to a sudden change. Unfortunately, it turned out that the value of houses was indeed subject to a sudden change, so that the banks suddenly had collateral of extremely uncertain value which could hardly be regarded as 'safe' or 'adequate' by the central banks.

So it seems that the central bank was incapable of controlling credit expansion during the boom/bubble, because the stock of collateral acceptable for the creation of central bank money was expanding rapidly - but once things began to contract, and some forms of collateral were rapidly falling in value, the requirement for good collateral did begin to bite into credit creation by the commercial banks, and bite hard, because the stock of good collateral was shrinking rapidly. Multiple pledging of collateral will have exacerbated that fall.

Which answers the question as to why the banks couldn't simply 'create' their way out of their problems they had run themselves and the economy into by creation - because to do so, they require decent collateral, and so they were caught in a spiral of falls in collateral value leading to restrictions on credit creation leading to falls in collateral value.

All of that assumes that a major source of collateral for credit expansion in the Irish bubble was property - whose value, in turn, was driven largely by the expansion in credit. Am I wrong? If so, where?
All of which begs the question, has the Central Bank of Ireland (and again by extension the ECB) given up on monetary policy implementation in Ireland that would have curtailed this expansion of the domestic money supply?
 
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