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INDUSTRY
‘Itwasthisshort-term
fundingoflong-termloans
thatwastheproblem,more
thantheproblemswiththe
actualloansthemselves’
Thelongview
The banks remain top of the agenda this month, with the NAMA legislation due to go before the Dáil, but no
matter how we plan to mend them, banks will need to rethink their business models
I
N The Fall of the House of Credit,themostrecentofaseries didn’tunderminetheconfidenceintheinstitutionbecauseithada
ofbooksanalysingthefinancialservicescrash,AlistairMilne much more traditional business model of holding capital on the
ofCassBusinessSchool,Londonexaminesthebankingprob- balancesheetandrelyingonthelonger-termcapitalforfunding.
lems that lay at the heart of the crisis. He casts doubt on the “Whenyoulookatthenewermodelswheretheproblemsarose,
various so-called solutions that have been put forward, the banks were relying on essentially shorter-term funding, espe-
whether they be more regulation, the creation of NAMA-like bad ciallywholesale,”saysMilne.“Ifyouborrowovernightoroverone
banks,eventhereininginofthebonusculture.ToMilne,itwasthe weektofundloansthatareinanywayilliquid,that’sveryunstable
basicbusinessmodelofmanyofthebanksthatwasatfault. becauseifthere’salossofconfidence,ifyoucan’tgetdepositorsto
“Manyexpertsaretalkingabouttheneed,forexample,toregu- renewtheirdeposits,youhaveaseriousproblem.Itwasthisshort-
latebanks,butthisisnotthecentralissue,”hesays. termfundingoflong-termloansthatwastheproblem,morethan
“The bigger problem is that banks and other financial institu- theproblemswiththeactualloansthemselves.”
tionshavethewrongbusinessmodel.Intherecentpast,theymade It is a thesis that has some merit, according to Philip Bourke,
profitsbyrentingmoneyfromaroundtheworldandusingthisto professor of banking and finance at UCD Michael Smurfit
finance a spending boom. In the future, their profits will have to GraduateBusinessSchool.
comefromcollectingsavingsfromcustomersandraisingthelong- “Northern Rock went down because of a liquidity issue.
term funds needed to finance business investment. Without this Historically, we find that the banks that go bust are ultimately
change,therewillbenosustainedrecovery.” foundtobesolvent–thatistosaytheyultimatelyhavemoreassets
MilnecitesoneoftheUK’sbiggestbankstoillustratethethesis. thantheyhaveliabilities.
“ThebankthatlostthemostwasHSBC.Ithadevenbiggercredit “They are usually brought down by the fact that they become
lossesasaresultofthecrisisrelativetothesizeofitsbusinessthan illiquid – ie they can’t raise or maintain the deposits to support
RBS,butthereasonHSBCdidn’tgetintotroublewasithadavery theirassetbase.”
goodbusinessmodel.Itwasverywellcapitalisedanditdidn’tgoin That said, Bourke believes the Irish banks were a case on their
forthissecuritisation.Itwasholdingcapitalonitsbalancesheet. own. “It’s different in relation to the Irish banks. They are close
“Even though they lost a whole lot of money through their US enoughtobeinginsolvent–nevermindnotbeingabletogenerate
subsidiary, it didn’t hurt them beyond the losses themselves. It neededliquidity.”
14 UCD BUSINESS CONNECTIONS
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