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The Property Bubble and the

Banking Crisis: Comments on


Honohan/Kelly/Kelleher
Alan Ahearne
NUI Galway

‘Responding to the Crisis’


12 January 2009
National University of Ireland, Galway 1
Key policy issues
• Boosting transactions in the housing market.

• Restructuring the banking system.

• Easing the credit crunch.

• Helping distressed households.

National University of Ireland, Galway 2


Typical boom and bust cycle

Source: Ahearne, et al (2005)


National University of Ireland, Galway 3
House prices further to fall
Percent deviation from peak
0

-10

-20

-30

-40

-50

-60
0

8
10

12

14

16

18

20
0

0
-8

-6

-4

-2
-2

-1

-1

-1

-1

-1

Quarters from house price peak

National University of Ireland, Galway 4


Sweden’s experience
Figure 1
Percent
Bank Profitability
6
Loan Loss Provision for Commercial Banks, Percent of Average Total Assets
Profits Before Taxes for Commercial Banks, Percent of Average Total Assets
5
Loan Losses for four Large Banks, Percent of GDP

-1

-2

-3
1988 1989 1990 1991 1992 1993 1994 1995

National University of Ireland, Galway 5


Lending in Japan

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Zombies
Accountants v. Economists
• International Financial Reporting Standards
– Pro-cyclical provisioning

• IAS 39
– Losses recognised late in credit cycle

• TARP-type solution?
– Needs to be large scale
– Avoid creating “warehouses”
National University of Ireland, Galway 8
Credit crunch?
• Funding problems or credit risks?
– Loan-deposit ratios

• Problem of overbanking (Hoshi & Kashyap, 2005)


– Consolidation
– Concentrate capital injections

National University of Ireland, Galway 9


Helping distressed households

• Any scope for government schemes to


encourage forbearance?
– Externalities

• Maintaining employment and promoting


recovery.

National University of Ireland, Galway 10