Why would you lend to a bank?

The rules that the European Commission is introducing around dealing with banks that fail – the ‘bail-in’ – are notable for not removing taxpayers from the process. Although they introduce creditors as a buffer before taxpayer money is used they do not make banks stand on their own two feet, as every other business is required to do. These rules are also five years away from being introduced. This is most disturbing because of a recording that has been released by the Irish Independent newspaper.

It identified senior managers at now defunct Anglo Irish Bank as suggesting they should take smaller loans than they needed from the country’s central bank which they would consider a bridging loan to a bigger debt: “its bridged until we can pay you back...which is never.”

The men in question state that they should ask for less money than they need (€7 billion) so they can coerce the regulator into lending them the full amount  (€30 billion) and in the recordings mimic the regulator in question, Patrick Neary, as they laugh about the situation.

It would be short-sighted to identify the bank as the only one that asked for repeated injections of capital. It would be going too far to suggest that the other banks were acting in a similar way. However one has to ask whether taxpayers can now trust regulators to judge the veracity of their banks’ claims for support.

The bank in question collapsed eventually despite taxpayer funding and the tapes have been held ever since. They are now publicly available. As economies have been severely damaged by the financial crisis, despite taxpayer intervention, governments may have to ask whether the value of bailing out a bank is equal to the potential ridicule of asking their taxpayers to lend money to banks again.