What Caused the Irish Banking Crisis?

Abstract

Purpose – This paper explores the Irish banking crisis. It attempts to explain how various factors contributed to a collapse in asset prices, an economic recession and the near failure of the banking system. The paper will seek to document the dangers of pro-cyclical monetary and government policies, particularly in an environment of benign financial regulation and pent-up demand for credit.

Design/methodology/approach – The paper will map the Irish banking crisis against its general background. It will describe the roots of the crisis, with particular attention given to government and monetary policies, the practices of the financial regulator and banks during the property bubble, together with the difficulties associated with the international sub-prime crisis.

Findings – While the global financial crisis exacerbated matters, the banking crisis in Ireland was largely a home grown phenomenon. The crisis stemmed from the collapse of the domestic property sector and subsequent contraction in national output. Its root cause can be found in the inadequate risk management practices of the Irish banks and the failure of the financial regulator to supervise these practices effectively.

Originality/ value – This paper documents the “Celtic Tiger” phenomenon of the last decade: the Irish economic and property miracle, its sharp decline, and the sub-prime crisis. It delineates one of the most severe banking and economic crisis in a developed country since the great depression with a number of key policy lessons for rapidly expanding economies.

Keywords: Irish banking crisis, financial regulation, credit crisis, regulatory failure

JEL Classification: G18, G28