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

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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”
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 Credit crunch?
• Funding problems or credit risks?
– Loan-deposit ratios

• Problem of overbanking (Hoshi & Kashyap, 2005)

– Consolidation
– Concentrate capital injections

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 Helping distressed households

• Any scope for government schemes to

encourage forbearance?
– Externalities

• Maintaining employment and promoting

recovery.

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