Looking at the share prices of the big two banks as we come to the end of 2009, you could be forgiven for thinking not much had changed in banking over the past 12 months. AIB and Bank of Ireland are flirting with dipping below €1, roughly where they were a year ago. But the fluctuations in their share prices tell another story entirely.
The whole banking sector came into the year under a dismal cloud. The government had already pledged €3.5bn in new capital to Anglo Irish Bank, AIB and BoI to protect them from looming losses on property loans. But that modest plan flew out the window the day Anglo was nationalised in January due to acute funding problems. AIB and BoI shares collapsed in sympathy as investors fled the sector, prompting finance minister Brian Lenihan to raise the state's capital commitment eventually to €11bn – €4bn for Anglo and €3.5bn each for AIB and BoI.
While this was happening, scandal after scandal seemed to tumble out of the banks. Anglo's concealment of directors' loans was compounded by news that Irish Life & Permanent helped its beleaguered fellow institution inflate its customer deposit figure by €7bn. As news of a "golden circle" arrangement of Anglo clients to buy shares in the bank became public, gardaí swooped on Anglo's offices to collect evidence for investigations that are still under way.
The turn came in April when Lenihan and adviser Peter Bacon presented the outlines of a plan for a 'bad bank', Nama, to hive off and run down the billions in bad property loans handed out by the banks during the Celtic Tiger era. The move helped sustain the rally in bank shares, which appeared to be helped further by the inevitable announcements of board resignations at all the covered financial institutions. There was even talk in late spring that institutional investors were taking a look at Irish banks again after fleeing over the preceding months.
Yet as Lenihan presented the heads of the Nama bill in July, there was creeping evidence that €11bn in direct government support, together with Nama, just might not be enough to keep the banking sector intact. Anglo's €4bn loss for the year to March 2009 underscored just how serious a threat bad property loans had become. Ongoing revisions by the other lenders only confirmed that earlier estimates of impairments and losses had been optimistic.
Even so, the delivery of actual Nama legislation in September led to peak morale as talk of a rights issue for Bank of Ireland – a recovery signal of the highest order – reached a crescendo. Lengthy Dáil debate and increasingly bearish sentiment on the sector in general brought everyone back down to earth by early November and pessimism returned with a vengeance.
Now with tough new capital rules expected and Nama "haircuts" of 30% or more looming, most market-watchers, including Central Bank governor Patrick Honohan, now expect state majority ownership for one if not both of the two main banks, AIB and Bank of Ireland. The two building societies, forced into a merger by their own capital needs, will also effectively be owned by the government, but not after costing another €2.4bn to prop them up. Permanent TSB may yet join them, but as a large minority shareholder.
As 2009 ends, the final reckoning for the banks is fast approaching as the shares struggle. If there is insufficient private capital for the three remaining listed institutions, it is conceivable that the whole domestic banking system could end up under public control before the next year is under review.
A year that began with the state taking 100% ownership of a publicly-quoted bank, Anglo Irish Bank, is ending with the final preparations for transferring €77bn in bad assets into a state-funded 'bad bank', Nama. There is no doubt at this stage that the government became the virtual sine qua non of Irish banking in 2009.
Already in for €11bn in recapitalisations, the relationship only deepened as Nama was proposed in April and became law in November. This, as Central Bank governor Patrick Honohan told an Oireachtas committee earlier this month, was the natural conclusion of guaranteeing the banks' liabilities in September 2008.
Finance minister Brian Lenihan has been the prime mover behind much of what is happening in banking these days – mainly restructuring and Nama preparation. If he's not directing traffic, the banks are validating their own moves with reference to what the government is trying to achieve. Long gone are the days when bank executives would pledge their lives for private ownership: there simply is no survival outside the state's embrace. That is why Irish Nationwide is surrendering to EBS.
But this isn't to say the government and state institutions have done much that could be construed simply as right. January dawned with a Financial Regulator, Patrick Neary, taking early retirement as it became clear the watchdog lacked the systems, expertise and management to police the banking sector. The failed experiment of light-touch regulation, codified in Charlie McCreevy's separation of the Central Bank from the Financial Regulator, will be replaced in a couple of months by a newly unified Central Bank with new senior personnel and a more intrusive mandate.
With further recapitalisations looming in 2010, the government is looking at assuming more control than it ever wanted or intended when it made the unprecedented decision to take over Anglo.