Short Termism--Banks

Shares in all Irish finanicial institutions have seen huge falls in recent months. However, this week has seen new lows with shares in Bank of Ireland and Anglo Irish Bank falling below the one euro for the first time. These new lows were on the back of some horrendous news from Bank of Ireland in relation to an increase in its bad debt provision and the introduction of a no dividend policy for the forseable future.

Bank Of Ireland and all other banks in Ireland are commercial banks. They work by providing loans to companies and individuals. They fund these loans through their customers savings. Normally, banks only lend money in relation to the extent of their deposit base. This is prudent lending and allows the banks to pay their liabilities as they fall due.

However, in recent years the banks began to source money from outside their deposit base through wholesale funding, because technology and innovation was meant to have allowed them to control and assess risk to a much greater degree than was possible in the past.

But once, the banks realized that they could not manage this greater risk they fell into severe trouble because access to these new credit sources closed. This created new reduced credit conditions and led to a reevaluation of all asset classes and the beginning of this write down cycle. This write down cycle has thus reduced the ability of banks to meet their liabilities as they fall due.

However, how did the banks get themselves into these positions.

SHORT TERMISM.

The banks were only concerned with ensuring that each years annual profits were greater than last, that their market shares grew and that the share price increased each day instead of ensuring the protection of an ancient and venerable institution established by a Royal Charter in 1783.

While those those working in the banks were only interested in ensuring that their bonus cheques were as large as possible. And who can blame them, when we live in a world where there is little job security and companies offer employees nothing more than "yellow pack" pensions.