Opposition economics: Fine Gael

Fine Gael has been unequivocal in its opposition to NAMA. As an alternative, the party advocates the establishment of a National Recovery Bank (NRB) which would focus on providing credit to households and small-to-medium enterprises. The NRB would be a wholesale bank, capitalised initially by withdrawing €2 billion from the National Pension Reserve Fund. Customers would still apply to their local bank for loans, but the NRB would provide most of the capital.

However attractive it may seem initially, Fine Gael’s idea of a National Recovery Bank fails to address the problem it is designed for. As a number of economists have alluded to recently, there is no guarantee that the banking sector would avail of the NRB’s funds to lend to households and small firms. With banks currently attempting to shrink their balance sheets in order to meet the Financial Regulator’s capital requirements, it seems improbable that they will increase lending in the short-to-medium term.

Yet, since the bank would be state owned, the government would have a direct say in where capital is invested. Thus, loans could be advanced to the “real economy”, providing a shot in the arm to struggling businesses and households.

Fine Gael also plans to address the fundamental problems inherent in the banking system. The party aims to give the banks one year to shore up their balance sheets by selling assets and raising private equity. If the banks fail to raise the required capital, the government would split each bank in two, forming a “good bank” and a “bad bank”.

For each institution, the “good bank” would take control of the performing loans and the branch networks. These banks would initially be nationalised but would be resold to the private sector when market conditions allowed.

The “bad bank” element of each institution would be left to manage the impaired loans and would, in effect, act as an asset recovery vehicle. These institutions would be wound down over time.

Fine Gael’s approach has received support from a number of influential economic commentators. Joseph Stiglitz, former head of the World Bank has been vocal in his support of the policy, as has Irish economist David McWilliams. The strengths of the “good bank, bad bank” solution lie in the fact that there is less risk attached to the valuation of toxic assets, unlike NAMA’s “long-term economic value” valuation process.

Nonetheless, there is a glaring flaw in Fine Gael’s proposed solution to the banking crisis. Given that the banks have a year to shore up their balance sheets, there is a very real threat that international funds will fly from the Irish banks, should investors begin to fear that the banks will be declared insolvent. This quandary led former Fine Gael leader Alan Dukes to declare the strategy “unworkable”.

Like all mooted solutions to the current banking crisis, Fine Gael’s strategy contains both strengths and weaknesses. Given that the party is expected to participate in the next government, it is likely that some if not all of the elements of the party’s banking policy will be implemented. Whether they prove successful or not is another matter, and the country will have to wait and see.