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Prof Eamonn Walsh on "Temporary Nationalisation"

Date: 01 Sep 2009

Publication: Sunday Independent Business Post

Date: Sunday, August 30^th, 2009.

Author: Eamonn Walsh

Headline: SHORT VIEW

‘Temporary nationalisation’ has been suggested as a solution to our banking woes. I do not know if it is. Nor do I know if Nama will solve the problem. Nevertheless, proponents of temporary nationalisation do need to address six points. First, what is “temporary”? Five minute, five years or 50 years? Is there a commitment to this time scale? Second, once the banks are owned, who will manage them? How will new management teams be selected? How will these teams be motivated to make good lending decisions? How will financial rewards be determined? How does one separate lending decisions from political considerations? Third, how will the banks be restructured? A recent report estimated that 30 per cent of UK bank branches will be shut due to declining lending activity. If many banks are nationalised, will two or three state-owned banks compete with one another on the high street? How will downsizing occur? How will existing pension fund deficits be addressed? Fourth, getting credit flowing requires new entrants to the banking industry. What will be in mechanisms for encouraging new entrants? Fifth, core deposits are a key determinant of bank valuations. Witness Anglo Irish Bank’s elaborate efforts to secure 7bn Euro of “deposits” last September. How will the core deposit base be enhanced? How will one ensure a level playing field for bank deposits? Finally, what is the exit mechanism? Who is likely to purchase these banks? How will the value of the banks be determined? Nationalising assets is easy-managing and selling them is far more challenging. Many believe Nama is a pig in a poke. Proponents of “temporary nationalisation” should at least describe their poke.

Eamonn J Walsh is the PWC Professor of Accounting at UCD Smurfit Graduate Business School.