Nyberg Banking Report
Business Ethics
Nyberg Banking Report
During the Celtic Tiger and the run up to the crisis, Ireland saw an increase in liquidity and low risk premia. Financial integration in the euro area was deepening, and banks in Ireland had unprecedented access to cross-border funding. This put pressure on bank margins in Ireland. The report investigated the handling of the banking crisis and found that the crisis was essentially “home grown”. It was a result of domestic Irish decisions and actions, and not international developments. The efficient market hypothesis further created a sense of stability, and the need for regulation became less important in the eyes of those in control, such as the Financial Regulator, the Central Bank and the Department of finance.
Without questioning, herding and groupthink were huge contributing factors to the demise of the Irish banking system. Herding refers to the willingness of investors and banks to simultaneously invest in, lend to and own the same type of assets accompanied by insufficient information gathering and processing. In essence, banks behave in this manner to retain market share by competing with other banks. By doing so, banks can justify their actions as their competitors are operating in the same manner. However, the banks do not simply mimic each other. They take part in herding due to important externalities that effect the optimal decision making process. AIB and BOI were encouraged to operate in a similar manner to Anglo and INBS by various financial bodies such as The Financial Regulator and The Central bank and Department of Finance. This leads to what is commonly known as the bandwagon effect or Groupthink. Groupthink occurs when a group of decision makers decides on a course of action without questioning underlying assumptions. As the period of prosperity continued, executives took more and more financial risks based on prior judgments. As these financial risks paid off, the public, the
Nyberg Banking Report
During the Celtic Tiger and the run up to the crisis, Ireland saw an increase in liquidity and low risk premia. Financial integration in the euro area was deepening, and banks in Ireland had unprecedented access to cross-border funding. This put pressure on bank margins in Ireland. The report investigated the handling of the banking crisis and found that the crisis was essentially “home grown”. It was a result of domestic Irish decisions and actions, and not international developments. The efficient market hypothesis further created a sense of stability, and the need for regulation became less important in the eyes of those in control, such as the Financial Regulator, the Central Bank and the Department of finance.
Without questioning, herding and groupthink were huge contributing factors to the demise of the Irish banking system. Herding refers to the willingness of investors and banks to simultaneously invest in, lend to and own the same type of assets accompanied by insufficient information gathering and processing. In essence, banks behave in this manner to retain market share by competing with other banks. By doing so, banks can justify their actions as their competitors are operating in the same manner. However, the banks do not simply mimic each other. They take part in herding due to important externalities that effect the optimal decision making process. AIB and BOI were encouraged to operate in a similar manner to Anglo and INBS by various financial bodies such as The Financial Regulator and The Central bank and Department of Finance. This leads to what is commonly known as the bandwagon effect or Groupthink. Groupthink occurs when a group of decision makers decides on a course of action without questioning underlying assumptions. As the period of prosperity continued, executives took more and more financial risks based on prior judgments. As these financial risks paid off, the public, the