What caused the Irish banking crisis?

Abstract

PurposeThe purpose of this paper is to explore the Irish banking crisis and explain how various factors contribute to a collapse in asset prices, an economic recession and the near failure of the banking system. The paper seeks to document the dangers of pro‐cyclical monetary and government policies, particularly in an environment of benign financial regulation and pent‐up demand for credit.Design/methodology/approachThe paper maps the Irish banking crisis against its general background. It describes the roots of the crisis, with particular attention given to government and monetary policies, the practices of the financial regulator and banks during the property bubble, together with the difficulties associated with the international sub‐prime crisis.FindingsWhile the global financial crisis exacerbated matters, the banking crisis in Ireland was largely a home‐grown phenomenon. The crisis stemmed from the collapse of the domestic property sector and subsequent contraction in national output. Its root cause can be found in the inadequate risk management practices of the Irish banks and the failure of the financial regulator to supervise these practices effectively.Originality/valueThe paper documents the “Celtic Tiger” phenomenon of the last decade: the Irish economic and property miracle, its sharp decline, and the sub‐prime crisis. It delineates one of the most severe banking and economic crisis in a developed country since the great depression with a number of key policy lessons for rapidly expanding economies.