had no information at hand indicating that any of the banks were about to experience losses far in excess of their capital reserves. what i have suggested as the best course of action ( given the lack of such information scenario 2 ) – buying time for negotiation with partners, seizing control over the two failing banks, and limiting the scope of the guarantee – could hardly ( unless those negotiations had proved remarkably successful ) have reduced the direct fiscal bill by more than a few billion – a fraction of the actual damage. the alternative ( under the hindsight scenario 1 ) of bailing - in some of the bondholders and depositors of anglo and inbs would have imposed additional disruption to economic activity and capital formation which would have offset a lot of the savings to the state from not paying the creditors. i conclude that the need for “ austerity measures ” : the scale of tax increases and expenditure reductions that have proved necessary since, could have been reduced somewhat, but not all that much, by anything done at the end of september 2008. maintaining perspective as i have remarked recently, the boom and the bust both damaged our economy. the boom, and the decisions that were taken during it, meant that ireland had to adjust down from living standards that could never have been sustained, with sizeable and capricious shifts in the distribution of wealth. the style of banking in ireland, its regulation and broader economic policy were strongly influenced by comparable styles adopted at that time in countries often used as exemplars for irish decision makers, and in particular the us and uk. but the scale of the excesses in ireland put its banking crisis in a different league ( though not as bad as iceland ). the extent and nature of the guarantee decision frustrated subsequent efforts to minimise the costs and speed the recovery. but the bulk of these costs could not have been avoided by a different course of action on the night of the guarantee. bis central bankers ’ speeches

jeremy c stein : dollar funding and global banks speech by mr jeremy c stein, member of the board of governors of the federal reserve system, at the global research forum “ international macroeconomics and finance ”, co - organised by the european central bank, the federal reserve board and the federal reserve bank of new york, frankfurt am main, 17 december 2012. * * * thanks very much. it ’ s a pleasure to be part of this panel on the future of financial globalization. i will focus my remarks on one important aspect of this issue – namely, the growing use of wholesale dollar funding by global financial institutions. i ’ ll begin by briefly discussing research i ’ ve been doing, along with my coauthors victoria ivashina and david scharfstein, which examines some of the consequences of this funding model during times of market stress. 1 i ’ ll then touch on the policy implications of this and related work. but first, the usual disclaimer : the views that follow are my own and do not necessarily reflect the thinking of my colleagues on the federal open market committee. by way of background, the dollar liabilities of foreign banks have grown rapidly in the past two decades and now stand at about $ 8 trillion, roughly on par with those of u. s. banks. 2 a significant proportion of foreign banks ’ dollar liabilities are raised via u. s. branches, most of which are legally precluded from raising deposits insured by the federal deposit insurance corporation. the main source of funding for these branches, therefore, comes from uninsured wholesale claims such as large time deposits, making the cost and availability of such dollar funding highly sensitive to changing perceptions of these banks ’ creditworthiness. in our work, we asked how shocks to the ability of foreign banks to raise dollar funding might lead to changes in their lending. we began with a simple conceptual model : imagine a european bank that lends in euros to european firms and in dollars to u. s. firms. to finance its euro - denominated lending, it funds itself by issuing insured euro deposits to its local retail deposit base. by contrast, to finance its dollar - denominated lending, it raises funds in the wholesale dollar market. because the bank ’ s dollar liabilities are uninsured, an adverse shock to the bank ’ s perceived creditworthiness will result in a spike in its dollar funding costs. at the same time, the cost to the bank of funding in