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Ulster Bank's Loan Losses

Ulster Bank, founded in 1836, has been one of Ireland's most successful banks over the past 175 years.  However, yesterday it announced that it had written off more than £1 billion of bad loans (mainly in the property sector) in the first nine months of 2011.  Click here for further details. 

Along with Charles Hickson, I have examined the corporate governance of Irish banks (including the Ulster Bank) in the nineteenth century (click here).  Bank directors back then had incentives to ensure that their banks did not take excessive risk, which could potentially result in large loan losses.  First, directors were usually shareholders, holding about circa 1% of shares each, which meant that they stood to lose wealth if their bank performed poorly.  Second, they did not receive stock options or remuneration tied to performance.  Third, as with all bank shareholders at the time, they had unlimited liability, which meant they stood to lose everything (right down to their 'last acre and sixpence') if the bank failed.  Fourth, banks were allowed to fail - there was no deposit insurance or bank bailouts, which meant that bank directors and shareholders bore the full cost of their risk-taking decisions.

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