Banking Inquiry: Main findings and recommendations
Banks
Banks became over reliant on the wholesale markets in borrowing short term to lend long term. This made banks more vulnerable to a liquidity risk which was not recognised.
In the late 1990s, new and more aggressive lending practices in the commercial real estate and residential mortgage sectors changed the competitive environment in a marked and decisive way.
When the crisis struck in 2008, banks had already moved very far from prudent lending principles in their dealings with the property development sector in favour of a riskier asset value based lending model.
Commercial real estate lending was concentrated among a small number of debtors and in many cases lending was inadequately secured by paper equity and personal guarantees.
There was a culture of excessive executive remuneration in the banks.
No one single event or decision led to the failure of the banks in the lead-in period to the crisis, but rather it was the cumulative result of a series of events and decisions over a number of years.
A full review should take place of section 33Ak of the Central Bank Act 1942, to ensure that only documents deemed ‘secret’ which are independently reviewed by a High Court judge are withheld from any future Oireachtas inquiry.
All members of bank boards should have requisite financial skill sets and experience and should undergo ongoing compulsory Continuing Professional Development (CPD) appropriate to banking, to include risk and governance.
A personal remuneration clawback provision linked to medium term performance should be part of the employment contract for senior executive management and board members.
The Property Sector
Many developers had become heavily reliant on bank debt to fund their developments. In many cases, developers adopted a business model in which a bank would bear all of the risk of a transaction, either through 100% financing or using so-called ‘paper equity’ to fund any element of developer’s equity.
Property or land valuations were not carried out in all cases, even in the case of some large developments.
Relationship banking, where some developers built strong relationships with particular banks, was a part of the Irish banking system. In some cases, both parties became business partners in a joint venture.
A detailed and comprehensive commercial property price register should be introduced.
State Institutions
The ‘soft landing’ theory was cited frequently as the most likely outcome to the property boom from as early as 2000. No evidence was provided that this expectation was tested, let alone validated.
The Financial Regulator had sufficient powers to deliver their prudential supervision.
The Central Bank and Financial Regulator were aware as early as 2003 that the Irish banking sector was placing increasing reliance on lending to the property sector.
But, neither the Central Bank nor the Financial Regulator intervened decisively at the time or in the years prior to the crisis.
Banks in Ireland were allowed, through the inaction of the Financial Regulator, to breach sectoral lending limits on property, without fear of any consequence.
The Department of Finance relied on the Central Bank Financial Stability Reports as the basis for assessing risks or threats arising from the banks.
The Department relied on the overall assessment in the reports rather than responding to the specific risks identified in the reports. The Department did not carry out adequate independent analysis of the risks.
The membership of the Board of the Central Bank, appointed by Government, must include sufficient expertise and relevant direct experience in financial stability and prudential regulation.
An Independent Budgetary Office, possibly as part of the Irish Fiscal Advisory Council, to provide independent costings of budgetary and pre-election proposals of political parties and members of the Oireachtas, should be established.
Government Policy and the Oireachtas
Taxation policy choices made by the Government contributed to the development of a structural deficit.
The erosion of the income tax base in the years leading up to the crisis did not give rise to sufficient concern at Government level at the time.
Fiscal policy after 2001 was not focused on mitigating and managing the property price increases. If steps had been taken, for example through reducing or abolishing property tax incentives, as originally planned from 2002 to 2004, the severe overheating from 2003 to 2007 could have been mitigated.
Government, including individual Ministers, made policy decisions, based on a range of considerations, including having regard to, but not always accepting the advice of the Department of Finance, Central Bank and International organisations, and ultimately accepted overall responsibility for decisions made.
All the main political parties, whether in opposition or in government, advocated pro-cyclical fiscal policies up to 2007.
Members of Oireachtas committees should receive appropriate training and support in technical content, if they do not already possess the required skill set.
The Oireachtas Commission should carry out a detailed analysis of the resources allocated to support Oireachtas Committees, and of its potential impact on the capacity of Committees, to carry out effective oversight.
The Guarantee
The option of guaranteeing the banks did not arise for the first time on the night of the guarantee meeting on 29 September 2008. The option of introducing a guarantee was first formally noted in January 2008, again in February 2008 and again in June 2008.
A draft press release announcing a six-month bank guarantee had been prepared by the Central Bank prior to 21:10 on the night of the guarantee. The draft release only covered deposits and interbank lending.
The Department of the Taoiseach did not keep minutes of the meetings on the night of the guarantee and was unable to provide any drafts of the proposed guarantee as it evolved.
The word ‘solvent’ as it pertained to the status of the covered banks was removed from the final official Government statement, announcing the guarantee.
Bank executives from AIB and BOI when leaving Government buildings on the night of 29 September 2008 had differing views on whether the Government was going to proceed to guarantee 4 or 6 banks.
Conflicting evidence was provided as to whether representatives from BOI and AIB did provide their own written guarantee proposals to the meetings on the night of the guarantee.
The information available to decision-makers on the night of the guarantee about the underlying health of the Banks was inadequate.
Prior to the meeting it was made clear by ECB authorities that there was no Eurozone wide initiative coming and the Sovereign was to ensure that no bank was to fail.
The Government was advised by the Central Bank and Financial Regulator that all 6 banks were solvent on the night of the guarantee.
Post-Guarantee Developments
One consequence of the crisis and the ensuing bank restructuring efforts was the almost total cessation of new lending for businesses over the period 2009 to 2013.
The reasons that PwC’s Project Atlas Report (September/October 2008) did not reveal the true extent of the capital requirements of the banks were.
In October 2008 BOI had internal discussions about the bank’s possible need for a capital injection by the State as one of a number of options reviewed by the bank at that time.
Ireland and the Troika Programme
The Irish authorities were in discussions from September 2010 with the individual Troika partners prior to a government decision to enter into formal negotiations on a Troika programme.
The letter from the ECB to Minister Brian Lenihan on 19 November 2010 threatened that it would not continue to provide ELA support for Irish banks if Ireland did not enter into a bailout programme.
The Deauville Declaration pushed up Irish bond yields, reducing the possibility of Ireland’s reentry to sovereign bond markets at the time.
The National Recovery Plan was the basis for agreement between the Irish Government and the Troika.
By October of 2010 Ireland’s entry into a bailout programme was inevitable, but the timing of the entry into the programme was determined by factors outside of the Government’s control.
The possibility that Ireland might need external assistance from the IMF at some point in managing the economic crisis, was first considered in September 2008.
Burden Sharing
IMF mission staff favoured imposing losses on senior bond holders in October/November 2010 as part of Ireland’s negotiations for a Troika Programme. That position was also held by the Irish Government.
The Attorney General explored the possibility of burden sharing with senior bondholders with legal assistance from the IMF in November 2010.
There would have been no Troika Programme agreed in November 2010 if the Government proceeded with the imposition of losses on senior bondholders.
The ECB position in November 2010 and March 2011 on imposing losses on senior bondholders, contributed to the inappropriate placing of significant banking debts on the Irish citizen.
The Irish Government should seek to have the relevant European statutes examined and if necessary amended to allow the ECB to participate in parliamentary inquiries.
