Thursday 29 September 2016

Banking inquiry: 'Lack of trust in Anglo led to its nationalisation'

Clodagh Sheehy

Published 01/07/2015 | 10:30

Workers remove the signage outside Anglo Irish Bank’s HQ
Workers remove the signage outside Anglo Irish Bank’s HQ

A lack of trust in the Anglo Irish Bank organisation by the Department of Finance led to the decision to nationalise it, the Second Secretary General of the Department said today.

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Ann Nolan told the Banking Inquiry that her Department did not feel it could recommend recapitalisation of Anglo “without taking complete control as we had no trust in the organisation”.

It was decided to nationalise and replace the Board and management “because of the nature of the issues we had with Anglo” she added.

She told Deputy Joe Higgins that she did not believe banks had lied to the Department about their financial position in 2008.

The drop in GDP in 2009 was “phenomenal” and she did not think anyone had any idea the recession would be as deep as it became.

The stress tests at the time were not sufficient to measure the depth of the stress, she added.

In that context she did not think it was a question that the banks liked at the time so much as they did not know the position themselves.

Ms Nolan who was  Assistant Secretary in Financial Services Division and from December 2006 to November 2008 described how a PWC report commissioned by the Central Bank in the last quarter of 2008 “drew our attention to two important facts of which we were not previously aware”.

It suggested “ that the vulnerability of the system was significantly greater than the stress tests indicated.

It showed that land and development loans were  “generally on rolled up interest payments, so were effectively unlikely to make any payments to the banks until the underlying developments were completed and the assets sold.”

The economic shock of 2008 however “meant there was little demand for new developments whether commercial or residential.”

She referred to the fact that a small number of developers had “absolutely huge debts across the system with the top 20 owing €24.5bn to the financial institutions.

Initially Anglo had talked of raising money in the private sector “but it became clear very quickly that the market appetite for investing in Irish banks was non-existent”.

At the time  Bank of Ireland considered that State support of €2bn “would reassure the markets and was anxious that the support was done in such a way it could easily be repaid  when the crisis was over”

She stressed they did not want State ownership of the bank.

“AIB said that they did not need support as much as the other two but they were anxious that they be treated the same as Bank of Ireland.”

The PCW reports however “showed clearly that AIB had significantly higher exposure to land and development loans than Bank of Ireland”.

Anglo had said “they needed less than the other two as they were a smaller bank” and “all of the banks claimed that their loan books were better than average”.

In her department’s discussions with the banks several of them said they had personal guarantees from the developers which would protect them if the asset values proved to be less than the loans.

“When you realised that the same individuals also had significant loans to other institutions, it was clear the value of any such personal guarantee was limited.

ln view of these  facts, and the broad economic conditions, the Department immediately began discussions with the banks on the need to bolster their capital position.

These discussions took place in December 2008 culminating in the announcement on the 21 December 2008 of a plan to recapitalise the three banks, Bank of lreland, AIB and Anglo lrish Bank,” she said.

She described Bank of Ireland as the “most realistic” in assessing their position.

AIB was the “alpha male”. They said they didn’t need any capital.

Anglo had said they would get the money from the private sector “but that never materialised”.

On Central Bank Governor Patrick Honohan’s infamous call to RTE revealing that Ireland was about to enter a bailout, Ms Nolan said while he was “preempting a government decision” in some ways it made no difference.

She said it was “probably unhelpful to government” and probably unhelpful to the Department’s negotiating team “down in the trenches” concentrating on the smaller details, but even at that she did not think it made a difference.

Former Second Secretary General Donal with the Department Donal McNally told the committee there appeared to be little public support for restraint in the run up to the economic crisis.

This was against a background of “the near universal praise at international level for the performance of the Irish economy” and the consensus at home and internationally that significant positive growth would continue.

In his experience “only limited contrarian views were expressed and the majority held to the soft landing consensus as I did”.

Mr McNally said the challenge for the future would be the need for the system to communicate the message more successfully at policy level to the public that there is a case for restraint.

He regretted that the country suffered from a period of recession and austerity in restoring the public finances.

“Hopefully the experience will serve to instruct policy makers and advisors for the future in responding to such situations in a timely manner,” he added.

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