Banking inquiry: 'Troika was uncaring technocracy of neoliberal zealots' - David Begg
Published 22/07/2015 | 10:21
A “dispiriting experience and utterly valueless” is how David Begg, former General Secretary of the Irish Congress of Trade Unions has described meetings with the Troika.
“My impression of the Troika was of an uncaring technocracy of neoliberal zealots devoid of empathy” he told the Banking Inquiry.
Mr Begg, who is also a former Non-Executive Director of the Central Bank, specifically excluded the IMF from this description saying “they were more reasonable which was a surprise to me”.
In his opinion there were “two crucial policy errors” which made the impact of the global financial crisis worse for Ireland than it needed to be.
The first was the creations of a “dual pillar structure” within the Central Back Financial Services Authority and the second was the decision to embrace light touch regulation.
Both decisions, he added, resonated with international decisions of the time and “this was ‘group think’ on a massive scale”.
The wrong indicators were monitored which meant there was no effective external oversight which might have prevented the banking failure here.
The Financial Stability reports, he added, identified risks correctly but “assumed too much about the soundness of the banks as the Central Bank no longer had a direct line of sight on what was happening in the banking sector”.
It had relied on the Regulator for that information.
Mr Begg said he had “no expectation that the crisis would manifest itself as it did.
“ I had no independent line of sight on the soundness or otherwise of the Irish banks nor did I know or suspect that the mathematical approach to the evaluation of risk which caused Lehmans to collapse was flawed.”
The former Central Bank Board member said it was “manifestly the case now that supervision was neither effective nor appropriate but principles based - or light touch regulation - was no exclusively an Irish phenomenon.”
The shortcomings of the Irish approach, he added, were “located in an international context that was deeply flawed”.
Financial Stability Reports did identify major vulnerabilities “but these were located in a context where the banks were assessed to be generally sound”.
Mr Begg also said that while a soft landing might have been possible up to the Lehman Brothers collapse it was not possible afterwards.
“We were seriously exposed in the banking sector and we didn’t know it”.
He said the most significant learning for him out of meetings with the Troika related to how European Monetary Union worked in practice.
From this he concluded: “The remit of the ECB should be changed to reflect the same range of social and economic responsibilities as the Federal Reserve (FED) in the United States”.
Mr Fergus Murphy former CEO of the Education Building Society from 2008-2012 said the Irish banking system’s reliance on wholesale funding combined with a property exposure proved to be a critical weakness.
He joined the EBS just eight months before the Bank Guarantee “at a very difficult time for the institution”.
Although he soon realised the extent of the problems “I did not predict that the down turn would be as severe as it has been and I thought that EBS was fundamentally sound and would survive”.
When he took over “There was a large increase in residential mortgage lending at the Building Society in the previous 6 years. “The residential mortgage book had grown from circa €5bn in 2001 to €14.2bn by 2007.”
He said the EBS had also departed from its core business and gone into Commercial Property lending and Land and Development lending and “those two books had grown to a combined €1.7bn exposure by the end of 2007.”
This exposure had been funded primarily from short term wholesale markets and the legacy "contributed to a significant weakening of the institution as losses crystallised through the transfer of assets to NAMA".
Ultimately, the cost of this legacy, despite advanced talks with third party capital providers, was borne predominately by the Irish taxpayer.
Mr Murphy said that on the night of the Bank Guarantee the EBS liquidity was quite stable and the solvency of the organisation was solid.
“When a guarantee was formally announced, EBS was named as one of the covered institutions and we had no input into its construct or make up.”
The former CEO told the Inquiry that the backdrop for the financial crisis was set internationally but Ireland was responsible for its own economies.
The scale of the crisis, however, would not have been to the magnitude it was had it not been for the international aspect.
The decision to merge EBS with AIB three years ago was taken on the basis that a stronger combined bank would support the Irish economy as a "Pillar Bank" alongside Bank of Ireland.
"I think that the past three years have shown the success of that merger. Since the merger, AIB, in combination with EBS, has recovered significantly. "