Thursday 19 October 2017

Honohan writes to Banking Inquiry to “clarify” controversial testimony

Daniel McConnell

Daniel McConnell

Central Bank Governor Patrick Honohan has written to the chair of the Oireachtas Banking Inquiry to clarify hard hitting evidence he gave last month.

Prof Honohan has written to Ciaran Lynch to “rephrase” his views on what was the best thing to do with Anglo Irish Bank in September 2008.

He said that his thinking on what the Government could have done at the height of the crisis, but said: “On reading the official record, I can see a different impression might have been conveyed.”

Prof Honohan in his letter distinguishes between a “hindsight scenario” and what information was actually available to Government at the time.

“The discussion at my session with the inquiry moved between these two scenarios in a manner that may not have been altogether clear,” he wrote.

Setting out his hindsight scenario, Prof Honohan argued that had the Government known saving Anglo and Irish Nationwide would cost €35bn, guaranteeing the two banks would have been too expensive as opposed to liquidating it.

He said: “Although Anglo was clearly a systemically important bank at the time, the Government would have done better by not including those two banks in a guarantee.”

He said such a move would have “shocked” European officials.

In a second scenario, based on the limited information available, Prof Honohan said then finance minister Brian Lenihan should have been nationalised and top managers should have been cleared out.

He said emergency liquidity assistance from Europe would have been extended to allow time to wind the banks down. As a result a far less costly guarantee could have been provided.

He said ultimately the Government was mistaken in its course to extend the blanket guarantee, in leaving senior managers in place for months which he said created a “potential risk (even though there was no evidence of management looting of the two failed banks)”.

Ultimately, Prof Honohan said: “None of the courses of action available at the end of September 2008 would have relieved the State of all of the costs that resulted from bank failures,” he said.

Prof Honohan also sought to clarify testimony given in relation to a Department of Finance meeting in which a cost figure of €8.5bn for Anglo Irish Bank was discussed.

“The contemporaneous note by Kevin Cardiff [then Head of Banking] of a meeting in which David Doyle [then Secretary General] is reported to have referenced a possible sum of €8.5bn in relation to Anglo,” he said.

“Examining the record, my evidence to the inquiry is likely created a misleading impression here in regard to one point, which I would like to correct. I do not believe that I have spoken to Mr Doyle specifically about that note. I probably did speak to Mr Cardiff about it. My understanding of Mr Doyle’s perceptions of the state of Anglo in September 2008 is based on other previous conversations,” he said.

Prof Honohan also detailed that the Central Bank had specific powers to issue directions to the banks about how much money there were lent.

He said section 23 of Central Bank Act gave the Central Bank “general power” to require a bank to adhere to a “wide range of limits” including minimum capital and liquidity requirements.

He noted that section 23 was not enacted until 2010 and breaches of section 23 would not have been liable for sanctions until then.

But he said the normal operation of the Central Bank “did not entail” the Central Bank’s board of Governors intervening to second guess the Financial Regulator.

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