Foreign lenders have also benefited from our lax regulation on banking
A cast of thousands have summed up the dimensions of Ireland's banking crisis so far. But by far the most eloquent summary was provided last year by then TCD academic Dr Patrick Honohan, who asked a simple but searching question: "How could traditionally conservative banks -- some of them with a 200-year history -- have been so careless as to leave themselves exposed in such a conspicuous and obvious property bubble?''
A convincing answer to this question has still not really been provided and may never be -- despite political promises to hold an inquiry. While one should never trust the wisdom of crowds, the collective view of the business community is that the domestic banks became careless because of a failure of the regulatory system.
This is certainly true, but this collective wisdom may not actually go far enough. It is increasingly clear that these regulatory failings reached beyond just lax supervision of domestic institutions. The oversight of foreign lenders operating in Ireland was entirely deficient and, as Bank of Scotland (Ireland) winds down its retail operations, it's worth reflecting on this additional set of blunders by the regulatory authorities.
The failure to adequately supervise and curb the operations of Bank of Scotland (Ireland) and some other foreign lenders has had many damaging effects, direct and indirect.
One of the direct effects will be on the national economy, which is going to have to endure a painful contraction in the amount of credit available as one of the top seven lenders in the country goes into semi run-down mode.
Poor regulation of this bank also leaves its staff high and dry. Because they were working for an extraordinarily over leveraged institution the only possible escape route for these staff, joining the "third banking force'', was effectively cut off to them.
The third group which has suffered because of poor regulation of Bank of Scotland (Ireland) are some of its borrowers, who were given 100pc mortgages, thereby increasing their exposure to a downturn in the property market and making the overall Irish property market more unstable.
All of these problems can be traced back to poor regulation. For example, bank leverage is a key metric for any regulator to watch, but where was the Financial Regulator when Bank of Scotland (Ireland)'s loan-to-deposit ratio hit an extraordinary 500pc. This meant for every euro Bank of Scotland (Ireland) was holding on deposit, another five euro was being loaned out to first-time buyers or one of Ireland's developers. The international norm is usually 125pc.
Unless this newspaper missed it, I cannot recall any public intervention by the regulator compelling Bank of Scotland to scale back its leverage.
Obviously, with a large parent like HBOS funding was always likely to be available, but it effectively meant that Bank of Scotland was operating for the short term, failing to build up an adequate deposit base to fund its growth and instead making a leap for market share.
Now that the downturn has come, its model is shot to pieces and the regulators can only issue statements advising customers to make alternative arrangements.
The scale of its leverage has meant that Brian Lenihan, wisely, has no interest in including the bank in his third banking force. Why would the third banking force want to take on such a hugely leveraged institution with an endless appetite for wholesale funding.
The regulators also dropped the ball on the mortgage offerings the bank provided. It was only in April 2008 that Bank of Scotland (Ireland) finally withdrew its 100pc mortgage product. This was a long time after house prices has started to soften in Ireland. The 100pc mortgages stripped away one of the few layers of protection from a severe downturn both for borrower and the economy generally.
These products were of course offered by others, but Bank of Scotland (Ireland) used them as a cornerstone in its marketing. For some reason the regulator did not think it important to restrict loan to value ratios in Ireland, for domestic institutions and foreign-owned ones.
Its not as if the danger of 100pc mortgages was not widely known. This is from Alan Ahearne, now the Government's chief economic adviser, in a property magazine in 2006: "Giving people 100pc mortgages is a move in completely the wrong direction. It has drawn people from the financial margins into the mortgage market and in the event of a downturn they're going to be very exposed. There's absolutely no doubt about it''.
Bank of Scotland (Ireland) and other foreign-owned lenders compounded this dilution of credit standards by heavily promoting 40-year mortgages, again destabilising the market for short-term gain.
Mortgages with such long terms simply act as a way of disguising poor-credit risk in a new longer-term product. Of course, the repayments on long-term mortgages are much larger from a bank perspective, hence their popularity at one point with foreign lenders.
Again, the regulator failed to step in and check this activity. Of course its powers over foreign-owned institutions are limited, but there is little doubt more could have been done. For a time, the lax regulation of Irish banking must have been one of the attractions of setting up here.
As foreign-owned banks retrench, shrink and even depart the market, it's worth remembering that the recession is not the only reason they are no longer interested in being here.