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Wednesday 17 September 2014

The 2008 call to cut lending raises question of whether bank was really 'too big to fail'

Published 19/07/2014 | 02:30

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A workman removing signage from Anglo Irish Bank headquarters at St Stephen's Green in Dublin in 2011
A workman removing signage from Anglo Irish Bank headquarters at St Stephen's Green in Dublin in 2011

INTERNAL Anglo Irish Bank documents published today show management at the bank was on "red alert" from the start of 2008 – with an order to cut lending to an absolute minimum.

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That is certain to reopen the question of whether Anglo Irish Bank was genuinely of systemic importance to the economy – too big to fail – when it was saved later that year.

We all know now that the bank was in trouble in 2008, but it is worth reminding ourselves that when senior managers were sharing their views inside Anglo, the bank's official line was that the lender was in robust shape.

"We cannot afford additional lending in February and March at this stage," David Drumm wrote in an email in early 2008.

But on March 6 that year in an official trading statement, Anglo declared that lending was growing – though at a slower pace – and the slowdown was because the bank was being more disciplined.

"We continue to adopt a highly selective and cautious approach to new lending opportunities in the current environment," according to the statement, signed by David Drumm and other senior executives.

Ironically, later that month the bank began ramping up one element of its lending – the controversial loans to Sean Quinn. That happened after the so-called St Patrick's Day massacre wiped out much of the value of Mr Quinn's stake in the bank.

The money was ultimately to cover losses on shares in the bank, while we can now see clearly senior managers including David Drumm knew it was facing difficulties.

Overall, lending by Anglo Irish Bank increased during the 2008 financial year – which ran from September 2007. But with an increase of €6bn compared to €18bn increase the previous year.

We don't know how much of the €6bn had already been committed before January – which was already a quarter of the way through the reporting period.

But we do know that as much as €1.3bn of loans that year were in some way linked to Sean Quinn – either to members of the Quinn family, or the so-called Maple 10.

There is no evidence that David Drumm regarded the decision to cease lending as permanent. It may well be that he thought the market would improve and business would resume as normal.

But it is also clear from the documents that the decision to rein in lending was not a case of the bank seeing the error of its previous ways and adopting a more cautious approach to credit.

The order to stop lending was made in an effort to help the bank preserve its capital, the document shows.

Some of the bank's former customers may be learning for the first time today why loans they thought were in the bag ended up getting pulled back in 2008.

The latest revelations from inside Anglo indicate that – certainly by the time taxpayers stepped in to save the bank at the end of 2008 – there should have been questions about how meaningful a lender it was.

The ability to put credit into the economy ought to be the gold-standard for determining whether a bank is worth saving.

We will hear a lot about the concept of bank's being "systemically" important when the banking inquiry finally gets going.

In theory, if a bank is to be saved by taxpayers, it must be because the institution is genuinely important to the wider economy, not just its own shareholders, staff and customers.

Irish Independent

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