Analysis

Thursday 24 July 2014

Colm McCarthy: State must probe why banks failed

Published 18/11/2012|05:00

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We need an inquiry into the banking collapse so that those responsible are held accountable.

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Not all bankers are guilty. The revelations over the past couple of weeks about lavish pay and pensions for senior bankers, both current and retired, has given a new lease of life to the sizeable 'Bash the Bankers' movement. Since not every person employed by a bank can be held responsible for the calamity visited on the country by them, it was inevitable that some people should spring to their defence, or at least begin to argue for some modicum of understanding or even forgiveness.

Both former Taoiseach John Bruton and Transport Minister Leo Varadkar have been trying, without much success, to inject a little balance into the coverage.

The Irish banking bust, measured in terms of its cost relative to national income, is one of the largest which has ever occurred anywhere in the world. It was also a peculiarly old-fashioned bank bust, based essentially on lending money to people unable to pay it back.

This is the way banks went bust in the 19th Century. A more modern bust would have involved speculative foreign currency exposures, fancy derivatives, even a spot of fraud and intrigue. But the Irish bust was as dull as ditch water: every bank in the country went under mainly through lending money to Irish people in Ireland, an activity in which, collectively, they have been engaged for centuries.

Banks operate the payments system, raise money from depositors and other lenders, buy and sell foreign currency for customers, sell insurance products and undertake a long list of other financial services.

The staff involved in these lines of work must be pretty blameless: they did not make any dud loans, since this was not their responsibility. Nor can the staff engaged in managing premises, IT systems, personnel departments or catering have had much to do with the demise of the banking system.

The people responsible for the debacle, to be clear, were those engaged directly in lending. They constitute a minority, possibly a small minority, of all bank staff and those senior enough to have been making policy cannot number more than a few hundred for the whole of the banking system. It must be galling for the others to listen to the incessant and indiscriminating denunciations of 'bankers' as some sort of pariah profession.

Our banks were brought down by poor lending policies, along with poor management of their funding arrangements. The number of people directly involved in these errors, including boards and senior management throughout the bubble, is limited.

Even within these groups there may well have been people urging caution, only to be ignored. People outside the banks made errors too, including small numbers of regulators and external advisers. It is entirely possible that some of the people in all of these groups were misled by colleagues and committed venial rather than mortal sins, or none at all.

But the media and the general public must vent their anger at 'bankers' as a class, since they have little alternative. The reason is straightforward: there has been no proper banking inquiry. Until there is, nobody knows where responsibility lies.

Several people at senior level in Anglo Irish, the most costly of the failed banks, are facing civil litigation and criminal inquiries and have been pursued diligently by the media. In the other domestic banks, one of which, AIB, has cost the taxpayers a sum not far behind the catastrophic cost of Anglo, there does not appear to be evidence of legal breaches. These banks just managed to destroy their businesses and helped to bankrupt the State.

Several foreign-owned banks, including Bank of Scotland (Ireland), ACC (Rabobank), Ulster ( Royal Bank of Scotland) and National Irish (Danske) have also experienced dreadful loan

losses, with the tab picked up by foreign shareholders rather than by the Irish Exchequer.

Unfortunately, nobody has been held personally responsible in any of these banks, although it is true that numerous senior managers have retired early and boards have been replaced. But a veil of silence has been drawn around what actually happened. Who screwed up, and when?

It is clear that loose lending policies go back a long way. Which individuals in the various banks made the policy decisions that led to the herd following Anglo and Irish Nationwide over the cliff?

Until that question is answered, as it has been in other countries which have had banking collapses, the indiscriminate banker-bashing will continue. The innocent cannot be identified, never mind forgiven, until the guilty put their hands up, or are located by an impartial process of inquiry.

It is lamentable, four long years after the balloon went up, that so little personal responsibility has been taken, or assigned, for the collapse of the Irish banking system. Excessive pay and excessive pensions are legitimate issues for the media to pursue but they are secondary.

While the continuing eurozone failures have made things worse for this country, and while we might have been better off had we chosen not to join the single currency in the first place, it is unarguable that this is largely a 'made-in-Ireland' crisis.

The easy-credit virus infected most of the developed world but the Irish version was a stand-out. The first line of defence against a credit bubble is the banking system itself. Prudent banks do not vaporise because of lending errors. Most banks, in most countries, are still standing without taxpayer bailouts.

The second line of defence, the supervision system, failed dismally. Finally the government pressed the wrong button on September 28, 2008, when the blanket guarantee was introduced.

All of these are Irish, not European, mistakes.

It is reasonable to fault the unhelpful responses from European partners, but pointless to pretend that the Irish banking disaster was just collateral damage from external events. There is still no thorough narrative about the credit bubble, and particularly about the behaviour of the individual banks,

The principal issue is accountability. What happened, in each bank? We know quite a lot about what happened in Anglo, will likely learn more about Irish Nationwide, but all because of action in the courts and journalistic diligence, not as a result of a proper public inquiry.

How about Allied Irish, one of the two 'pillar' banks and an important Irish institution with nearly 200 years of history, all but 10 of which were marked by caution in lending? Why did AIB embark on a lending competition with the rogue Anglo Irish? Who took the key decisions, and when? Did dissident voices go unheeded?

The banks themselves have declined the job of explanation, not least to their own shareholders. The shareholders have been wiped out, and rightly so. That's capitalism.

For publicly quoted companies like AIB and Bank of Ireland to see their share prices drop by 99 per cent without a full accounting to the owners is quite simply breathtaking. If the boards of these companies have undertaken a full internal inquiry into the lending calamities, they should publish these reports promptly. If they have not, they should explain the omission.

Thousands of people around the country owned shares individually in Allied Irish and Bank of Ireland, and every member of a funded pension scheme owned some indirectly. That means hundreds of thousands of citizens.

These people are deserving of no compensation. They must take their losses. But they have been offered no explanation either.

If the banks will not account for what happened, the Government must fill the gap. Economists at the IMF in Washington maintain a databank on banking collapses around the world. The Irish collapse will feature prominently in future editions, for the simple reason that it has been one of the most destructive financial disasters to have ever occurred, anywhere in the world.

The absence of accountability for the banking collapse, given its sheer scale, is quite remarkable. To be fair to the Government, they held a referendum in October 2011 to confer investigative powers on parliament to inquire properly into the banking debacle. They managed to lose it (there seems to be a sizeable No vote on just about any proposition) through complacency and a well-timed lawyers' ambush.

The referendum should be held again. The lawyers might explain, this time round, why the representatives of the public should not be trusted to inquire into the greatest economic disaster to have befallen the State since its foundation.

Sunday Independent

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