Look to the UK and US for how to conduct an inquiry into banks
Any investigation must also highlight the role of those who did warn of impending disaster, writes
As National Indignation Week draws to a close following the Anglo Tapes revelations in the Irish Independent, it is time for a little perspective. Banks in their death throes worry only about liquidity and their time horizon foreshortens. Colourful language and nervous jocularity are not surprising. Nor is the complete absence of any alertness to the broader picture. The bad singing was the only real shock. Anglo Irish was a cooked goose in mid-September 2008 and the managers captured on tape must have known this in their bones.
A full banking inquiry is now inevitable. What does it need to address and how should it be organised? There is no need for another review of the macroeconomic background to the Irish banking collapse. The three reports already available, the Honohan Report, the Regling/Watson Report and the Nyberg Report, as well as various academic studies, provide an adequate account.
There are four critical areas in which available information is absent or incomplete. These are: the lending behaviour of the individual banks in the years leading up to the bust; the performance of overseers; the policy response from government; and the role played by international bodies, particularly the European Central Bank (ECB).
Lending Behaviour of the Banks
Every significant bank failed to a greater or lesser degree. Some incurred loan losses exceeding 50 per cent of the loans they had extended. All would have gone under without support from the State or from their foreign parents.
It is a fair bet that all were worried about the drain of deposits in the weeks prior to the bank guarantee and that panicky phone conversations were taking place all around the city of Dublin, some hopefully not quite as flippant as those revealed from Anglo.
The bank loan losses were incurred over many years prior to the events of autumn 2008 and it is the lending policy, rather than the liquidity panic, that needs to be explained.
Cautious and prudent banks are the first line of defence against credit bubbles. There has been no attempt, in any of the three official reports prepared to date, to probe in detail the decision-making processes within each of the banks.
More is known from journalistic efforts, including informative books on Anglo and Nationwide, authored by journalists, than can be gleaned from the official reports.
Admirable reports, naming names and assigning responsibility for bank failures, have been prepared in several foreign jurisdictions which could serve as templates.
Aside from some honourable resignations, there has been no voluntary assumption of accountability anywhere in the Irish banking system, not even by way of explanation to shareholders.
Performance of Overseers
Unlike in other businesses, bank failures inflict widespread economic damage on third parties. Hence, banks are licensed and regulated. The overseers constitute the second line of defence against credit bubbles. The Honohan and Nyberg reports consider at some length the performance of the Central Bank and the Financial Regulator.
They conclude that there were serious failures of regulation and supervision, despite warnings and plentiful evidence that threats to financial stability were mounting.
The third line of defence was the Department of Finance, which was also judged in these reports to have acted too little and too late. The reports assigned responsibility to institutions, rather than to individuals.
While the banking crisis unfolded, it emerged that a major insurer, Quinn Insurance, had also been courting insolvency through inadequate governance and risk controls. There was supervisory failure here also and it needs to be explored.
Finally, none of the auditors to the banks raised the alarm. The performance of auditors and external advisers needs to be included in any inquiry.
Policy Response from Government
At the end of September 2008, the Irish government chose to guarantee almost all of the liabilities of a banking system that was already irretrievably bust. Both the Honohan and Nyberg reports draw attention to alternative policies, exposing the Exchequer to lower risk, which could have been undertaken at the time.
The circumstances in which the government came to believe that the banks were illiquid, rather than insolvent, have never been fully explored in any of the available reports, nor has the retrospective nature of the guarantee.
The inclusion of certain junior (subordinated) liabilities of the banks has never been satisfactorily explained either. It is clear that had the government been advised of the likely insolvencies, a different course would at least have been considered.
It is a tragic irony that the European finance ministers agreed last Wednesday, during the final week of Ireland's EU presidency, that future bank resolutions cannot follow the disastrous route chosen by Ireland in 2008.
The other main component in the Irish government's policy response was the establishment of Nama. In the report advocating its establishment, the initiative was mooted on the basis that it would address the solvency issues in the Irish banks. This it did not do: the banks had to be recapitalised at taxpayer expense anyway.
The inordinate delay in recognising the extent of bank insolvency, which was not fully recognised until early 2011 after the EU/IMF bailout, has yet to be explored in any official report. Did the establishment of Nama, in contrast to an upfront bank resolution and recapitalisation, add to the ultimate cost?
The Role of the European Central Bank
Communications between the Irish authorities and the ECB have been the subject of intense speculation. The ECB, under its former president Jean-Claude Trichet, consistently pursued policies that were helpful to bank creditors and unhelpful to taxpayers and sovereign bondholders. This policy position has now been effectively abandoned, both by eurozone politicians and by the leadership at the ECB.
It is unknown the degree to which ECB pressure induced the Irish government to pursue policies contrary to Ireland's national interest and whether any of these pressures were improperly applied in a manner exceeding the ECB's statutory remit.
If the ECB is blameless, it is time to establish its innocence through the release of all relevant records and correspondence, including communications concerning the Irish banking crisis between the ECB and the Irish government, creditor institutions in continental Europe and with the governments of France and Germany.
If the banking inquiry is to address these matters, there are several options as to structure and procedure. One option is to rely on a parliamentary committee, as envisaged in Brendan Howlin's bill, currently before the Oireachtas. This was designed inside the constraints arising from the Government's failure to win the referendum restoring investigative powers to parliamentary committees.
The success of the parliamentary committees in both the UK and US suggests this is feasible. But the Taoiseach is right to have left open the option of re-running the referendum. A politicised inquiry by grandstanding deputies would damage rather than enhance the reputation of the legislature and there were intimations of politicisation in some of the Dail exchanges over the last few days.
The public is already aware that the guarantee was issued by the previous government and took due note at the last election. There is hardly any need to pin the tail on this donkey yet again.
A non-parliamentary inquiry may be the better option. One advantage of a non-parliamentary inquiry would be the opportunity to include some foreign experts with experience of recent investigations in their own countries into bank failures, several of which have been impressive, speedy and inexpensive.
Such an inquiry could be headed by a judge of the superior courts and there are now several who have shown themselves both competent and committed in dealing with complex financial cases.
A proper and comprehensive inquiry must allocate responsibility and must have the power to draw conclusions where facts are disputed. An inquiry which can only record agreed 'facts' could be entirely unsatisfactory.
A thorough inquiry should also be an exercise in exoneration. Not all bankers got it wrong and there were public officials who urged caution. The inquiries in the US identified unsung heroes, people within the failed banks and the lax overseers, who sought to limit the damage. They deserve to be identified too.
The Government has legislation before the Oireachtas fashioned after the (narrow) defeat of the October 2011 referendum. The Cabinet should take a time-out and consider carefully whether a refashioned constitutional alteration should be put to the electorate, at zero cost, along with the other referenda due in the autumn.