Colm McCarthy

Wednesday 23 July 2014

Party politics threatens progress of bank inquiry

The long overdue probe into one of the world's biggest-ever economic disasters has had a poor start

Published 22/06/2014|02:30

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Jean-Claude Trichet
Jean-Claude Trichet

THE banking inquiry should be about the failures in banking and its regulation, not about party politics. The banking collapse was the largest home-grown economic disaster to have occurred in independent Ireland and one of the biggest banking crashes to have arisen anywhere.

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It looks like the Government is trying to establish that it was Fianna Fail's fault, a proposition already endorsed by the voters at the 2011 General Election. Given the constraints which apply anyway to Oireachtas committees of inquiry, this latest effort to provide the public with a factual narrative about the causes of the disaster has made a bad start.

It is almost six years since the balloon went up in October 2008. There have been several official reports, all useful and interesting in their own ways, about aspects of the affair – as well as numerous books by journalists and academics. But there has been no proper banking inquiry, in the sense of an inquiry into the behaviour inside the individual banks which led to their collapse and the inability of bank regulators and supervisors to avert the looming disaster.

The failure of the political system to arrange for the provision of a comprehensive factual narrative is a damaging omission, feeding perceptions of an establishment cover-up. The unedifying carry on over the composition of the Oireachtas committee suggests, to be polite, a certain lack of seriousness.

The absence of a comprehensive inquiry into the causes of the Irish banking crash and the adequacy of the policy response has permitted a number of dangerous myths to become embedded in the public consciousness. These myths are very convenient for those yet to be brought to account. The most dangerous myths are that nobody saw it coming and that it was caused by forces nobody could have controlled, a kind of asteroid strike from deep space for which nobody is responsible.

There were numerous warnings, stretching back to the year 2000 and even earlier, about the bubbles in bank credit, in-house prices and in public spending. That none of these warnings were heeded does not establish that they were never uttered. There were indeed international circumstances, particularly a worldwide liquidity bubble, which contributed to the Irish crash.

But Ireland managed to have a bigger crash than almost anybody else and it consisted essentially of a national banking system that chose to make enormous and dangerous loans into a domestic property bubble without any adequate response from the regulators.

These myths feed the notion that nothing went wrong here in Ireland and that the banking system will somehow restore itself to health, without the requirement that lessons be learned from the dysfunctional behaviour of bankers, regulators and policymakers.

Deputy Ciaran Lynch's committee has commenced work on its terms of reference. If the committee follows the example of successful banking inquiries in other countries it will first address the question of the time-frame which should be covered. The lending explosion in Ireland commenced back in the late Nineties and the credit boom was widely remarked on at the time and subsequently. The inquiry should reach back to the commencement of the credit expansion. The Irish banking system had experienced not a single serious system-wide crisis during the entire period since 1921.

There had been a few failures of small banks, an insurance crash in the Thirties and a couple of rescues of the state agricultural bank ACC. But nothing remotely approaching a systemic crisis and no reason to expect that Ireland would enter the record books for banking crashes. Indeed the Irish banks were seen as traditional, cautious and dull. There has as yet been no examination of the developments in Irish banking which turned these boring bankers into dashing risk-takers. External events, particularly access to easy funding subsequent to eurozone entry, played a role. But something ominous happened inside the Irish banks and it has yet to be thoroughly examined.

The establishment of a regulator separated from the Central Bank (a decision since reversed) may also have made a contribution. A good starting date for the inquiry would be around 1996.

A practical finishing date would be the summer of 2011, by which time the full consequences of the bank guarantee had played out with the Irish Government strong-armed into bailing out unsecured creditors of banks already closed, courtesy of Jean Claude Trichet's European Central Bank.

In between, the untold stories are really about the behaviour of the banks, of the regulator and of the authorities, in particular of the Department of Finance. There should be a module devoted to each bank, every one of which had to be rescued either by the Irish taxpayers or by their foreign owners.

A crash in which every bank goes wallop is unusual internationally, so there were clearly common features.

But each of the banks was run by adults, and every single one managed to find domestic borrowers who defaulted in sufficient numbers to destroy the bank's solvency. Along the way they abandoned their traditional caution about the rate of balance sheet expansion, about capital adequacy, about the concentration of risk and about liquidity management.

None has offered an explanation of the course of events, not even to their own shareholders, and the most important task of the inquiry is to find out, bank by bank, what went wrong and on whose watch. Who made the decisions to change the traditional policies of these dull, boring banks?

The explanations should be given in their own words. That means that the inquiry should be able to compel witnesses and to discover documents, including board papers, minutes of credit committees, email traffic relating to lending policy and to major lending decisions and problem borrowers. If Deputy Lynch's committee discovers at any stage that it is precluded from pursuing these matters, it should disband and report back to Dail Eireann that a satisfactory Oireachtas inquiry is not possible. There should also be a module devoted to the failures of bank supervision, so vividly illustrated again by the unsatisfactory performance of witnesses at the recent Anglo trial.

It is clear from the apparently chaotic events of September and October 2008 that the Department of Finance was not well prepared for the crash when it came, and the performance of the department should constitute another module. The Government's dazed response to the crash was akin to the behaviour of an ambush victim, in part due to the succession of complacent reports from international agencies, including the EU Commission, the ECB, the OECD and (I regret to say) the IMF, in the years leading up to the bubble-burst. Their poor monitoring should constitute another module. External monitoring is taken seriously in small countries, and when it feeds complacency it provides the authorities with the opportunity to wave away domestic worry-warts, of whom there were plenty.

Auditors operate, mainly on slim margins, in accord with international accounting standards, and produced questionable reports on the solvency of Irish banks before and, remarkably, after the balloon went up.

There should be a module devoted to auditors, including internal as well as external auditors, and to the adequacy of the international accounting standards which guide their operations.

The costs of the Irish banking bust, for which the primary responsibility is domestic, were exacerbated by the behaviour of our European 'partners', in particular the ECB. Ireland has unfinished business with the ECB, which imposed a bail-in of Irish taxpayers designed to re-assure lenders to the rest of the European banking system. Ciaran Lynch's inquiry should invite the ECB to explain its actions and should be alert to the fact that, under explicit provisions in the ECB statute, its acts are subject to judicial review at the European Court of Justice.

Finally, the crisis response of the Irish authorities imposed excessive Exchequer costs, including a blanket guarantee, recapitalisation and a bad bank, and this should occupy another module

The committee, if it is able to navigate through this long list of modules, should draw lessons and should make recommendations. Ireland needs a banking system which extends credit prudently to plausible borrowers, without funding asset price bubbles and courting bankruptcy. It also needs supervisors who are alert to emerging systemic problems and who enjoy a productive relationship with the ECB. It is simply not true that the system has been fixed and recommendations for a better banking policy are overdue.

Sunday Independent

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