Ex-bank regulator has demonstrated amazing ineptitude
Neary's appearance at the Banking Inquiry suggests he still understands little about banks and their fragility
Published 31/05/2015 | 02:30
'The public sector did not cause the crash". Whenever the issue of public sector pay comes up, in relation to past cuts or, now, when the case is made to increase it, this point is inevitably made. Nobody watching the extraordinary testimony of former public servant, Patrick Neary, to the Banking Inquiry last Thursday could deny that failings in the public sector were a significant cause of the crash.
The performance of the man charged with regulating individual banks during the worst excesses of the bubble was quite shocking in its ineptitude. And to add insult to injury, the complacency he appears to have shown while at the helm of the regulator has changed little since he retired. Mr Neary clearly has not used his ample free time to deepen his understanding of banking or banking crises in the six-and-half years since he was "put on gardening leave" (as he himself described it) just as all the banks he regulated needed vast taxpayer resources to prevent them collapsing.
The main conclusion to be drawn from Mr Neary's testimony is that not only was there was no effective regulation, but, for all intents and purposes, there was no regulation at all. Despite the organisation he once led existing to regulate individual banks, he left banks entirely to their own devices.
Given the many hours of testimony it is not easy to know where to begin, but his replies to questions on commercial property issues are as good as any, not least because it remains poorly understood - including, it would appear, by Mr Neary - that the banking collapse would not have happened if the residential market alone had collapsed (that is because developers, who went bust en masse, defaulted on most of their loans. By contrast, only a fraction of mortgage loans had to be written off because most people could continue to service their home loans - even at the worst of the slump 85pc of the workforce was employed - the corollary of a 15pc unemployment rate).
Despite being so intimately involved in banking, Mr Neary still does not seem to understand the fragilities caused by lending massive sums to a small group of people in the same line of business. When asked specifically about commercial property lending by Senator Michael D'Arcy on Thursday, Mr Neary incomprehensively began his reply by mentioning residential property, going on to say - somewhat incoherently and vaguely - that there had been no bad loans in the banks, implying that because everything had been fine in the past that there was no reason to worry that the situation could sour.
Even when the bursting of the property bubble was in progress, the dangers do not appear to have registered with him. Responding to a question by Deputy John Paul Phelan about the collapse in commercial property prices in the year up to September 2008, given the historical connection between commercial property busts and banking busts, he simply said "it wasn't picked up".
Mr Neary also did his fair share of buck passing on the risks of so much property lending, addressing one inquisitor thus "Senator ... excuse me ... I think we're straying into a financial stability area and this is ... I think, fits comfortably where the Central Bank had a mandate to assess those risks that were out there and to alert the Financial Regulator to the threat posed by those risks".
This is absurd. The Central Bank's job was to look at the overall system. While that institution, just as others, including the IMF, failed to see the fragilities when looking at the bigger picture, Mr Neary was supposed to be most informed about the risks individual banks were taking and inform his counterparts in the Central Bank accordingly, not the other way around, as he claimed on Thursday.
The greatest failing of the regulator was in relation to Anglo Irish Bank. It grew from a tiny, specialised lender to a systemically important bank in a very small time. For comparison, Lehman Brothers, the American bank whose collapse triggered the global financial crisis in 2008, had a balance sheet equivalent to around 5pc of US GDP. Anglo's balance sheet had grown to a size more than 10 times greater relative to Irish GDP (it is worth noting that in his nine hours of testimony Mr Neary mentioned balance sheets - the central issue for financial regulators - a mere five times).
When scrutinised on Anglo, and in particular on the tiny number of developer clients who made up the core of its business, Mr Neary moved from blaming the Central Bank for missing the bigger picture weaknesses, to saying that it was "not the business of the regulator, to ... to dictate to banks or their customers whether or not they can borrow or lend money. I mean, that is a commercial transaction between mature borrowers and lenders".
He introduced this irrelevancy despite his questioner never suggesting that individual transactions would, could or should have been scrutinised. Although raising it could have been obfuscation on Mr Neary's part, it seems more likely to be explained by his continued incomprehension regarding what a regulator should do.
Among the most astonishing comments Mr Neary made on Thursday (and there were a great many) was his statement on his now infamous October 2 RTE Prime Time appearance which illustrated just how shallow was his understanding of the issues he needed to be aware of to do his job.
When asked by Deputy Pearse Doherty for the basis of his assertion on that show that Irish banks were the best capitalised anywhere in Europe, this was his response: "Some weeks before that, I had seen a table that had been presented, prepared, I think, by some international college of regulators, I can't remember where it was, which showed me where our required ratio stood in relation to the other countries in Europe, and we were close to the top of that".
One really has to wonder what Mr Neary spent his working days doing when he ran the regulator, but it does not appear, from this statement and many others, to have been in deepening his understanding of the institutions he was paid to understand.
Among the huge number of issues raised by the ineptitude on display on Thursday is the process of recruitment which led to Mr Neary's appointment, including whether those involved in making the decision actually realised the regulator would be utterly feeble.
The hiving off of the financial regulatory function from the central bank in 2003 was long ago reversed. Although Frenchman Cyril Roux is head of regulation, his boss is the central bank governor Patrick Honohan.
With the latter to retire later this year, it is vital that his replacement is qualified for the role. This column will shortly be returning to the question of who is best qualified for that vital job.