Monday 23 April 2018

Inquiry a waste of time

Paul McNeive

THE Oireachtas inquiry into the banking crisis will tell us nothing we don't already know and will waste money and energy that should be focused on today's problems. The role of the property market in the banking collapse is even easier to explain and there is a misconception that the property bubble alone brought down the banks.

From the onset of the economic collapse, I have always felt that the country needed to return to the conditions of the late 1990s. That period was one of strong but controllable growth rates, rising employment and a growing population.

Investment in IT and infrastructure was seeing new business parks being developed, new retail schemes and more housing. There was an air of confidence, but it all seemed to make sense and valuations could be supported by hard evidence.

So how did the property market become detached from reality? The biggest single factor was Ireland entering the single currency, which meant European banks could suddenly lend easily into Ireland and interest rates were low as Germany emerged from recession.

European banking rules were changed to allow the banks to count subordinated bonds as half of their 8pc capital adequacy, so they could lend even more. The Irish property market was flooded with cash, so asset prices rose fast.

In the early noughties, economic growth rates fell steadily while property prices rose sharply.

The normal braking system – the Government, the Department of Finance, the Central Bank and the Financial Regulator – proved to be useless, a combination of enjoying their share of the good times and a lack of expertise.

Meanwhile, the banks were enjoying massive profits, not least from lending to both developers and the companies and individuals buying their developments. As the banks chased market share, one of their main selling tools was how quickly they could approve a loan.

The routine process of credit committees examining loan proposals stayed in place for end users of property but some banks began a fast-track approval process for developers, which were the "big ticket" deals. The normal checks and balances went out the window.

Prices for development land began to detach from valuation fundamentals around 2003. Some schemes developed from then were successful because property values kept rising and it became even easier for occupiers and investors to raise finance. However, the only way the schemes could work was if values continued to rise quickly.

By 2006, every major auction or tender of a site was accompanied by an "office sweep" where whoever guessed nearest to the selling price would win the pot. This saw experienced valuers coming up with their most optimistic set of figures possible, adding another 30pc for someone going mad and paying over the odds and then being at least another 20pc short of the selling price.

There was no logic to the prices being paid and the main reason it kept happening was that banks weren't assessing the risks properly and were prepared to lend even more than their competitors.

The Irish bank collapse was caused by a liquidity crisis in the world banking system. Property was only a part of that. Remember that Depfa, many times larger than AIB or Bank of Ireland and headquartered and regulated in Ireland, had to be bailed out by the German government and Depfa doesn't lend any money into property.

The Honohan report has already agreed that the Government had no choice but to guarantee the banks and that decision was reinforced anyway in 2010 when the troika bailout insisted on a guarantee to save the Irish banks and thus the European banks.

What's the point in inquiring into all that again on top of the Honohan, Nyberg and Regling reports?

The simplest thing the Central Bank could do to prevent a repeat of the property bubble is to make it compulsory for banks to secure an independent "Red Book" valuation for every commercial loan. (It's already compulsory for a house mortgage.)

This would greatly reduce the chances of banks lending sums of money that are detached from economic fundamentals and market evidence.

Ireland's national debt is almost €171bn, of which €64bn is the cost of bailing out the banks. In the four minutes you spent reading this column, the national debt increased by another €100,000.

Property values are close to 1990s levels. Producing 1990s growth rates to solve our debt mountain is what the Oireachtas should be putting its energy into.

Irish Independent

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