Thursday 22 March 2018

Authorities rapped in stinging banks report

Finnish expert Peter Nyberg at the launch of his report into the causes of the banking crisis at the Department of Finance in Dublin. Photo: PA
Colm Kelpie

Colm Kelpie

Financial authorities had enough information to be suspicious about the property boom but did not understand it or could not foresee the damage, a report has found.

A study into the banking crisis by Finnish expert Peter Nyberg has found that the risks went undetected or were at least seriously misjudged.

The 156-page report branded their actions and warnings modest and insufficient.

Mr Nyberg found that the regulators and Central Bank also had information that would have raised concerns about trends in the financial markets.

"The relaxed attitude of the authorities was therefore the result of either a failure to understand the data or not being able to evaluate and analyse the implications," the report stated.

Finance Minister Michael Noonan said the report required careful consideration.

"It represents a thoughtful and multi-faceted analysis into the causes of the banking crisis in Ireland and bears careful and measured consideration by all concerned," the minister said.

The report - Misjudging Risk: Causes Of The Systemic Banking Crisis In Ireland - found that financial regulator Patrick Neary chose to trust bank chiefs to make proper and prudent decisions.

And it warned that when problems were identified, the watchdog did not ensure sufficient corrective action was taken.

In one damning line, Mr Nyberg summed up the failures of the top executives in the banks: "It appears now, with hindsight, to be almost unbelievable that intelligent professionals in the banking sector appear not to have been aware of the size of the risks they were taking."

The findings include:

- The speed and severity of the crisis was worsened by worldwide economic events but the cause and scale were down to domestic Irish decisions and actions.

- A systemic banking crisis is caused when a number of important safeguards are simultaneously ineffective.

- There was an apparent inability or unwillingness among banks to remember that lending is a risk, not a sale.

- Many banks appear to have emphasised and valued loan sales skills above risk and credit analysis.

- There was a lack of capping on loan size or on total exposure to connected parties or sectors.

- Management and boards did not fully appreciate and were totally unprepared for the key risks they were exposed to including developer/speculator funding.

Mr Nyberg lashed the financial regulator - headed by Mr Neary until his resignation in January 2009 on a €630,000 pension.

He found no evidence that the watchdog gave the bulk of the problems in the banks the necessary attention and did not appreciate funding and lending risks that had been built up.

Mr Nyberg said these were evident from the returns banks were making to the authorities.

The report said the inquiry had uncovered a lack of scepticism and appetite to prosecute the challenges.

On the Central Bank, headed at the time by John Hurley, Mr Nyberg said it seriously underestimated the nature and extent of the risks.

And the former International Monetary Fund official said the Central Bank offered "only nuanced and somewhat indirect concerns on possible risks rather than study contingent worst-case scenarios".

On the Department of Finance he warned it did not have the necessary professional staff to involve itself concretely in financial stability issues.

Civil servants believed they were there to draw up the rules and let others implement them.

Mr Nyberg said it was surprising that very few people expected the bust or realised anything was wrong until it went belly up.

No one is named and shamed in his report. The criticisms focus on institutions rather than individuals.

Mr Nyberg said the devastating banking and subsequent economic collapse was not the work of one or two people but hundreds of thousands.

He added: "You can say that people were either in denial or they didn't understand what they saw."

The Nyberg report backs the controversial September 2008 bank guarantee scheme - the late night decision which said that the State would protect the banks.

"Given the information provided the Commission understands the Government's decision to provide a broad guarantee for the banks," a key finding said.

The report also noted that discussions on other options before the guarantee were based on "very deficient information".


Mr Nyberg's review of nationalised Anglo-Irish Bank and Irish Nationwide Building Society shows two finance houses run under lax controls.

Anglo - which is costing Irish citizens about €30bn - had deficient risk management and lenders at the bank commonly ignored their own rules on loan policy.

Irish Nationwide - which is costing €5.4bn - had a sub-standard lending wing with files often badly maintained and deals not reviewed.

Even its IT department lacked the necessary knowledge and skills.

"Contrary to public perception at the time, lending at Anglo and INBS had proceeded with insufficient checks and balances during the period," the report said.

Mr Nyberg found that the Financial Regulator hesitated over whether to come down hard on the two lenders after problems were identified.

"Had the Financial Regulator rigorously enforced its recommendations to improve structures and process, it is possible that Anglo would have grown its property lending in a more prudent manner," the report stated.

"Moreover, determined public action by the Financial Regulator early in the period could possibly have meant that other banks' prudential standards would not have deteriorated to such an extent over the period."

Business Newsletter

Read the leading stories from the world of Business.

Also in Business