Tuesday 23 January 2018

Banking inquiry: 'Anglo Irish Bank insolvency would not be detected today '

A worker removing the Anglo Irish Bank sign from outside the bank's headquarters in St Stephens Green in 2011
A worker removing the Anglo Irish Bank sign from outside the bank's headquarters in St Stephens Green in 2011

Clodagh Sheehy

The insolvency of Anglo Irish Bank would not be detected today because auditing standards had not changed in the intervening years, the Banking Inquiry has heard.

Professor of Accounting at UCD, Eamonn Walsh told Deputy Pearse Doherty that using today’s standards Anglo would still appear as if it were on course for a profit of almost half a million euro.

“There has been no change in standards so one could reach much the same conclusion today as one would have reached in 2008”, he added.

The inquiry has also heard how inaction by both the Central Bank and the Banking Regulator had resulted in “costly failure”  and how political bias may have unduly influenced the decision to bring in the Bank Guarantee.

Economics Professor Gregory Connor from NUI Maynooth said the Bank Guarantee was “clearly wrong on balance”

He added “I think there was political bias. I suspect they thought what’s best in our political situation” instead of looking at it from the perspective of the public.

The property development community, he said, “had a very strong relationship with members of the Dail” and he suspected that that too played a role but this area was beyond his expertise.

Prof Connor described “light touch banking regulation” in this country as the “second worst in the world” - second only to Iceland at the time.

The Irish Central Bank and the Regulator, he said, should have blocked the enormous growth in property lending by domestic banks and the excessively fast debt capital inflow at the time.

Both of them “should have said stop”.

“In terms of preventing the Irish crisis this inaction was a very costly failure”.

Prof Walsh explained how at the time of the banking crisis “unfortunately accounting standards were especially unhelpful and served to obscure  the underlying nature of both profits and loan portfolios to external investors and lenders”.

Asked if external auditors could have flagged the problems, he said that audits were largely concerned with whether financial statements had been prepared in accordance with accounting standards.

“I think it would be true to say auditors are really quite limited.”

Signals from auditors  “are going to come late in the day - really just at the stage where the ship is sinking and has hit the bottom of the sea bed.”

Prior to the banking crisis, he said, it was widely believed that Irish banks were highly profitable and that they had sufficient cushions but by 2009 it was apparent these were “entirely inadequate”.

The “seismic” shift  had come when the property sector changed from being dominated by residential mortgages to 50pc commercial loans.

The problem was worsened by the fact that a significant proportion of these loans were concentrated among a relatively small number of borrowers, he stressed.

The UCD professor also pointed out that while the accounting rules had not been changed since 2008 there was now provision for future change in 2017/18 which would require banks to record some sort of estimate of expected losses so problems could be recognised earlier.

Prof Connor told the Inquiry he believed the economic crash was perhaps the one time where “some single individual or some small group could have stopped the banking crisis from happening.

“If one or more senior officials in the Irish Central Bank had shown the wisdom and strength of purpose” to block the debt capital inflow or the risky property development lending “the crisis would not have happened.”

The  expert on portfolio risk analysis and security market pricing, said Irish bank managers “are quite correctly blamed for irresponsible lending policies during the credit bubble”.

He also suggested that information from the banks to government at the time “may have been deliberately embellished”.

The shareholders too “pressurised bank management to pursue risky strategies” with an expectation of rapidly increasing annual earnings and dividends.

Economists should have “spoken more forthrightly” and had to share some of the blame.

The blanket Bank Guarantee “to an insolvent banking sector” was also “a very costly error”.

At the time, he stressed, the domestic banks on aggregate were insolvent and the two most insolvent banks,Anglo and Irish Nationwide, should have been left out of the guarantee and restructured.  Giving them the guarantee was “a very costly error”

In response to questions from Deputy Michael McGrath said he felt “quite strongly” that there were senior people at Anglo and Irish Nationwide banks knew the banks were insolvent and the regulatory authorities should also have known.

 

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