The Banks created the economic crisis but the Central Bank and the Financial Regulator should have done more, a former Secretary General of the Department of Finance has told the Banking Inquiry.
avid Doyle who was appointed in 2006 said bank lending was “by far the greatest factor” but the Central Bank had placed “undue reliance on the regulator’s assessment” of banks’ financial reports.That was a mistake”.
The Regulator “took the reports of the banks at face value and did not subject their loan books to any meaningful scrutiny. That was a mistake”.
The Department of Finance, he added “was wrong to rely on consensus forecasts for a soft landing.
“It was also wrong to take at face value the assessment of both the Central Bank and the Regulator of the state of the financial sector. I regret this”, he stressed.
“What really caused the banking crisis” concluded Mr Doyle concluded was the €25billion a year average increase in lending by banks to individuals and non-financial business between 1998-2008.
Mr Doyle was critical of his own Department’s reliance on “consensus forecasts” which he repeated “was a mistake and I regret it”.
Three days before the Bank Guarantee, he told the Inquiry, Merrill Lynch presented a number of options to Government.
They advised there had been “a dramatic worsening of market conditions”, liquidity was being affected by a large outflow of funds land they commented that this was the worst credit crisis ever
On the night of the Guarantee, he said, their formal advice was that all of the Irish banks were profitable and well capitalised but liquidity issues were being compounded by investor concerns in regard to the high concentrations of loans for commercial property.
Merrill Lynch he added, said if an Irish bank was allowed to fail without Government intervention the resulting shock would be “very damaging” leading to asset deflation, major write downs by other banks and no access to equity and capital markets.
They recommended “a more controlled interventionist approach” he explained, which included a guarantee for six primary banks.
That night, said Mr Doyle, the question of emergency liquidity assistance was considered for Anglo but it was thought that the chance of keeping this secret was “slim to none.
“Too many parties would have known and the view was that the information would leak with dire consequences.”
The former Secretary General said Bank of Ireland and AIB argued that Anglo and Irish Nationwide should be nationalised and there should also be as guarantee for all banks.
He added that an involuntary liquidation of the two would have created a real danger of a complete collapse in the banking system with all that would entail for the economy as a whole.
He also said that in his view nationalisation might lead to the undermining of the other banks even with a full guarantee and Mr Trichet had told the Central Bank Governor was that no bank failure could be allowed.
In relation to taxation, Mr Doyle said “there is little doubt that tax incentives generally in relation to housing and the incentives for commercial development did contribute to the pressures in the construction sector.
“Other factors driving activity in that sector were reduced interest rates, the availability of loans on easier terms and unreal expectations that investing in property was always going to be a winning formula.”
Loos and uncoordinated planning development controls had also contributed to the problem.