Thursday 14 December 2017

Banking Inquiry: Blanket guarantee was worst decision in history - Bill Black

Clodagh Sheehyand Daniel McConnell

The decision to issue the 2008 blanket bank guarantee as been described as the worst decision in history because it "sank an entire nation."

Outspoken US banking expert Bill Black in evidence to the Oireachtas Banking Inquiry was scathing in his criticism of the decisions taken by the Fianna Fáil led Government.

We are still vulnerable to the practices which caused the banking crisis, an international expert on white collar crime has told the Banking Inquiry.

Financial regulation has not been sufficiently transformed to protect us, Prof Bill Black stressed.

The man who wrote the book “The Best Way to Rob a Bank is to Own One” told the Inquiry he was  offering his services free to train Irish regulators and prosecutors to deal with our economic problems.

Prof Black is an expert on white collar crime and public finance and recently helped the World Bank develop anti-corruption initiatives.

The Associate Professor of Law and Economics at the University of Missouri-Kansas City said banking crises follow characteristic patterns that could be identified before the crisis stage.

Funding institutions likely to cause massive losses could be identified and action taken while these institutions were still recording massive profits.

He described the recipe for disaster as having four key ingredients - grow like crazy, make absolutely terrible loans, extreme leverage and set aside no meaningful loss reserves.

“Pathetic underwriting” was also a common feature of banking crises and “if you look to the US this is precisely what we did.”

Prof Black explained that if people had followed the advice they give their children about things seeming to be too good to be true “if we had followed this in banking regulation there would be no crisis”.

A dynamic identified in Jonathan Swift’s book Gullivers Travels in the 1700’s still held true, he said.  ‘If cheaters gain a competitive edge then bad ethics will drive good ethics out of the market.’

He described the sub-prime crisis as more “the liars loan crisis” but said his message was one of hope.

In the States measure had been taken to successfully prosecute over 1,000 people in relation to a banking crisis “so you can succeed”.

The Irish Bank Guarantee was the “most destructive own goal in history” said Prof Black.

To give an unlimited guarantee with no real facts about the situation “turning a banking crisis into a fiscal crisis”

He also said you would “never ever ever bailout subordinated debt holders. To my knowledge.

The Irish banking crisis was “the most easily preventable” crisis “you could ever imagine” by even  having  competent bankers and competent regulators.

Mario Nava is Director for Regulation and Supervision of Financial Institutions at the European Commission was also before the inquiry today to advise on bank supervisory policies, systems and practices in the run up to the financial crisis, the lessons learned and the improvements made in recent years.

 

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