Businessman Sean Quinn’s exposure to Anglo Irish Bank could have affected the stability of the whole financial system, the Banking Inquiry has been told.
Former Central Bank director general, Tony Grimes said the bank was aware of the risk from early 2008.
He told Fine Gael Deputy Kieran O’Donnell that the Quinn Group issue was not a factor in the Bank Guarantee and was not raised at any meeting he attended that night.
Mr Grimes said the Quinn Group issue was discussed “in general terms” at a meeting in July 2008 but it was his understanding that the Central Bank was aware “a month or two earlier”.
He confirmed to Fianna Fail Deputy Michael McGrath that he felt it was “highly unusual” that Anglo was funding margin calls for Sean Quinn when he was one of the biggest investors in the bank.
Mr Grimes agreed it was “a big issue” but he could not recall if he expressed his opinion at a meeting between the Central Bank and the Department of Finance in July 2008.
At that meeting the problems at Anglo were raised in general terms of the difficulties caused by Contracts for Difference, the need to unwind them and the risks if shares were suddenly released to the market.
He also stressed that while the Central Bank would have been concerned about the possible implications for shareholders and liquidity, it regarded the issue as mainly a regulatory one.
As such any direct action would fall within the realm of the Financial Regulator.
The former Director General described how the outflows of corporate deposits at Anglo in the two weeks from mid-September were particularly severe and “regarded as unsustainable.
“The system could not continue on this basis without the banking system imploding. An urgent and decisive intervention was required.”
They needed a solution that would “not just finance the outflows but change the dynamic of the unprecedented scale of liquidity losses and prevent contagion from Anglo to the rest of the system”.
The critical requirement on the night of the Guarantee, said Mr Grimes was to “find a solution that would prevent contagion from Anglo to the remainder of the domestic banking system”.
He had been present at meetings in government buildings on the night of the Guarantee.
“While earlier having had some doubts, in principle, about guarantees of this type, in the circumstances facing the financial system at end September I concluded that it was likely to be the most effective option”.
Mr Grimes denied to Socialist TD Joe Higgins that three days before the Bank Guarantee it was known at the highest level politically and financially that two banks were insolvent.
The Financial Regulator, said Mr Grimes, had told an informal meeting with the Taoiseach, Central Bank and National Treasury Management Agency on September 26th 2008 that two banks were not insolvent but “illiquid”
According to Mr Grimes a Department of Finance official said one bank had a €2bn hole and another had one of €8.5bn but no-one left the meeting thinking the banks were insolvent.
The Inquiry also heard how preparations for a Bank Guarantee began almost a full year before it was introduced, with the authorities preparing in late 2007.
A contingency plan was prepared after the collapse of Northern Rock and by February 2008 they had moved beyond a stage of thinking the crisis might never happen to realising they should be prepared.
Mary Burke, head of banking supervision at the Irish Financial Services Regulatory Authority said
regulatory revision would not have been “a Panacea” given the nature of the issues which arose.
She suggested the regulatory powers available to the Financial Regulator and the Central Bank were “broadly sufficient.”
She criticised staffing levels in the Banking Supervision Department (BDS) and said two requests for an increase in staff had been rejected.
“It was not a question of somehow multitasking - it was an unrelenting onslaught of demands with staff working long hours which ultimately became unreasonable and unsustainable,” she added.
They could and did identify serious issues within banks but did not have the resources to follow through, challenge or force.
They did not have the resources to take administrative sanctions, she said.
Mr. Con Horan, former Prudential Director of IFSRA said he was the exception to all the regulators who failed.
It was known within the Central Bank that he held views “contrary to the group-think on property lending that existed in Central Bank and Financial Services Authority of Ireland.”
When he took up office he introduced stringent measures to curb high loan to values but he regretted that this were introduced too late to prevent the crisis.
“With hindsight, it is obvious from what occurred that the approach adopted in lreland was inadequate and failed to deliver a safe and sound system.
“This is a matter of deep regret. The system afforded far too much scope to the banks and placed too much faith in the boards and management and their control systems for risk management, internal audit and compliance.”