Tuesday 21 November 2017

Banking Inquiry: Irish banks were concerned about poor scrutiny in the sector two and a half years before the collapse

Professor John FitzGerald arrives at Leinster House to give evidence before the Oireachtas Banking Inquiry
Professor John FitzGerald arrives at Leinster House to give evidence before the Oireachtas Banking Inquiry
Professor John FitzGerald arrives at Leinster House to give evidence before the Oireachtas Banking Inquiry

Clodagh Sheehy and Niall O'Connor

Irish banks were concerned about the poor scrutiny of their own sector a full two and a half years before the collapse, the Banking Inquiry has been told.

AIB got in touch with Prof John FitzGerald who was a research professor at the ESRI in early 2006 because of these concerns, he said.

A senior bank economist phoned him and “my understanding was they felt the stress-testing was not stressful enough - kind of ironic,” he added.

He described how he met with the senior economist and another staff member and he believed their approach was coming from “a more senior level than the economists” and it had “first primed me to be concerned in this area.”

Prof Fitzgerald said he had explained to the bankers that the ESRI had already put together a series of macro-economic scenarios on CD which were publicly available and he referred them to this.

He told Fianna Fail deputy Michael McGrath he was subsequently approached by Ulster Bank and PTSB for a similar assessment.

On foot of these concerned he approached the Central Bank by email in 2007 saying he wanted to talk to them about it but despite emails over several months  “for various reasons” the meeting never happened.

Of the ESRI he added “clearly we had put out our warnings. Nobody in the political system seemed to be interested.

“My impression was that people weren’t interested in taking the punch bowl away.”

“What we do know is that the Regulator and the Central Bank were asleep on the job and did nothing,” he said.

He took responsibility for not examining bank data before  “catastrophic” collapse of the financial sector at the end of 2008.

“Its a regret” he added. “Not seeing the unsound nature of the banking sector was a bad mistake”

"I made a mistake.  I thought that at that stages house prices had turned the corner, they were coming down gradually and I thought the odds were that we would reach a soft landing.  I was completely wrong."

He felt if the ESRI had properly scrutinised the balance sheets they would have detected a problem.

Referring to the property bubble as  a “tumour which grew and grew and squeezed the rest of the economy” he said the number of houses being built was running ahead of the population and this had led to the bubble.

At the time, however, “the people of Ireland did not want to change. The information was out there. You couldn’t miss what we were saying” but people went ahead and bought houses and the government behaved as if there was no tomorrow.

On the Bank Guarantee while it was not something he had researched “we now know it was the wrong decision”.

He described it as “not the best outcome for Ireland but  something had to be done”.

No-one from the Department of Finance had consulted him personally or the ESRI about the guarantee. Relations with the department were “frosty’ at the time, he added.

Prof FitzGerald’s view of Nama was: “I think it has done a pretty good job.  It looks as if the State, instead of losing money, is going to get it back.  I think it has helped in terms  of the recovery and sorting out the problem.

He also said concerns about Nama had “turned out to be totally wrong”.

The bailout was something “we have got broadly right” in that Ireland, unlike Spain had “under-promised and over-delivered”

He stressed that when it became clear that €64billion was needed by the banks “a bailout became essential”.

Luckily interest rates were so low “the burden of the debt has turned out tho be much lower than anticipated.”

His assessment of the current situation is that “we are in a structured surplus” and “we do not need further cuts”

He was concerned that there was a need to improve the method of assessing fiscal policy to provide better guidance in the future.

Asked by Sen Susan O’Keeffe if he had every considered resigning when the financial crisis hit he responded: “No I felt I had done a reasonable job over the previous 30 years I looked at the fact that nobody else had done a better job.”

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