Tuesday 16 January 2018

Nationalisation of Anglo 'might have been viewed more negatively than guarantee'

Former top bank chief gives evidence at Banking Inquiry

Clodagh Sheehy

The government wanted to avoid the nationalisation of Anglo Irish Bank on the night of the Bank Guarantee, a former Director General of the Central Bank has told the Banking Inquiry.

Tony Grimes, in a heavily redacted statement, said the nationalisation of Anglo “might have been viewed by the markets more negatively than a guarantee”.

He denied that the Government and Central Bank knew that two financial institutions were insolvent that night and that the Guarantee was given to allow them survive.

The critical requirement on the night said Mr Grimes was to “find a solution that would prevent contagion from Anglo to the remainder of the domestic banking system”.

Mr Grimes stressed that “in these circumstances, a guarantee of bank liabilities seemed to offer the best prospect of avoiding a systemic banking crisis with all the attendant costs”.

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He told the inquiry he had been present in government buildings for two meetings 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”.

He said that 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”.

Mr Grimes described how the first meeting he attended that night involved the Taoiseach, Brian Cowen, Minister for Finance, the Attorney General and officials from the Departments of the Taoiseach and Finance, the Financial Regulator and the Governor of the Central Bank.

That meeting had been told that Anglo would have been unable to open the following day without emergency lending from the Central Bank.

He said arrangements had been made to provide funds to Anglo if necessary.  “However the latter was regarded as a short-term measure only and one that, if made public, would likely exacerbate the liquidity problem as a whole.”

The main concern, he added, was to avoid contagion from Anglo to the other domestic banks and especially the two major banks.

Mr Grimes said he was not present when AIB and Bank of Ireland agreed to provide temporary funding to Anglo.

He took part in one further meeting that night after the Guarantee decision “at which some of the more technical aspects of the guarantee were discussed”.

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Mr Grimes fully accepted that assumptions underlying stress tests in the run up to the crisis were insufficiently demanding and did not reflect the changing conditions in the global markets that were beginning to emerge.

“In my view, no stress test conducted at that time would have reproduced the liquidity conditions which, in fact, prevailed from the late summer and autumn of 2008”

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