Regulators had 'minimal' contact with AIB over loan policy in 2007
The Central Bank and Financial Regulator had "minimal" contact with AIB over its lending policy in 2007, and it was not until late 2008 that they began to get heavily involved in the bank's loanbook, according to AIB's former chief credit officer.
Kieran Bennett told the Banking Inquiry that, to his knowledge, "during 2007 until late 2008" there may not have been any loan portfolio reviews conducted by the Banking Supervision team in the Financial Regulator or Central Bank" (FR/CBI).
"In fact, up to late 2008, the degree of contact/engagement from the FR/CBI was minimal," he said. "It wasn't until the fourth quarter of 2008 at the earliest that there was any serious engagement from (them) when they had personnel attending various committees".
Mr Bennett's written testimony - published online yesterday - reinforces the perception that the regulation environment around the banks was too light at that time.
Mr Bennett also said that lending limits in AIB were dramatically increased in October 2006, to the point that only loans of more than €750m had to approved by the board.
Up to October 2006, any loan over €250m had to be presented to the board for approval. However, in October that limit was removed.
Under the new policy, loans of over €500m were approved personally by the chief executive, and only loans of over €750m went to the board.
On how the bank carried out valuations on property being offered as security on a loan, Mr Bennett stated that "almost without exception, a full (accredited) valuation was not sought".
"Rather a 'desk top' or 'drive by' valuation was provided," he said.
Mr Bennett added: "A second valuation was almost never sought and valuations were rarely updated".
In his evidence to the inquiry, former AIB board member Jim O'Leary admitted the atmosphere within the bank was "collegial" and the board should have held to account better the bank's governance and risk management policies.
"Looking back on it now through the prism of crisis it is easy to conclude (obvious almost) that in general the INEDs (non-executive directors) were too respectful of senior management, too willing to accept management explanations and too trusting of management assurances (in particular those assurances that were provided in respect of the monitoring and management of risk)," he said.
In his witness statement, he said the board made "some big and very costly mistakes" and singled out the lack of oversight with regard to home loans.
"The biggest and most costly of them was to pay insufficient attention to the bank's large and growing property portfolio and to accept too readily management assurances that the risks attaching to this portfolio were being properly measured, monitored and managed," he said.
Sally Burke of the investment bank, Merrill Lynch, which provided advice to the Government on how it might handle the struggling banks, said the bank's team told the Government that a blanket guarantee was the "most decisive and impactful decision from the market's perspective".
"It would stem outflows (from the banks) and may result in inflows," the bank said.
However Ms Burke made clear that Merrill's presentation also highlighted the risks around the idea of a blanket guarantee. In particular, "whether the market would find it credible given its scale, the question of whether the Government could afford the guarantee...the impact it may have had on Ireland's credit rating...and how long it would have to last".
Merrill Lynch International (MLI) advised the Government. Another part of the huge firm, Merrill Lynch International Bank (MLIB) asked to be covered under the Guarantee.
MLIB's former country manager for Ireland, Michael Ryan, said he requested for his division to be covered by the Guarantee independently of what MLI were advising the Government. He met the minister for finance in November 2008.