Monday 23 July 2018

We are as naive about risks of another reckoning as we were at start of crash

Northern Rock customers who feared for their savings queue up to withdraw cash at the beginning of the credit crunch in 2007
Northern Rock customers who feared for their savings queue up to withdraw cash at the beginning of the credit crunch in 2007
Richard Curran

Richard Curran

The first dominos of what became the financial crisis began to topple this month 10 years ago. On August 9 2007, BNP Paribas froze withdrawals from funds it held which had been hit by the American sub-prime crisis.

In London it quickly became known as the "credit crunch" - a quintessentially English example of understatement with a word that sounds like a minor inconvenience or pinch somewhere unpleasant.

Within weeks it hit the streets of Dublin, when there was a run on Northern Bank as Irish customers queued to withdraw some of their €2.4bn of savings. The run on the bank was dramatic, with around €3bn of Northern Bank customers' savings withdrawn in just four days in Ireland and Britain.

I remember getting a call from a retired media colleague in September 2007 asking me whether he should get his money out of Northern Rock. The British government had underwritten all of its deposits and I assured him there was no need to bother standing in the rain at the top of Harcourt Street to take his money out. It was safe since the government had stepped in.

The very next day I was driving by the Northern Rock office in Dublin and saw him and his wife standing in the queue. Fear had taken over. He clearly had as much confidence in my advice as he did in Northern Rock itself.

Yet it is striking to think how slow we were in Ireland to act. The credit crunch had to become a full blown crisis in Anglo Irish Bank the following summer by the time our regulators and politicians took it seriously.

We actually didn't understand it very well. Any barman, taxi driver or barstool pundit today could tell you what went wrong in the crisis and how banks became too reliant on borrowing from other banks abroad to fund their lending.

But it wasn't always that well understood. Here is a quote from a newspaper report 10 years ago, after Northern Rock imploded.

"A Northern Rock-style scenario is unlikely to happen to any Irish banks because they obtain their money from a wider variety of sources in the financial markets and have access to a much larger pool of cash within the European Central Bank (ECB)." Indeed!

Here we are 10 years and tens of billions of euro later, still dealing with the fallout of the crisis. In the UK action came quickly. Parliamentary hearings were held into what went wrong, recommendations were made and many have been acted upon.

In Ireland the wheels moved a lot more slowly, given that we had our banking inquiry hearings seven years after the crash and the Oireachtas committee was legally prohibited from making findings of fact against anyone.

Looking at the strength of Central Bank regulation today, it might appear that we have learned a lot from the crash. But the jury is still out on that.

Some of the change is cosmetic. We have a chief executive of AIB whose pay is not allowed to go above €500,000 per year, and a retired former chief executive of Bank of Ireland whose pension is reported to be €650,000 per year.

We have a Central Bank inquiry into several former executives at Irish Nationwide Building Society, including an 80-year-old Michael Fingleton, who is being asked about processes and paperwork on loans he gave out 12 years ago. It is necessary but hardly ideal.

We have a dysfunctional housing and rental market, which emerged right under the noses of our politicians after the recovery began but which they have failed to fix.

The big and obvious question is could it all happen again? Yes, a banking crisis could happen again because the primary driver of it was the culture of banking organisations. There is no real evidence this had changed substantially. The mechanics of a bank failure would likely be different next time round but the vulnerability is still there.

The exchequer crisis which followed the banking meltdown could easily happen again. There is a tighter rein being kept on public spending than in the boom. However, we are playing by Europe's rules and the money isn't there to spend. Any money that has been there, has actually been spent.

Politically, we have not changed one iota. Our political culture still thinks too short term and has completely failed to see the value that having an affordable place to live can bring to our country socially and economically. Housing is still seen as a reflection of wealth or a source of wealth rather than a basic right.

We still don't do inquiries very well. We have too many toothless inquiries which get caught up in the inevitable legal rights of due process. Preventing the Banking Inquiry from making findings of fact against anyone was a failure of our system and ultimately an embarrassment.

We still don't do regulation well despite the massive expansion at the Central Bank. Quinn Insurance's collapse, in a regulated sector, will cost us around €1.1bn. Yet we are told there is still understaffing in insurance regulation within the Central Bank.

It is also ironic that Sean Quinn, whose losses on unregulated CFDs in Anglo Irish Bank cost the taxpayer around €2bn, has now set up an online gambling business - a sector regulated by legislation which dates back to 1956. Our gambling regulation laws were described almost 10 years ago by an Oireachtas report as a "relic of social history".

He isn't the first person connected with the crash to find a new home in gambling. Andy Hornby, former CEO of HBOS in the UK became chief operations officer of Ladbrokes Coral. Former Ulster Bank CEO Cormac McCarthy became CFO of Paddy Power.

Some bankers who clearly broke the law have gone to prison.

Two former Anglo Irish Bank executives and one former IL&P executive have been handed prison sentences. There were also findings of guilt in relation to organising loans at Anglo Irish Bank for the Maple Ten.

The ODCE debacle in the case of Sean FitzPatrick shows how little we have learned.

The scale of unfinished business around the crash is enormous. We see it in the housing crisis. Also 10 years ago this month our national debt was €39bn. Today it is around €200bn.

The Government has yet to make a decision on whether to cut a deal with Sean Quinn and his family around their €2bn worth of legal actions against IBRC and the bank's various cases against them. That will be a highly controversial decision if and when it is made.

Much of the ire has gone out of people's feelings about the nature and origins of the crash that began 10 years ago. Some have anger fatigue and want to get on with their lives.

There is lots to be positive about in the performance of the jobs market and the clean-up. Furthermore, we have so far got back around half of the €20bn pumped into AIB. Today, the state's remaining stake in the bank is valued at €10bn. Having got back the funds put into Bank of Ireland, the state's 15pc shareholding is worth around €1bn.

The worst thing we can do is convince ourselves we have recovered. We are recovering but we are not there yet, especially when all of our economic achievements since the crash have been built on extremely low interest rates that cannot last forever.

Ten years ago, in one day, markets were shocked to find the ECB had pumped an "astonishing" €94bn into money markets. Yet today, it is still supporting recovery by pumping €60bn a month into the system with QE.

As the ECB grapples with how and when to step back from that, it is hard to see how there won't be a reckoning.

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