Bank Inquiry fails to shed light on shortcomings of individual lenders
While all banks were mismanaged before the crash, some performed far worse than others, writes Colm McCarthy
The Irish banking bubble had been a decade in the making when it began to deflate almost eight years ago. In what had been a cautious and conservative banking system, every single bank went wallop and all required guarantees and capital injections.
The worst banks lost eight or 10 times their capital; all the others lost enough to face immediate closure without support from the State or their foreign parents. Not a single detailed report is available into the failings of even one of these banks.
All of the official reports have interesting things to say about the banking system in the round and its spectacular collapse, but there has been nothing exploring the failures on a bank-by-bank basis.
In other common law jurisdictions, the investigators, including parliamentary committees, have been free to explore the failings in financial institutions case-by-case. The report of the Banking Inquiry, as feared, has failed entirely on this score.
The report sheds no light on the manner in which each bank mismanaged liquidity and vaporised capital to the point where the State had to find €64bn in rescue funds for the Irish-owned banks alone.
Non-Irish banks operating here were rescued at additional huge cost by their British and Danish parents, themselves in receipt of taxpayer support in those countries.
The public has been persuaded, accurately, that 'the banks' went bust and brought down the broader economy. But while all banks were mismanaged, some performed far worse than others. For example, AIB made far more bad loans than Bank of Ireland, its near-identical twin, which nonetheless lost enough to wipe out shareholders.
Of the two small building societies, Irish Nationwide lost far more than Educational. None of the official reports, of which the Oireachtas inquiry is the fourth, has drawn any distinction between the performances of the various banks. There are no rosettes to be awarded to any Irish bank but some were clearly the victims of worse management than others.
This continuing failure to explore what went wrong, bank by bank, ensures that lessons go unlearnt and that bank management and boards have been held publicly to account only in the aggregate.
This is the prime failing in the latest response to the Great Irish Banking Bust, one of the most damaging bank crashes to have occurred anywhere.
The report finds that the bank guarantee was a mistake, that the bank supervisors were complacent, that the government was poorly prepared and that the European Central Bank (ECB) behaved improperly.
All of these things were well understood before the inquiry commenced its work. The Oireachtas has been unable to resist the continuing efforts of m'learned friends in the Law Library to deep-six a proper investigative role for parliament.
The effect of their success has been to protect corporate and professional reputations from independent scrutiny and accountability. It is an achievement of sorts to have delivered any report at all.
The Taoiseach has responded by promising to re-visit the constitutional constraints on parliamentary investigations, and he is right to do so.
A veil has been drawn in Ireland, courtesy of an idiosyncratic legal notion of a right to reputation, over the failings of banks and bankers which have been fully ventilated in other common-law jurisdictions. The inquiry's focus on the failings of the ECB has been criticised on the grounds that it seeks to offshore responsibility for the Irish disaster.
There would have been no opportunity for the ECB to exacerbate the Irish crisis had Irish banks and their regulators not permitted the credit bubble to inflate in the first instance. The ECB did not create the banking mess in Ireland.
Moreover, the cost imposition on the Irish Exchequer arising from improper ECB actions is dwarfed by the contribution of domestic errors to the public debt explosion.
So any narrative seeking to apportion some responsibility to the ECB cannot exonerate Irish failures. But it is abundantly clear that the ECB behaved improperly, arguably illegally, towards this country and Ireland is not the only victim of ECB arbitrariness: the governments of both Italy and Spain were improperly pressured as a matter of public record and the banking systems of both Cyprus and Greece were closed down by fiat of the ECB's Governing Council. As the ill-fated guarantee of bank liabilities was approaching its expiry date during the summer of 2010, the Irish authorities indicated their intention to impose losses on the holders of unsecured bank bonds which did not enjoy any State guarantee.
They were perfectly entitled to do so as was the new Government in March 2011 - there was no European agreement in place protecting these bank creditors and there is none today.
But the ECB had the capacity to interfere in what should have been a purely domestic decision on bank resolution. The ECB is required to sanction the extension of emergency funding by national central banks to their domestic banking systems.
The rules about emergency liquidity assistance (ELA), a credit risk for the national central banks and not for the ECB, are opaque and murky.
The ECB has withdrawn, or threatened to withdraw, ELA sanction on several occasions, most recently in the case of Greece on June 28, last year.
That decision resulted directly in an extended shutdown of the Greek financial system. So the threats made to Michael Noonan, and earlier to the late Brian Lenihan, were credible and serious and neither of these Irish finance ministers should be faulted for choosing the least risky course.
But the threats went beyond the ECB's legitimate powers and should never have been made. The justifications advanced by the ECB then and since are essentially twofold: that haircuts to these bank creditors would have been financially damaging to Ireland and the Irish banks, and that there was a risk of contagion to bank bond markets elsewhere.
Imposing additional debt on a state already in an IMF programme, in the form of payouts to creditors of failed institutions to whom it did not owe any money, worsened the ability of that state to carry the debt burden and to further support the banks. This is not complicated.
The Oireachtas inquiry entertained former ECB President Jean-Claude Trichet in Kilmainham, Dublin, courtesy of a curious event staged by the Institute for International and European Affairs.
Trichet maintained, in effect, that the imposition under ECB threat of these avoidable extra debt costs was somehow in Ireland's interests. It is possible, but unlikely, that Trichet actually believes this.
More likely is that he feared haircuts on senior bank bonds in Ireland would weaken the access of European banks to the debt markets.
The IMF's AJ Chopra, who had the courtesy to turn up and give evidence under oath at a formal sitting of the inquiry, expressed the view that Trichet's fears of contagion were exaggerated.
In any event, if the object was the reassurance of lenders to continental European banks there is no basis for imposing the cost of that reassurance on an individual member state.
The ECB already had form on this score. In May 2010 a sovereign debt haircut for Greece, since conceded, would have spared that country much subsequent trauma, and some IMF staff favoured an early haircut. But they were resisted by Trichet and the French and German banks, large holders of Greek exposures at the time, were spared.
The ECB is perfectly entitled, indeed is obligated, to worry about the large French and German banks. But it enjoys no powers in its statute to impose the costs of their protection on Greece, Ireland or any other member state.
Trichet has also been accused of 'bouncing Ireland' into the 2010 troika bailout. This is unreasonable.
The resort to official lenders had become inevitable, but the enforced 100pc payout to unguaranteed and unsecured bondholders in bust Irish banks was a policy choice by the ECB and it was a mistake. It added debt to a fragile Exchequer and endangered public support for the adjustment programme.
The Irish Government has chosen not to challenge the actions of Trichet's ECB at the European Court in Luxembourg.
It had bigger fish to fry, in negotiating reduced interest rates and longer maturities on the European portion of the official lender support and in restructuring the promissory notes on more favourable terms.
These fish have now been successfully fried and the next government should reconsider the options for legal action.