Why inquiry must look beyond night of bank guarantee
The inner workings of each individual bank is the black hole at the heart of the narrative.
Deputy Ciaran Lynch is to chair the long-overdue Oireachtas banking inquiry and the other eight members are to be announced next week. The committee will first work on its terms of reference, and actual hearings will not commence until the autumn, six full years since the balloon went up.
Political exchanges have concentrated on responsibility for the bank guarantee announced on September 30, 2008 and the inquiry should, of course, explore that decision fully. But it is important that the inquiry deals also with events prior to the guarantee, and with subsequent events.
What Caused the Banking Bust?
Despite regular assertions that there is nothing still to be discovered about the causes of the Irish banking crash, there has been no explanation whatsoever as to what went on inside each individual bank. Aside from incidental revelations during court cases and the best efforts of academics and journalists, the black hole at the heart of the narrative is the internal workings of each bank. Every single bank went under, itself a remarkable feature of the Irish crash, but they went under in different ways and to hugely varying degrees. Some lost over 50 per cent of the loan book, others considerably less although all lost enough to render them unsustainable without State rescue. Some went down mainly through mortgage lending, others through commercial property, some had a foot in both graves. None of the bank boards has offered an account of what happened, even to their own shareholders who have been wiped out to the tune of tens of billions.
The Irish banks went under in a very old-fashioned way, a 19th-Century banking bust. They incurred the losses mainly through lending to Irish people in Ireland, their core activity for generations. There was virtually no exposure to fancy credit derivatives concocted on Wall Street, no speculative lending to blue-sky adventures in exotic corners of the globe. The banks went bust without venturing outside their traditional business. And every bank did it, including the traditionally conservative and centuries-old clearing banks. Within each bank, what risk management systems were in place? Were there board presentations about credit quality along the way? If so, it is clear that they were inadequate and misleading, since the extent of the loan losses came as a genuine surprise to both boards and senior management in most of the banks. Were these people misled, deliberately or otherwise?
It suits lots of people to pretend that no warnings of impending trouble were sounded, notably people who neglected to give warnings themselves, or to hear the many that were, in fact, given. The collapse arrived, in their rewriting of history, suddenly and unannounced in September 2008 like a meteor strike from deep space, randomly settling on Ireland as the impact point. The inquiry should explore whether any warnings were voiced within the banks, and whether the banks paid any attention to the warnings available from other sources. It should also explore the failure of international monitoring by bodies such as the European Commission, the IMF and the OECD, all of which produced excessively complacent assessments in the years leading up to the crisis.
Were bank loan losses concealed through ever-greening, that is, through fresh lending to property developers and others to avoid triggering arrears? It is clear from the loan loss provisions eventually booked at several banks that the losses related to loans given out many years prior to the crash. What did the internal and external auditors do, and the credit control committees?
The failures of regulation are manifest and have been highlighted again during the recent Anglo trial. The intense involvement of the regulator in problem banks revealed during these proceedings belies the notion that there was 'light-touch' regulation. There was inadequate regulation it is clear, but not in the form of non-engagement. Why were the regulators satisfied with the adequacy of bank capital and with their excessive reliance on short-term wholesale borrowings?
When disaster finally struck in the autumn of 2008, the Department of Finance found itself lacking the legislative framework to engage in effective bank resolution. It was not alone in this: several other countries also found themselves short of crisis-management options. Bearing in mind that the subprime crisis had been recognised as such in the United States in the summer of 2007, that bank shares had been tumbling for over a year and that the UK's Northern Rock collapse occurred in September 2007, why was the Department of Finance under-prepared when the guarantee option was chosen?
The Guarantee and Banking Policy Thereafter
It is widely accepted that the Irish response of guaranteeing virtually all of the liabilities of the banking system was a mistake, and it found no imitators. The inquiry needs to explore why this route was chosen, as against the available alternative of providing emergency liquidity to Anglo and buying time for a considered response.
What estimates were made of potential losses from such a broad guarantee? Is it true that no losses whatsoever were expected, in any bank? Was the guarantee reconsidered at any point? Was consideration given to the immediate nationalisation of Anglo, the better to avoid any losses which might have been incurred subsequent to the guarantee?
What Caused the Collapse of Ireland's Sovereign Credit?
Government debt was rising rapidly and likely to reach serious levels, without the costs of bank rescue. These costs were not ascertained with any confidence for two-and-a-half years after the guarantee was given, by which time the Government was in a Troika bailout programme. Why did it take so long? During this period, including two known occasions in the spring of 2010 and in April 2011, the European Central Bank under its then president Jean Claude Trichet forced two Irish finance ministers to pay out at 100 per cent to unsecured bondholders in bust Irish banks. The inquiry should ascertain the circumstances surrounding these ECB actions, should review the evidence for the view that the run on the Irish banks in the third quarter of 2010 was caused by the ECB and should consider whether the actions of the ECB exceeded the powers conferred in the ECB statute. The inquiry might also examine whether the legality of the ECB's actions could usefully be challenged at the European Court of Justice as provided for in the same statute. The inquiry should also explore what role the French and German governments played in influencing the actions of the ECB towards Ireland and the other countries forced into Troika programmes, in particular whether any of these actions were designed to protect the interests of French and German banks.
The bank rescue costs are not the only, or even the main, source of Ireland's build-up of excessive debt. However, it should be clear that if different policies had been pursued in Ireland and by the ECB, the resort to official bailout could have been avoided.
The Purpose of the Inquiry
The repeated assertions that available official reports tell all that is worth knowing about the great Irish banking collapse are not credible. This has been, relative to the size of the economy, one of the greatest banking collapses ever to have occurred anywhere in the world. Countries which experienced far smaller crises in relative terms have already furnished their citizens with comprehensive accounts of what happened. The official reports in Ireland were prepared within narrow terms of reference, to tight timetables and without powers to discover documents and to compel witnesses. They did not name names, of individuals or even in some cases, of institutions. In addition to failing to allocate responsibility, they necessarily failed to exonerate. Most directors and senior officials in most banks bear, in all likelihood, little or no personal responsibility for the mistakes that were made. They cannot be exonerated until those actually responsible are identified and a full factual reconstruction of the genesis of the banking crash is made available. A full account of the regulatory and policy failures is also desirable, the better to ensure higher standards in the future.
The reaction to the Anglo trial was instructive. Many people simply wanted to see bankers heading for jail and to hell with the evidence. Virtually all of the enormous sums lost by the Irish banks arose without benefit of any breaches of the criminal law so far as one can discern. The inquiry is about accountability, not about dishing out retribution.