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Banks face tough crackdown over loans to directors

THE Financial Regulator is to crack down on lending by banks to directors -- activities such as those of disgraced banker Sean FitzPatrick, who hid loans of €122m at the bank.

Speaking at the Dail Public Accounts Committee, the head of financial regulation Matthew Elderfield said loans to directors, senior managers, related parties and shareholders had "the potential to give rise to conflicts of interest and abuse".

He went on to say that there needed to be "clear and enforceable rules" in the area of lending by banks and their directors to senior managers, shadow directors or connected individuals.

Without naming Sean FitzPatrick, Mr Elderfield referred to "one notorious case" concerning large sums which was "apparently designed to avoid detection".

"Unfortunately, Ireland has witnessed some of this lending at irresponsible levels," he said.

Mr Elderfield said he planned to ensure that such lending was "on an arm's-length basis, and subject to appropriate and effective management oversights and limits".

"Loans to bank directors and senior management have been subject to abuse and excess, if not outright subterfuge," he said.

Mr Elderfield said new checks and balances would now be created to ensure this type of lending never happens again.

Mr FitzPatrick resigned from Anglo in 2008 after admitting he had concealed his loans over eight years using loans from Irish Nationwide Building Society. Nationalised Anglo was owed €155m by former directors at the end of last year, but they only expect to recover €50m.

Loan limits for directors or senior managers would be set at 0.5pc of "own funds", essentially a bank's cash reserves, and 5pc for all directors, senior managers and connected people.

Significant shareholders would be limited to loans of 5pc of "own funds" and 15pc in aggregate for all shareholders.

If these measures had been in place Sean Quinn and his family, the largest related shareholding group in Anglo, would not have been permitted to borrow €2.8bn from the bank, amounting to 70pc of Anglo's funds at the time.

The rules will forbid lenders from granting loans to directors, managers and shareholders on more favourable terms, and force them to secure board approval for any variation to loan terms.