THIS COUNTRY IS suffering from paralysis by analysis. The only people who stand to gain are lawyers. They’re the guys who keep the meters running every time you hear the words Tribunal, public inquiry or court case.
The latest planned probe into the banking crisis will produce nothing more than further fractious exchanges between Fianna Fail, which is blamed for the crisis and Fine Gael/Labour, which claim to have partially sorted out the mess. We are set for a wave of self-regarding rhetoric and posturing from a new elite, drawn from a younger generation within the same parties.
The bureaucrats who were responsible for economic management and the regulation of banking from 2000 to 2010 have almost all retired, as have the key political figures. Almost all the major bankers have moved on too.
Either way these people cannot be made accountable in any meaningful way by a parliamentary inquiry. Those who are being pursued separately by An Garda Siochána, Revenue, the ODCE, the DPP and others will almost certainly refuse to appear before the new inquiry. They will argue correctly that they do not want to prejudice their own legal rights by making themselves amenable to an Oireachtas probe which is as open-ended as any tribunal in Dublin Castle.
As a country, we are all probed out.
The State has already commissioned four investigations into the banking crisis alone:
The authors of these reports had much in common. They were largely academics and senior public servants. They were not business people or even bankers.
Honohan has been Central Bank governor since 2009, is a former economic adviser to a FG Taoiseach (Dr FitzGerald) and a former TCD professor. Regling was a German and EU public servant, Watson an academic. Wright served at a high level in Canadian politics. Nyberg served as a Finnish civil servant and central banker.
Each of their reports contained information of value. But each was unable to answer the key questions:
(a) was the conversion of private loss/risk into public loss/risk a correct strategy and could the net cost to the state have been reduced by forcing the banks to deal with the mess they created themselves?;
(b) to what extent were the EU and the ECB responsible for the credit bubble and asset price bubble in Ireland and should they carry some or all of the cost?;
(c) how were the critical decisions – especially the 2008 blanket guarantee of the debts of certain licensed banks and the 2010 multi-year contract with the Troika – taken? Were the people consulted about these decisions and whose interests were served by them?
Unconscionable delay, absence of records
These events began 14 years ago when a ludicrous credit explosion was permitted by the Finance Minister, the Regulator and the Central Bank. This permitted credit growth of up to 30% a year.
By the time this new probe is over the question of the guarantee (or ELG as it is known) will be of historic interest only, having been phased out at the request of the banks because it was so expensive. The key Irish negotiator of the bailout of 2010, Mr Brian Lenihan, is sadly deceased.
It is not clear whether the ECB, the EU, and the IMF will co-operate with the inquiry. If their recollection of the bailout negotiation process is different from that of our own Department of Finance will that help the Irish cause in the future?
Very limited written records of important meetings appear to have been kept by some of our senior public servants. This seems bizarre given their normal addiction to record keeping. At least one of the public servants – the former regulator Pat Neary – is also suffering from severe memory loss.
Will the Oireachtas probe be given all the files? Will those files be complete? Or will they be redacted heavily? Will Irish civil servants be obliged to testify?
Light touch, soft touch
Central banks generally never admit that they have made errors. There is no reason to believe that the Central Bank of Ireland will adopt a different approach.
Recent statements from the likes of Barroso and van Rompuy suggest the ECB will take a similar attitude. They think Ireland threatened to destabilise Europe. We think that they bled us white.
There may be no meeting of minds between the CBI and the ECB on key issues. Especially if the central bankers are asked how they dealt with each other during crucial exchanges.
Ireland was promised a deal in June 2012 – but we are still waiting. Central Banks don’t write off debt very often and much of Ireland’s sovereign debt is now to the ECB, EFSF and allied bodies.
In the Greek ‘debt exchange’ of 2012 the ECB was the only party not to take a haircut on its debt. Private banks got burned for 54% of their exposure. The ECB did give practical assistance by putting up a modest amount of new cash to sweeten the deal for creditor banks with an up-front cash payment.
Ireland opted for what’s called light touch regulation because it wanted to expand the economy rapidly and to develop the IFSC. At that time the light touch was all the rage, having started in the Clinton era in the US. It, together with off-balance sheet lending instruments, allowed banks to develop on an unimagined scale.
Now the idea of light-touch regulation seems discredited. Yet there is no reason to believe that we will fundamentally alter this approach in the future, though we will operate a tighter ship. We are running a small peripheral economy, after all, and we need customers to come into the shop.
In terms of day to day monitoring of banks, Patrick Honohan may believe that all is changed utterly and for the better. Try telling that to the shareholders of Royal & Sun Alliance who recently coughed up stg£250m in new capital largely because RSA mispriced risk in Ireland.
Think about Rusnak, about the ICI and the PMPA. We hopefully may never see another Lehman Bros collapse again or another 2010 bailout but problems remain with supervision.
A future with banks
What counts for most Irish people is the future, not the past. For most of us these reports are just a form of financial taxidermy.
People may loathe banks because of the austerity of the past five years. But Ireland needs functioning banks. That is banks and bankers that lend new money against well assessed levels of risk and charge appropriate fees and rates of interest, that permit business to make a profit.
Arguably the country had succeeded in developing just such a cadre of skilled bankers and banks by the year 2000. Big projects could be financed at competitive cost, decisions could be made quickly, the Irish economy was catching up, making up for lost ground arising from its troubled history.
The period of exponential credit growth from 2004 to 2006 killed that achievement. The Icarus Syndrome prevailed not just among bankers but among borrowers and politicians too.
Today a lot of the banks that fuelled the lending boom are not there anymore. ICC, ACC were sold by the state. Bank of Scotland Ireland is gone. Danske is running off its book. Anglo, INBS wiped out. Ulster Bank is posssibly for sale.
Bank of Ireland is fighting hard for a good future but if there isn’t a rapid turnaround at AIB and Irish Permanent soon they will become permanently dysfunctional entities, operating like arms of the public service. These are banks, after all, not debt collection agencies.
The effort we spend probing the banking climate in 2006-2008 might be better spent identifying a way forward for banking in Ireland. The capital markets, for the moment, are awash with cash, as those who have sold Irish property in recent times have discovered.