Updated, 15.08
A REPORT INTO the governance of the Irish banking sector has concluded that the willingness of banks to issue high-value loans for risky commercial property – in vain attempts to keep up with the rapid development of Anglo Irish Bank and Irish Nationwide Building Society – was a fundamental cause of the banking crash.
The report, compiled by Finnish academic Peter Nyberg and completed last month, found that the rapid emergence of Anglo Irish Bank as a major player in the commercial lending scene led other banks to accept lower credit quality and a lower standard of risk management.
The report also slams the “consensus” that the rise in property prices would end with a “soft landing”, and that this “conformity of views and self-limitation of responsibility” meant there was little appreciation of the increasing dependence of the Irish economy on the property bubble.
It also bemoans the government’s decision to introduce a blanket bank guarantee as ill-informed, and criticises the roles of the Central Bank and Financial Regulator – painting a picture of two duelling institutions who worked together only when compelled to.
“Anglo and to a much lesser extent INBS are important for the wider crisis because they were both seen as highly profitable institutions to which other Irish banks should aspire,” the report reads.
“As other banks tried to match the profitability of Anglo in particular, their behaviour gradually, and even at times unintentionally, became similar. Accordingly, when the crisis broke, large losses were realised not only in Anglo and INBS but in other banks as well.”
The report also adds that governance at the banks “fell short of best practice” which allowed Anglo and INBS to engage into what it terms “relationship banking” – providing loans to certain developers without any apparent consideration of whether they could, or would, be repaid.
Other big banks then found themselves under pressure to adopt similar lending models or face the “loss of long-standing customers, declining bank value, potential takeover and a loss of professional respect.”
While the scale of Ireland’s banking crisis was exacerbated by the worldwide economy, the fundamental reason for the collapse was the “unhindered expansion of the property bubble” – which itself had emerged as a result of a “national speculative mania”:
Even obvious warning signs went unheeded in the belief that the world had changed and that a stable economy was somehow automatically guaranteed… Traditional values, analysis and rules could be gradually less observed by the banks and authorities because their relevance was seen as lost in the new and different world.
While some banks had scaled back their exposure to the property markets, others simply decided to pursue higher rates of growth “with little apparent realisation of the attendant risks; implementation (and risk policy) was implicitly left to staff.”
The government, meanwhile, had decided to introduce the banking guarantee on the incorrect assumption that the banks would remain solvent, but Nyberg said the alternative options to the blanket guarantee were “not seriously considered”:
If accurate information on banks’ exposures had been available at the time, it seems quite likely to the Commission that a more limited guarantee – combined with a state take-over of at least one bank – might have been more seriously contemplated.
The Central Bank, despite being able to advise the government and direct the Financial Regulator, apparently did not exercise the powers it had, and the report condemns the Central Bank and Financial Regulator – which have since been merged – for not working together to avert the country’s over-reliance on overseas funding until it was ultimately too late to do so:
Neither the Central Bank nor the Department of Finance seem to have considered the implications of a possible interruption in the flow of foreign funding. If such a scenario had been considered, the link between such funding, property market developments and bank solvency could perhaps have been uncovered. [...]The primary problem with governance in the majority of the covered banks was not that it was lacking or poorly structured but that, over time, it changed as controls gradually weakened to allow increased growth.
External auditors – which the report says had the “skills, opportunity and procedures required for detecting and evaluating asset and funding risks” - were “silent observers”, who fulfilled the narrow functions asked of them without apparently reporting any excessive lending to the Financial Regulator.
The report opines that it is “particularly vital” that the Department of Finance hire more staff with the “financial market expertise… for it to be able to actively fulfil its part in the stability mandate”.
Nyberg’s report had been submitted to Noonan on March 22nd, and was approved for publication at this morning’s Cabinet meeting. No individual bankers are named in it.
Today’s report constitutes the final report of the Commission of Investigation into the Banking Sector in Ireland, which has now been disbanded with the completion of Nyberg’s duties.
Two preliminary reports had been published last year, with the first – by Central Bank governor Patrick Honohan, published last May - discussing the role of financial regulation.
A second report, compiled by Max Watson and Klaus Regling and published last summer, was intended at informing the future management and regulation of the sector.
Nyberg, a former senior advisor at the IMF, is also a former senior advisor at the Finnish ministry of finance and an advisor to the country’s central bank.
Copies of the report were also sent to the Director of Public Prosecutions, the Director of Corporate Enforcement, and the Gardaí.
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