Banking Reports: Statements
Senator Ivana Bacik: I am very grateful to Senator Twomey for sharing time. As he has said, the reports show how warning bells should have been ringing a long time ago in the Irish financial services and banking sectors. These two reports, one by international experts and the other by the Governor of the Central Bank, lay the blame fairly and squarely on the Government and in particular on the Taoiseach, who was then Minister for Finance. It also lays the blame on the Central Bank and the Financial Regulator, whose total failure to supervise the banks and prevent a crash has led us to this crisis.
Earlier on the Order of Business there was some comment to the effect that the reports do not describe this crisis as home-made. However, right at the start of the Regling and Watson report, the first sentence says that while Ireland’s banking crisis bears the clear imprint of global influences, it was in crucial ways home-made. The authors go on to point out clearly the very particular home-made features of the banking crisis, namely, weak bank governance and risk management and what they describe in memorable language as the “plain vanilla property bubble”, adding that our “banking exuberance” indulged in few of the exotic constructs that caused problems elsewhere. They say this was a plain vanilla property bubble compounded by exceptional concentrations of lending for purposes related to property, notably commercial property.
To put it bluntly, the banks were simply lending too much. They were lending money they did not have. One does not need to be an international banking expert to realise that a check should have been put on the excesses of their banking exuberance at that point. Similarly, in Professor Honohan’s report there is very clear reference to the domestic nature of the crisis. In paragraph 1.5, having discussed the difficulties in the global debt markets, he goes on to say that even before the failure of Lehman Brothers in September 2008, Irish residential property prices had been falling for more than 18 months, something that is, perhaps, overlooked now, and few observers expected that fall to end soon. In a much quoted passage, he goes on to say that it was conceivable that had international financial markets remained calm, the two main banks, AIB and Bank of Ireland, might have been able to manage their emerging loan loss problems without Government assistance by drawing on capital. It seems clear, however, that at that point Anglo Irish Bank and Irish Nationwide Building Society were well on the road to insolvency. In my view, that is an extremely critical finding.
The reports go on to discuss how the situation was allowed to emerge and stress the weakness of the Central Bank and the regulatory function. Looking at the finding in particular as regards the road to insolvency on which Anglo Irish and Irish Nationwide were well underway by the time of the collapse of Lehman Brothers, it is now very clear that the banking guarantee which we debated late into the night in this House was ill-advised, in the breadth of its scope in particular. The Labour Party was the only party to oppose it. We voted against it, as I did at the time as an Independent Senator. We were the only ones who did so, and I believe we have been proven right.
Senator David Norris: I voted against it, too.
Senator Ivana Bacik: I apologise to Senator Norris, who corrects me on that. However, very few of us at that time opposed the guarantee. Therefore it is extremely interesting to see now what Professor Honohan has to say about it. It is fair to say the Government has been spinning very hard paragraph 1.25 which finds it is hard to argue with a view that an extensive guarantee needed to be put in place. We all accept that small depositors needed to be protected, and to have confidence in the security of their deposits. However, the report says the extent of the cover provided can, even without the benefit of hindsight, be criticised in as much as it complicated and narrowed the eventual resolution options for the failing institutions and increased the State’s potential share of the losses. Again, to put it bluntly, this meant we were on a road that led to NAMA. At paragraph 1.27 the report says it should have been clear at the time the open ended guarantee was provided that the two institutions were on the road to insolvency, and another key point, the wisdom of leaving senior management in place was not even considered.
There are quite a number of critical findings which emphasise that the fault for this crisis lies at a domestic level with the Government, the then Minister for Finance and the Regulator as well as the Central Bank.
I shall conclude on another interesting point, namely, that what we learn from this is the need to ensure there are adequate levels of regulation and that a greater degree of control is placed over the exuberance of bankers. Left to their own devices, clearly, they become particularly exuberant, but one of the features to emerge strongly from the reports is that in other countries the exuberance took different forms. Complex financial transactions were engaged in among the US investment banks and so on, but in the case of Ireland the banking exuberance manifested itself in what Regling and Watson termed a plain vanilla fashion, amounting to the simple excess of lending by the banks of money they did not have. A key point about regulation, they say, is that it is important not to emphasise process over outcome. Process was emphasised. Complex regulations were adapted from the EU, but in the end all that was needed was clear regulation as regards the assets the banks should have retained when they were lending. It was not as complex a cause of crisis as in other countries. It was a very simple failure, in fact, yet devastating, as we all know to our cost.
