Ireland. The causes of the banking and economic crisis

SIMON CARSWELL, STEPHEN COLLINS and CIARAN HANCOCK

THE FIRST official reports into the causes of the banking crisis have concluded that home-made factors and not international financial volatility were to blame for the meltdown.

Hard-hitting reports by the new Central Bank governor Patrick Honohan and international banking experts Klaus Regling and Max Watson heavily criticised misguided government economic policies, a weak system of financial regulation and poor bank lending.

Taoiseach Brian Cowen accepted that policies introduced while he was minister for finance had led to a “deeply challenging” situation for the Irish people and he regretted that. He agreed that a more restrictive fiscal policy would have helped in slowing the economy.

“Hindsight is always clear and obviously we would not have taken such a course if we had known of the scale of the property collapse which was facing the country,” he said. “I deeply regret that.” 

Major failures in banking regulation and the maintenance of the financial stability of the country – coupled with excessive and high-risk lending by the banks – led to the crisis, the reports concluded.

The Government’s budgets during the boom years “contributed significantly to the economic overheating”, Dr Honohan said, as they relied to an “unsustainable extent” on the construction sector and encouraged the property boom through tax breaks.

“This helped create a climate of public opinion which was led to believe that the party could last forever,” he said.

Dr Honohan found that the Financial Regulator was “excessively deferential and accommodating” to the 

banks, while the Central Bank, led by his predecessor John Hurley, had not been alert to warnings signs of an imminent crash.

There was insufficient awareness or willingness to accept “how close the system was to the edge” and 

that it was the responsibility of the Central Bank and the regulator to pull it back from the edge, he said.

“Rocking the boat and swimming against the tide of public opinion would have required a particularly 

strong sense of the independent role of a central bank in being prepared to ‘spoil the party’ and withstand possible strong adverse public reaction,” Dr Honohan said.

Pat Neary, the former chief executive of the regulator, said he had no comment. Mr Neary’s predecessor, Liam O’Reilly, and Mr Hurley could not be reached for comment.

Dr Honohan said there was “a comprehensive failure of bank management” to maintain “safe and sound banking practices”.

The weakness of the Irish banks was not caused by the collapse of US bank Lehman Brothers in September 2008 but by an over-exposure to property driven by excessive overseas borrowing “to support a credit-fuelled property market and construction frenzy”.

Anglo Irish Bank and Irish Nationwide Building Society were “well on the road towards insolvency” at 

that stage, he said, while the two biggest banks, Allied Irish Banks and Bank of Ireland, could only have 

survived without a State bailout if the international financial markets had calmed.

The scale of the Government guarantee raised the cost of the bailout to the State, narrowing options available to fix failing institutions, he said.

The Regling-Watson report said regulation was not “hands-on or pre-emptive” and was “insufficiently 

intrusive” and “forceful”, while resources were “seriously inadequate for the more hands-on approach” 

required.

Regulators under-estimated the funding risks linked to the banks’ over-exposure to property.

“The fact is that supervisors, right to the end, clung on to the hope of a soft landing for the economy and the property market,” they said.

The Regling-Watson report found that the Government failed to rein in bank lending and that policies “even fuelled the fire”. Mr Cowen said the Government had taken action to reduce the vulnerability of the banks to the property market but he accepted that this was insufficient.

The Taoiseach maintained that Dr Honohan had strongly vindicated the Government’s handling of the crisis.

The reports will be referred to the Oireachtas finance committee which will meet tomorrow to consider 

draft terms of reference of a six-month commission of investigation into the crisis. The Government has 

published draft terms of reference to look at the causes of the crisis but they do not include a review of 

budgetary policies.

Fine Gael finance spokesman Richard Bruton said it was extraordinary that the draft terms excluded the Government’s contribution to the crisis and its response to it since September 2008, including the decision to grant the blanket guarantee.

The reports showed that Mr Cowen and the regulatory and banking systems he oversaw were guilty “of 

spectacular and catastrophic failures”, he said.

The Honohan report found that regulatory staff regarded Anglo Irish Bank management as “slick and 

buccaneering” but felt they did not present a large or imminent risk.

Former Irish Nationwide chief Michael Fingleton was seen by regulatory staff as a “an overly dominant figure” who needed to be surrounded by stronger governance structures.

Dr Honohan said that the wisdom of leaving senior management in place at the banks after September 2008, while providing “an open-ended guarantee to two institutions which – it should have been clear – were on the road to insolvency, does not seem to have been considered”. 

The Irish Times - Thursday, June 10, 2010