Banking Inquiry: Poor stress testing key to AIB’s difficulties

The former head of AIB's retail operations in Ireland has told the Oireachtas Banking Inquiry that insufficient stress testing of loans and "inadequate" loan security were key reasons behind the bank's difficulties in late 2008.

Donal Forde added that his failure to forecast the property crash in his senior role was a matter of "deep regret" to him.

He also told the committee that the “sweeping” nature of the Government’s bank guarantee of September 30th 2008 “surprised” him, although he had no role or part in the decision.

“With the benefit of hindsight, the first point of failure came with the collapse of economic activity and the manner in which it undermined repayment capacity – sales agreed to in contracts , while legally binding, did not materialise; rental incomes were much reduced and other commercial revenue streams were compromised,” he said.

“The second point of failure was the inadequacy of the 70 per cent loan to value constraint on our security,” he said. In light of the scale of the subsequent fall in property values, this left the bank with insufficient cover. The bank’s vulnerability was further exacerbated by the high concentration of property risk in the loan book and the scale of individual counterparty exposure.

Mr Forde said it was now clear to him that these failings “represented poor judgements from an internal bank management perspective”.

On the issue of AIB’s solvency in early 2009, Mr Forde said he was asked to report on potential losses in the Irish retail division. “I recall very clearly that my report pointed to losses across the division that could be between €2 billion and €3 billion,” he said.

“In carrying out that process, my instruction to the lending officers was to be rigorous and to ensure that we did not underestimate the scale of any potential losses. I am satisfied that the result was a genuine and bona fide assessment of the position at that point in time, reflecting the market conditions and expectations that then prevailed.”

In his opening statement to the committee, Mr Forde said credit decisions were “centralised and regimented” but the problem lay “more fundamentally in the credit policy that we had adopted and the level of property related exposure in our portfolio”.

He said AIB’s lending decisions were based on the belief, “now obviously mistaken”, that long established, experienced scale-players in the property market represented a better risk than smaller less experienced counterparties.

“They were seen to have had a track record of performance and built up significant equity through the previous years. This fuelled an appetite to sustain AIB’s share of their business in the face of intense competition and did lead to a growing number of large individual counterparty exposures.”

Mr Forde said he “simply did not foresee the scale of the collapse that was to follow” and accepted that AIB’s credit policies were inappropriate at that advanced stage of the economic cycle”.

His view in 2008 was that the economy was on a more “resilient and sustainable footing” than subsequently proved to be the case.

“With the wisdom of hindsight, this was a serious misjudgement on my part and on the part of many others, within the bank and outside. My own failing in this respect is a matter of deep personal regret.”

Mr Forde ran the Irish retail operation from 2002 to 2009, at which point he was informed by the chief executive that he being moved to a newly created position as director of group strategy.

“However, that position never materialised in the way that was indicated at the outset. I found myself completely removed from discussions at executive management and board level, and without objectives or direction in terms of a work agenda. That situation persisted until I decided to leave the bank nine months later in November 2009.”