Banking inquiry report: main findings and recommendations

The main report of the Oireachtas banking inquiry made a range of findings and recommendations under eleven key headings. Here are the main points.

Banks

Findings:

- Banks became over reliant on wholesale markets

- New and aggressive lending arose from increased competition

- New mortgage products helped mask year on year increases in house prices

- By 2008 banks had already moved very far from prudent lending principles towards a riskier asset value based lending model

- Exposures from poor commercial property related lending threatened the financial system

- Commercial real estate lending concentrated among a small number of debtors and inadequately secured

- Culture of excessive executive remuneration in the banks

- Bank failure the responsibility of senior executives and boards of directors

- No one single event or decision led to failure of the banks

- Internal audits not fully utilised in some key risk areas

- Introduction of tracker mortgages based on false presumption

Recommendations:

- Competition and Consumer Protection Commission should conduct immediate review of impact on consumers

- Only documents deemed ‘secret’ by a High Court judge be withheld from future Oireachtas inquiries

- All members of boards should have requisite financial skill sets and undergo ongoing compulsory training

- Clause to link pay to medium term performance in contracts of senior executives and board members

- Banks must ensure risk function has an independent position in the management structure with direct access to the board

- Risk appetite should be clearly defined at board level and should be key driver

The role of external auditors

Findings:

- KPMG, EY and PwC dominated audits of financial institutions for extended, unbroken periods

- Open to the banks to make voluntary disclosures of potential future provisions for loan losses

Recommendations:

- Mandatory rotation of audit firms

- European supervision of the audit sector

- Direct reporting of critical business risk to regulatory authority by external auditor

- Financial institutions be obliged to obtain independent audit of regulatory returns

The property sector

Findings:

- Developers became heavily reliant on bank debt to fund developments

- Property or land valuations not carried out in all cases, even in the case of some large developments

- Developers built strong relationships with particular banks

- Revenue from property sector was significant source of income for media outlets

Recommendation:

Comprehensive commercial property price register should be introduced

State institutions

Findings:

- ‘Soft landing’ theory cited frequently as most likely outcome to property boom, but no evidence provided

- Financial Regulator had sufficient powers to deliver prudential supervision in more intrusive manner

- Central Bank had sufficient powers to intervene to manage risk posed by individual financial institutions both to the State and banking sector as a whole

- Central Bank and Financial Regulator could have required banks to hold additional capital

- Tone of Financial Stability Reports too reassuring and did not identify systemic and macro prudential risks

- Central Bank and Financial Regulator aware in 2003 banking sector was increasingly relying on lending to property sector

- Breaches of prudential limits and requirements identified by the Financial Regulator but moral suasion rather than intervention relied upon

- In years leading to crisis, regulator did not identify systemic risk

- Poor assessment by Central Bank of the build up of micro prudential systemic risk

- Financial Regulator allowed banks to breach sectoral lending limits on property

- Department of Finance relied on Central Bank Financial Stability Reports and was too reliant on external agencies such as IMF

Recommendations:

Board of the Central Bank should include relevant direct experience in financial stability and prudential regulation

- In matters of exceptional risk, clear procedures for conflicts between advice provided by the Department of Finance and decision proposed by minister

- Ensure Oireachtas can apply adequate oversight to budgetary process and hold Executive to account

- Independent budgetary office to provide costings of budgets

- Banking division in Department of Finance be subjected to performance reviews

- Clear guidelines on best practice on the recording, minuting and documentation management of meetings in the civil service

Government policy and the Oireachtas

Findings:

- Government’s tax policy contributed to structural deficit

- Government’s fiscal policy resulted in significant, long-term expenditure commitments

- Income tax base eroded in years leading to crisis

- Fiscal policy after 2001 not focused on mitigating and managing property boom

- Budget Strategy Memorandum exceeded by actual budget with exception of one year

- Oversight by the Oireachtas of the Government inadequate in pre-crisis years

- Government made policy decisions and ultimately accepted overall responsibility for decisions made

- All main political parties advocated pro-cyclical fiscal policies, including increasing spending and reducing taxes

Recommendations:

Acceptable bands should be agreed with regard to proportion of total State tax revenue accounted for by defined cyclical, transaction-based taxes

- Members of Oireachtas committees should receive appropriate training in technical content, and be adequately resourced to carry out effective oversight

- Public Service Oversight and Petitions Committee should identify key reforms necessary to improve accountability and oversight

Preparation for the crisis (July 2007-29 September 2008)

Findings:

- In February 2008, a Department of Finance presentation warned an ‘open-ended’ State guarantee would expose the Exchequer and should not be ‘part of the tool kit’

- In August 2007, the NTMA halted deposits with any Irish bank but was legally obliged by the Minister for Finance to place deposits with AIB, BOI, IL&P, Anglo and EBS

- Central Bank and Financial Regulator made joint approach to banks in March 2008 to seek ‘liquidity support’ from some banks for others

- Bank nationalisation legislation had been drafted prior to the night of the guarantee

- Bank resolution legislation had been discussed by the relevant authorities in July 2008

- Legislation for blanket bank guarantee was available on September 30th, 2008

Recommendation:

Legislation governing powers of the Minister for Finance relating to directions to the NTMA should be reviewed

The guarantee

Findings:

- Option of introducing a guarantee first formally noted in January 2008

- Department of the Taoiseach did not keep minutes of meetings on night of guarantee and was unable to provide any drafts as it evolved

- Condition requiring solvency was removed from final official statement announcing guarantee

- In the absence of a guarantee, the Central Bank had put in place sufficient measures to ensure all banks would have opened and no default would have taken place, but it was strong view of the Governor that guarantee was necessary

- Information available to decision-makers about underlying health of the banks was inadequate

- ECB said State must ensure no bank fail

- Government advised by Central Bank and Financial Regulator that all six banks solvent on the night of the guarantee

Post-guarantee developments

Findings:

- New lending to businesses almost totally ceased from 2009-2013

- Bank of Ireland had internal discussions in October 2008 about possible need for capital injection by the State

Establishment, Operation and Effectiveness of NAMA: Findings

- Not possible to fully assess NAMA’s effectiveness until evaluation based on medium-term property prices is carried out

Recommendation:

When NAMA completes its work, it should be the subject of a further comprehensive and final review

Ireland and the Troika programme

Findings:

- Authorities in discussions with Troika from September 2010

- Letter from the ECB to Brian Lenihan threatened withdrawal of ELA for Irish banks if Ireland did not enter bailout

- National Recovery Plan was basis for agreement between Government and Troika

- By October 2010 Ireland’s entry into a bailout programme was inevitable, but timing determined by outside factors

Burden sharing

Findings:

- IMF favoured imposing losses on senior bond holders in October/November 2010

- No Troika programme agreed in November 2010 if Government burned senior bond holders

- ECB position contributed to inappropriate placing of significant banking debts on Irish citizens

Recommendation:

Government should seek to have amend European statutes to allow the ECB participate in parliamentary inquiries

The inquiry by the numbers

Joint committee meeting days: 106

Witnesses called to public hearings: 131

Public hearing statements: 131

Witnesses from whom material clarifications sought: 31

Pages received from institutions: 500,000

Letters issued: 638

Support staff: 57

Cost: €6,568,000