Central Bank directs AIB to reverse internal changes

THE CENTRAL Bank has directed Allied Irish Banks to reverse plans to reform its credit approvals process that were agreed by the board in September and which led to the departure of the bank’s chief credit officer.

AIB has been told to revert to seeking sign-off from the bank’s overall group chief credit officer for loans agreed within the bank’s three business units.

Central Bank deputy governor Matthew Elderfield wrote to AIB about two weeks ago raising concerns about proposed structural changes to credit reporting lines.

The board of AIB agreed in September on a new credit approval process where chief credit officers in the bank’s three new “segments” would report directly to the head of each of the businesses.

This changed the structure introduced by Colm Doherty after he became managing director in late 2009, where he directed that credit approvals in each internal unit report directly to an overall chief credit officer sitting on the group executive team, and not to the heads of individual businesses.

The “siloed” nature of credit approvals in AIB retail during the boom was blamed as a reason for the heavy losses on property, State bailouts of €20 billion and the bank’s effective nationalisation.

Mr Doherty installed Joe O’Connor, the chief credit officer in the capital markets division he previously ran, as AIB’s group chief credit officer in 2010. Mr Doherty left the bank last year.

Mr O’Connor resigned after criticising the changes agreed in September, which were proposed by the bank’s executive chairman David Hodgkinson and acting chief risk officer Stephen Bell, a PricewaterhouseCoopers director.

Another banker who worked with Mr O’Connor, Declan Flynn, a former chief credit officer in AIB’s Polish unit, decided to leave the bank at about the same time.

In his letter sent on November 14th, Mr Elderfield told AIB its internal chief credit officers should report to the group chief credit officer – the structure introduced under Mr Doherty.

Asked about Mr Elderfield’s letter, the Central Bank said it was “undertaking specific work” on improving credit risk standards, as outlined in its banking supervision strategy in June. This included “investigating and highlighting processes, behaviours and policies that we consider weak and that were prevalent prior to and during the financial crisis”.

The Central Bank said it was “addressing areas including culture and risk awareness gaps at senior management level”.

A spokesman for the bank said: “AIB is improving credit structures, framework and practices, and actions to do so are taken in consultation with the regulator.”

A source close to AIB said it had not been asked to abandon changes agreed in September but to continue the practice where credit officers reported to the group chief credit officer until its new structures were “embedded”.

Consultants Deloitte and Promontory said in private reports for AIB this year that the bank failed to fix credit risk problems identified by internal auditors prior to the crisis and that front-line “business-getters” were not separated from those sanctioning loans.