Revised code of practice on loans to directors

THE CENTRAL Bank has issued a statutory code of practice on lending by banks and building societies to directors, senior managers and significant shareholders, along with parties connected to them, to prevent past abuses from recurring.

The code is designed to stop directors, managers or large shareholders in banks or building societies from abusing their positions to borrow large sums or to obtain preferentials loans on terms more favourable than those available to ordinary customers.

Under the code, any loan worth more than €1 million to any of these parties must receive prior approval from the Central Bank.

Financial institutions will be required to submit details of related party lending to the Central Bank every quarter under the code, which comes into effect from the beginning of next year.

The bank said the code was “to prevent abuses arising from exposures to related parties and to address possible conflicts of interest in this area”.

Speaking at the Irish Banking Federation national conference, Jonathan McMahon, the Central Bank’s assistant director general of financial institutions’ supervision, said the code was to prevent a repeat of problems that arose during the banking crisis.

“We want to avoid the risk – we have seen some of it here – that banks have too close a relationship with some of their employees through the loans that banks can make available to directors and their family members and others connected with those individuals,” said Mr McMahon.

The revelation that Anglo Irish Bank had concealed multimillion euro loans to chairman Seán FitzPatrick over its financial year-end undermined the bank, leading to its nationalisation in early 2009.

Anglo is pursuing Mr FitzPatrick for debts of €110 million, while the bank has also issued proceedings against the bank’s former chief executive David Drumm to recover loans of €8.5 million.

Under the code, a bank or building society cannot lend more than 0.5 per cent of “own funds” (shareholders’ funds) to a director, manager or person or business connected to them. No more than 5 per cent of own funds can be loans to these parties.