Judge urges banking regulation

Thu, Jun 14, 2012, 01:00

A High Court judge has stressed the need for urgent reform and regulation of banks and the markets following "heedless lending behaviour" that has caused "fathomless damage" to the Irish economy.

"Banks should never be allowed the power to disort a national economy; experience has shown that they cannot be expected to act solely in the national interest," Mr Justice Peter Charleton said.

It was obvious there must be "guidance, and more" provided to banks as to when to loan money and, "more essentially", banking must become honest and prudent", the judge said.

On the basis of expert banking evidence provided to the court, he said financial transactions involving "products" incorporating debt of various kinds or moving through several layers "may need to be made transparent and then controlled".

Transparency also extended to bank accounting as he had heard evidence, when the former Anglo Irish Bank was nationalised in January 2009, its management then estimated its impaired loans at €5 billion when it later appeared the correct answer was about €35 billion, the judge added.

He made the remarks in a judgment today in which Irish Bank Resolution Corporation - formerly Anglo Irish Bank sought €10.4 million judgment orders against two companies - Cambourne Investments Inc, a British Virgin islands company with a branch registered here at Parnell Centre, Parnell Street, Dublin; Century City Ltd, with registered offices at Sheridan IMAX Theatre, Parnell Street, and property developer, Peter Curistan, Hampton Park, Belfast, over loans advanced to purchase several units in Dublin's Parnell Centre.

While finding those loans were "foolhardy" and made by a bank "intent on lending money without proper analysis", the judge ruled they were repayable and the bank was entitled to judgment against Cambourne and Mr Curistan. He noted there is no tort of reckless lending here.

He said the money was borrowed by Cambourne and the bank was entitled to repayment despite "the lack of findnancial reality" to the transaction. The claim against Century was based on a contract that did not come into operation against it as a guarantor because clauses related to valuation and loan to value were not fulfilled. Mr Curistan was however liable under a separate guarantee.

In the judgment, the judge found the bank "heedlessly adopted an inappropriate risk" in advancing the loans and had engaged in profit-sharing which draws banking directly into property speculation. "Astonishing decisions" were made by the bank, including relating to valuations, which provided an unreal and false basis for the loans advanced, he found.

In this case, the decision to lend the money was foolhardy and the decison to borrow it was as bad, he said. He also noted that, during the case, in relation to "a very large loan to a group known as the Maple 10" to purchase Anglo shares, it had been admitted such "illegal dealing" had taken place.

Given the extensive evidence by experts on proper banking practices, the judge said it had become obvious from that testimony there must be "guidance and more" provided to banks as when to loan money.

The "countless repetition" of heedless lending as had occurred in the case before him had "caused ruination" not just to those involved in imprudent trasnactions but also to the wider community that has been required to assume responsbility for debt on "a gignatic scale" for fear the failure of banking industry would undermine more than the Irish economy.

"Regrettably, human trasnactions are at the mercy of human emotions," he said. The regulation of markets was therefore prudent." When property as an investment over-rewarded those speculating, it would draw money out of investment in business.

That trend could "undermine the fundamentals of a society", he said. People could also be unfairly excluded form house ownership through property inflation and wages and costs would be put under pressure.

A ratio of 3:1 of borrowings to debt used to be regarded as a good mean for lending to couples buying houses, he said. When that is exceeded, "some may predict trouble".

An index of inflation on purchase and rental of property could provide pointers to a particularly damaging kind of inflation that potentially affects the entire community. Where there was a disparity between that index and the index of consumer prices, controls of an inflationary property market could very quickly be introduced and one of those controls was the availability of money.

Borrowers are likely to be more responsible when their own money is put into a project, he said. A "startling aspect" of the case before him was that full loans were advanced for highly expensive properties in Dublin and Belfast with recourse to the property only as security being part of the deal being offered by Anglo "for this speculation".