Central Bank sent out wrong message on crisis

ANALYSIS:John Hurley's pre-crisis public statements differ from the warnings he claims to have given

IN AN unguarded moment John Hurley said in his final public statement as Central Bank governor last July that people, perhaps, feel he should have issued stronger warnings about the economic risks facing the country.

Now, in an unusual twist, Hurley’s effectiveness as governor and his role in the banking crisis will be scrutinised by his successor, Dr Patrick Honohan, who will pass his report on the causes of the crisis to Minister for Finance Brian Lenihan next Monday.

His work, together with the report by former IMF officials Klaus Regling and Max Watson into the causes of the crisis, which is also due to be published shortly, will lay the groundwork for a statutory commission of investigation to assess how the Irish banking system suffered meltdown.

At the publication of the Central Bank’s 2008 annual report last summer Hurley argued that the bank had highlighted the “very strong” risks to financial stability over time but that this failed to alter the behaviour of the banks.

He argued that the risks were detailed in the series of regular financial stability reports published by the Central Bank. One of Hurley’s major failings as Central Bank governor was not just his inability to force the hand of its partner in financial supervision, the Financial Regulator, if he saw landmines on the economic road ahead, but his warnings were clouded in indecipherable Central Bank speak that had little impact.

The stability reports had warned about the “very significant” increase in indebtedness, he said, and that the property market was “no longer supported by fundamentals”. This, he argued last July, was “a very strong statement by a central bank at the time”.

It is hardly surprising then that his warnings were not acted upon if they failed to convey any sense of emergency that the taxpayer was facing a bailout of €32 billion to boost the solvency of the banks and a €40 billion State agency to deal with their most toxic loans.

Despite Hurley’s failings, he saw out his full term as governor on a salary of €369,000 and was asked by Lenihan to stay on beyond his scheduled retirement until September 2009.

While Hurley may now argue that he issued the right warnings, history should record his role differently if his pre-crisis public statements are scrutinised closely.

Below are excerpts from his speeches starting in July 2007, when the credit crunch struck, and ending with his last public statement before the Government bank guarantee in September 2008.

July 11th, 2007 - at the launch of the Central Bank 2006 report

“It is important to recall that the major underlying factors supporting the demand for housing are employment growth, increases in incomes, demographics and social changes.

“The prospects for these key factors remain favourable, even allowing for some moderation in the growth rate of the economy, and we continue to believe that the most likely scenario is a soft landing for the housing market.”

October 11th, 2007 – speaking to financial association, ACI Ireland:

“Our stress-testing of the banking system and our extensive financial stability analysis indicates that Irish banks are solidly profitable and well-capitalised and, consequently, have good shock-absorption capacity to deal with risks emanating from the current period of heightened stress in financial markets. . . I would add that we in the Central Bank, along with our colleagues in the Financial Regulator, have been monitoring our domestic situation very closely.”

November 27th, 2007 – speaking to a finance conference:

“We have concluded that while the risks to financial stability have increased since last year, the stability and health of the banking system here remain robust when assessed by the usual indicators of financial health such as asset quality, profitability, solvency, liquidity and credit ratings . . .

“The current situation and outlook for Irish banks, based on an assessment of developments so far, is positive . . . the sector’s shock absorption capacity has been largely unaffected by the turbulence in international financial markets . . .

“Our stress-testing of the banking system and our extensive financial stability analysis indicate that Irish banks are solidly profitable and well-capitalised. In this context, it is worth noting that they have one of the lowest rates of non-performing loans among banks in all EU countries.”

January 30th, 2008 – to Oireachtas Joint Committee on Finance and the Public Service:

“The Central Bank and Financial Services Authority of Ireland is the institution charged with contributing to financial stability in Ireland under both domestic and EU legislation. The organisation consists of two component entities – the Central Bank and the Financial Regulator – each with its own particular responsibilities. The roles are complementary and we enjoy the closest co-operation . . .

“The Central Bank’s responsibilities for financial stability relate to the surveillance of the strengths and vulnerabilities of the overall economy and financial system. The Financial Regulator’s remit includes surveillance of the financial soundness of individual institutions. Both approaches are necessary for a comprehensive assessment of financial stability and our organisational structure facilitates the seamless sharing of expertise.”

February 28th, 2008 – to the Irish Association of Pension Funds

“Our stress-testing of the banking system indicates that Irish banks are solidly profitable and well-capitalised.”

April 28th, 2008 – at the Banque Centrale du Luxembourg

“The Financial Stability Committee is the main forum where senior management from both the Central Bank and Financial Regulator meet formally to consider financial stability issues.

“However, in practice, staff at all levels of the organisation come together regularly in an informal way to discuss these matters and to undertake joint work . . .

“In addition, the Central Bank and the Financial Regulator jointly hold round-table meetings with senior executives of the main domestic credit institutions as early as possible after publication . The aim of these meetings is to focus attention on the key risks outlined in the report . . .

“Financial stability considerations were key in the design of the organisation. This choice of organisational structure reflected the shared high-level objective of contributing to financial stability for both the Central Bank and Financial Regulator. The end result is an organisation with a cohesive and comprehensive approach to financial stability issues.”