From boom to bust: what the Central Bank report found

NEW GUIDELINES issued by the Central Bank to the lending institutions to ensure that lessons are learned from the banking crisis and the property crash have gone virtually unnoticed since they were published in the run-up to Christmas.

The report was highly critical of the way some valuations were carried out during the property boom and warned that the Central Bank would in future be scrutinising how new guidelines were being implemented as part of its ongoing supervisory role.

The State’s supervisory bank did not challenge the valuation principles set down in the chartered surveyors’ Red Book but noted that, in many cases, the “terms of engagement with a valuer” had either been overlooked, omitted or totally disregarded during the boom.

The Central Bank reported that poor valuation instructions were a contributing factor to the level of property losses by banks. Vague instructions provided inaccurate valuations and therefore inaccurate assessments of risk at the time of underwriting.

During the busiest period of the development boom, certain valuation practices were accepted by banks that involved significant conflict of interest. Many valuations utilised by lending institutions were informal, either recorded conversations with the valuer, short notes from “drive-by assessments” or desktop research.

The report also identified weaknesses in the appointment, utilisation and performance review of valuer panels by the banks. Some valuers did not have the appropriate experience, qualification and professional indemnity insurance for the particular assignment.

During the lending boom there was increased reliance on informal valuations by the credit institutions. These were utilised as if they were full valuations. There was also inadequate training of bankers on how to interpret valuation reports and their importance in credit risk assessment.

The Central Bank said that in some instances the lending staff may have been motivated to obtain a valuation that supported the price paid and the funding requirement rather than to support a proper risk assessment of the loan. In some development loan valuation reports, the valuation reflected the projected value at a future completion.

Some lenders interpreted this future value as the current actual value of the project, thereby assuming that zoning and planning were granted, construction completed according to budget and sales would be ultimately achieved in full.

The Central Bank recommended that in future banks should give written instructions to valuers, reminding them that their duty of care was to the credit institution. Valuers should also be required to disclose any material involvement in a property. Where the value of a loan to be advanced was more than €25 million, the bank should seek a full Red Book valuation from more than one valuer.

Banks should avoid having one valuer doing more than, say, 33 per cent of all valuations. Credit institutions should report any concerns in relation to non-ethical behaviour, including unrealistic valuations, to the Royal Institute of Chartered Surveyors.