Central Bank failed to act on property lending alert, court hears

Former chief economist says ‘senior people within the Bank simply did not wish to know about the problems or, if they did know, they did not wish to do anything about them’

A former chief economist with the Central Bank has told the High Court that information and advice available to the bank from the 1990s should have prompted it to "rein in" lending by commercial banks ahead of the financial crisis but it repeatedly failed to act.

A section of a draft 2007 Financial Stability Report referring to house prices being overvalued by 39 per cent was deleted at “a higher level” within the bank before it was published, Tom O’Connell said. The final version of the report said the Central Bank expected a “soft landing” in the housing market.

While he assumed the Central Bank was anxious to prevent a run on the banks, this illustrated, that when presented with information a crisis was at hand, the Bank did not act on it, he said.

“The senior people within the Bank simply did not wish to know about the problems or, if they did know, they did not wish to do anything about them,” said Mr O’Connell, who worked with the Central Bank from 1970 and was chief economist between 2005 and 2009.

His sworn statement was read in the coninuing hearing before Mr Justice John Hedigan of proceedings by John Stanley Purcell, a former director and financial controller of Irish Nationwide Building Society (INBS), challenging the Bank's proposed administrative inquiry into a number of former INBS directors over past conduct of the building society's affairs.

Among various arguments, Mr Purcell contends he and other former INBS directors were never told of an expert report for the Central Bank in 2005/06 that the property bubble was about to burst and claims he is being “hung out to dry”.

The Bank denies the claims and is opposing two actions by Mr Purcell, one for judicial review and the other for damages, over claims his reputation and right to earn a living have been damaged. It argues the proceedings are premature and Mr Purcell is seeking to have the court supervise the procedures of the inquiry in advance of it.

The Bank also denies the decision to hold an inquiry amounts to bias or prejudgment or that its neutrality is undermined by reason of any alleged interest in vindicating its own reputation.

In his statment, Mr O'Connell said one Central Bank director, Friedhelm Danz, said at some board meetings attended by Mr O'Connell (who was not himself a member of the board) that the housing market was a "house of cards" which would fall, or words to that effect.

“The Central Bank did nothing within its power to deal with this matter in the manner that it should have”.

The response to a note sent in 1999 by him and another colleague, Michael Casey, to then Central Bank governor Maurice O'Connell recommending the property sector be reined in to prevent rapid overheating of the economy was that a ceiling on credit was "out of the question", he also said.

The response to concerns expressed by him from the 1990s was to the effect that the Bank was not going to “disadvantage” the Irish banking sector or collapse the construction sector, he said.

Ireland’s banking and economic crash “should never have happened”, he said. While the principal responsibility for the crash lay with the commerical banks, the secondary responsibility lies with the Central Bank of Ireland and Ifsra (the Irish Financial Services Regulatory Authority).

Mr O’Connell said his own role was advisory and he had no role in relation to regulation of financial insitutions. He said assessments and data were avilable to the Cantral Bank from the late 1990s onwards which should have moved it to take action concerning the lending institutions regulated by it but “such steps were not taken”.

He and others in the bank became increasingly concerned from the 1990s the property market was over-valued and the Bank should take steps in relation to lending in that regard. While he and others continued to mention those matters to senior people within the Bank, he was unaware of any steps taken.

The annual increase in property and construction lending reached a peak of 65 per cent on one occasion although the European Central Bank had indicated the appropriate growth in the money stock in the euro zone was 4 to 4.5 per cent, he said.

The case continues on Tuesday.

Mary Carolan

Mary Carolan

Mary Carolan is the Legal Affairs Correspondent of the Irish Times