'Herd mentality' led banks to copy risky Anglo Irish model


A report into the causes of the Irish banking crisis has criticised the “herd mentality” that saw financial institutions copy the risky lending practices of Anglo Irish Bank.

The report by Finnish financial expert Peter Nyberg found that while the speed and severity of the crisis was exacerbated by global events, the main reason for the crisis was “the unhindered expansion of [Ireland's] property bubble financed by banks using wholesale market funding".

The 156-document, entitled Misjudging Risk: Causes of the systemic banking crisis in Ireland, is highly critical of the banks, financial regulators and the Department of Finance.

“It appears now, with hindsight, to be almost unbelievable that intelligent professionals in the banking sector appear not to have been aware of the size of the risks they were taking,” Mr Nyberg told a press briefing in Dublin following the publication of his report.

His six-month commission of inquiry into the crisis concluded there was a lack of critical debate across Irish society about the scale and sustainability of the economic growth and the property boom.

There was a general view that property values would not fall which contributed to the growth in property lending and excessive risks taken by the banks, the report said.

This led to "a gradual adoption of lower credit standards" by a number of banks as a method to sustain market share and profitability.

“The willingness of banks to accept higher risks by providing more and shockingly larger loans primarily for commercial property deals was an important reason for the gradual increase in financial fragility in Ireland,” the report said.

Mr Nyberg said the absence of sufficient information on the underlying quality of loan books at the banks impacted on the options considered by the Government when it decided to introduce the bank guarantee in 2008.

“If accurate information on banks’ exposures had been available at the time it seems quite likely to the commission that a more limited guarantee combined with a state take-over of at least one bank might have been more seriously contemplated,” his report said.

The commission said regulatory authorities should have done more to dampen bank lending during the boom and criticised the introduction of 100 per cent mortgages. It also said regulatory authorities should have capped the amount of money lent by banks.

Both the Financial Regulator and the Central Bank either failed to detect or “seriously misjudged” the risks associated with the property boom. Both regulatory bodies were aware of the "macroeconomic risks" and the risky bank behaviour but appear to have judged them “insufficiently alarming” to seek to restrain lending, his report concluded.

However, Mr Nyberg said it was "extremely difficult" to put specific blame on any one group or institution for the banking crisis.

Minister for Finance Michael Noonan said there would be a Dáil debate on the report tomorrow. All financial institutions covered by the bank guarantee scheme are also to be asked to provide a “board renewal plan” to him and the National Treasury Management Agency, the Minister said.

While he did not blame individual board members, he said that because the crisis happened on their watch, it was right that they should move on.

The Minister also said the Cabinet would prioritise legislation for a referendum on the Abbeylara judgment, to give Oireachtas committees much stronger powers of investigation and ability to compel witnesses to appear.

In a statement this evening, former finance minister Brian Lenihan said he agreed with the report's finding that there was a "systemic failure of regulation and oversight." 

"The report is a direct challenge to what it shows to have been a wide consensus through that period which looked at the property market primarily in terms of the need for more houses and expectations of rising prices.

"The report is also correct in pointing to the political consensus, involving all parties, which saw the main issue at the time as being the expansion of public services and increasing public spending. Fianna Fáil accepts its responsibilities in this regard, but the question remains whether Fine Gael and Labour will now recognise and acknowledge their role."

"We welcome the fact that the relevant agencies have received the report and have been asked to examine possible legal action concerning failures of corporate governance," he said.

Mr Nyberg's inquiry follows two reports into the causes of the crisis last year by Central Bank governor Patrick Honohan and by banking experts Klaus Regling and Max Watson.

Mr Nyberg’s report focused closely on lending practices at Anglo and Irish Nationwide to examine why they incurred much heavier losses than other financial institutions.

In the case of Anglo, the report said while procedures and processes existed on paper, in certain cases they were not properly implemented or followed in practice.

“It appears that, at least in the latter years, only a handful of management was aware of all activities of the bank,” it said.

At Irish Nationwide, a number of essential, independent functions either did not effectively exist or were seriously under-resourced.

Corporate governance at these banks fell short of best practice and risky lending policies at these institutions served as a role model for other banks, the report found.

“As other banks tried to match the profitability of Anglo in particular, their behaviour gradually, and even at times unintentionally, became similar,” the report said.

Mr Nyberg’s report found that the then financial regulator Patrick Neary chose to trust bank bosses to make proper and prudent decisions.

“There was almost an element of the Financial Regulator being ‘fobbed off’ by banks that had particularly full confidence in the quality and sophistication of their models and systems.”

Mr Nyberg’s report also noted what it termed as “the herd mentality” of other banks in the face of the rapid expansion of the loan books in Anglo and Irish Nationwide.

“Bank management and boards in some of the other covered banks feared that, if they did not yield to the pressure to be as profitable as Anglo, in particular, they would face loss of long-standing customers, declining bank value, potential takeover and a loss of professional respect,”.

The report was also critical of the role played by the banks’ external auditors, describing them as “the silent observers”.

The crisis, the report said, was underscored by Irish banks’ access to cheap and abundant credit internationally, “owing to monetary policies in major countries”.

A majority of the people interviewed by the commission indicated they saw no major problems except lack of liquidity until the end of 2007, at the earliest, and autumn 2008, at the latest, the report noted.

“The reasons given were usually very similar, the most prevalent being: property prices in Ireland had never decreased markedly; everybody expected a “soft landing” at worst; loan portfolios appeared sound; property credits were diversified by country or county or class; peer banks abroad did the same thing; and ‘nobody told them’ there was a potential problem.”