AIB approached ESRI in 2006 to ask for stress test

AIB approached the ESRI in early 2006 to see if the thinktank would carry out a stress test of the bank's balance sheet as it felt that a similar exercise in the previous year by the Central Bank had not been robust enough.

This emerged on Wednesday in evidence given to the Oireachtas banking inquiry by economist John FitzGerald, who retired from a full-time role with the ESRI in 2014 after 30 years with the body.

Mr Fitzgerald said he was contacted by a senior economist at AIB and two people from the bank subsequently went to meet him. “My understanding was that at a senior level in the bank they felt the stress tests [by the Central Bank in 2005] were not stressful enough . . . and they needed a proper model to do this. They approached us to say ‘could you do this?’.”

Declined

Mr FitzGerald declined to take on the project. He told the bank it had already established a model using adverse macroeconomic scenarios involving a steep fall in house prices, an increase in unemployment and the knock-on effects these measures would have on government tax revenues, and the AIB could use the material.

“I would’ve preferred not to take AIB’s money,” he said, adding that the ESRI always publishes its research and would never let an external party change its findings.

Mr FitzGerald was of the view that the concern about the stress tests emanated from the board of AIB. “This would not have happened unless there was very senior buy-in [at AIB].”

When asked if this had struck him as an unusual approach, Mr FitzGerald said: “Yeah and it first primed me to concerns in this area.”

The ESRI provided similar macroeconomic scenarios to Permanent TSB and Ulster Bank, he said.

Assumptions

Mr FitzGerald said he sought a meeting with the Central Bank in 2007 to flag his concerns that the assumptions in the stress tests on Irish banks had not been adverse enough. “The communication of the details of my concerns did not happen,” he said.

Mr FitzGerald accepted the ESRI had failed to forecast the financial collapse in its medium-term review in May 2008 and said it was another six weeks before the full scale of the problem became evident to him. “I failed to foresee the impending financial collapse,” he said.

“We made a call that Ireland would probably escape it and we were totally wrong,” Mr FitzGerald said, adding that he made a “big mistake” by not spotting obvious difficulties on the balance sheets of Irish banks at the time.

Mr FitzGerald outlined tensions that existed between the ESRI and the Department of Finance. He said the department was “thoroughly grumpy” about some of the measures the ESRI called for in 2008.