Banking Inquiry: Ex-IBF chief lobbied for Depfa bank guarantee

Pat Farrell rejects assertion he lobbied for German bank, says it was ‘representation’

Pat Farrell,  chief executive of the IBF from mid-2004 to June 2013, said there was  a recognition that the business models of the Irish activities of international banks operating here were “either flawed or could not be maintained as they sought to preserve capital and liquidity, and reduce costs”. File photograph: Eric Luke/The Irish Times

Pat Farrell, chief executive of the IBF from mid-2004 to June 2013, said there was a recognition that the business models of the Irish activities of international banks operating here were “either flawed or could not be maintained as they sought to preserve capital and liquidity, and reduce costs”. File photograph: Eric Luke/The Irish Times

 

Former head of the Irish Banking Federation Pat Farrell lobbied the then government to have German bank Depfa included in the State’s blanket bank guarantee from September 2008.

This emerged at the Oireachtas Banking Inquiry today as Mr Farrell gave evidence about his nine years as chief executive of the IBF.

Depfa had its head office in the IFSC in Dublin and was a member of the IBF. Mr Farrell described it as an “orphan” in regulatory terms, as it wasn’t clear if it was subject to Irish or German regulation at the time.

This representation included Mr Farrell sending an email on October 15th, 2008, some 16 days after the guarantee decision by the government, to Dermot McCarthy, the then secretary general of the department of the Taoiseach, seeking to have Depfa included in the guarantee.

Depfa was later rescued by the German state amid the financial crisis, with the bailout being larger than any given to an Irish domestic bank.

“I got a representation from Depfa that I passed on to the relevant authorities, no more no less,” Mr Farrell told Sinn Féin’s Pearse Doherty.

Assertion rejected

He rejected Mr Doherty’s assertion that he had lobbied on behalf of Depfa to be included in the guarantee. “You say I lobbied, I say I passed on representation,” he said. “I saw it as a representation.”

Mr Farrell said that when the guarantee was announced, it was clear that only Irish banks were included under its terms. This “annoyed” the foreign banks here, who felt they were placed at a disadvantage.

He said with hindsight, it’s clear that Depfa was regulated by the German authorities.

Mr Farrell also told the inquiry that the hosting of a retirement dinner for the former chairman of the Financial Regulator, Brian Patterson, some two months after the guarantee decision, was a mistake.

He said Mr Patterson had retired in April 2008 of that year but had been unwell at the time and so the dinner did not take place until November.

With the benefit of hindsight, he said the dinner should not have taken place but it was a case of “damned if you do and damned if you don’t”.

“The dinner happened,” he said. “It was a two-hour affair. It was a pretty sober affair because it was during the working week. There were no speeches.

Optics ‘far from good’

“There was certainly no business transacted at it. Understandably…the optics of it were far from good. That’s the background to it. It’s as straightforward as that.

“It was not inappropriate in the sense that it was a social event, it was not anything more than that.”

Mr Farrell served as as an Oireachtas senator for one day during Albert Reynolds’s time as taoiseach and was asked by Mr Doherty if the access afforded to former members of the Seanad had been useful to him as head of the IBF.

“I wasn’t in the business of wandering around the corridors of Leinster House,” he said, adding that he has usually only appeared in the building on official business or to appear before a committee.

In his opening statement, Mr Farrell said business models pursued by many banks operating in Ireland before the financial crash in late 2008 were “fatally or fundamentally flawed”.

Mr Farrell, who was chief executive of the IBF from mid-2004 to June 2013, said there was also a recognition that the business models of the Irish activities of international banks operating here were “either flawed or could not be maintained as they sought to preserve capital and liquidity, and reduce costs”.

Mr Farrell said common business model flaws were under-capitalisation, over-dependence on wholesale funding, aggressive pricing and loosening of credit standards coming into the crisis, followed by rapid retrenchment to their home country franchises post-crisis.

He said more than €50 billion in rescue funds for international banks operating in Ireland was borne by the shareholders or home taxpayers of these banks, which had to recapitalise their subsidiaries competing in the domestic Irish market, along with losses they incurred as they retrenched.

Mr Farrell said this retrenchment or exit caused “significant difficulties” for Irish consumers as they sought to make alternative banking arrangements, or customers found their loans had been sold to entities where they had no choice in the matter.

As chief executive of the IBF, Mr Farrell sought on “several occasions” to have “broader dialogue” with the Central Bank of Ireland on general banking issues but was given the clear message that the Financial Regulator, which was responsible at the time for day-to-day supervision of Irish banks, was the “primary conduit for engagement”.

‘Notable feature’

He said business model discussions and general issues of prudential regulation in areas such as capital, liquidity or credit standards were not a “notable feature” of agenda discussions within the IBF or between the federation and regulatory or other authorities.

Mr Farrell said that, as the crisis unfolded during the second half of 2008, the various members of the IBF became increasingly focused on their “own specific issues” and it became apparent that for some of the subsidiaries of international banks the key decisions were being taken outside Ireland.

“The members of the IBF council had differing senses of priorities, were reluctant to show their hands for obvious reasons and had differing degrees of mandates to articulate to the IBF as to what they wanted the IBF’s mandate to be in engaging with relevant authorities and regulators on solvency and liquidity issues,” he said.

Before September 2008, when the guarantee decision was made by the then government, the IBF had no mandate from its council to discuss “specific government liquidity or solvency support initiatives for the sector with the authorities and was not a party to considerations by the authorities on such matters”.

‘Increased evidence’

During 2009 and particularly after the arrivals of Patrick Honohan as governor of the Central Bank and Matthew Elderfield as Financial Regulator, there was “increased evidence” of cross-stakeholder working groups involving the Department of Finance and the Central Bank where IBF was a participant on sector-wide issues.

Before joining the IBF, Mr Farrell served as general secretary of Fianna Fáil, and also as a senator.

As head of the banking body, he said his dealings with government and public authorities were at all times “appropriate and professional”, and noted that many other former political figures operate in advocacy roles for industry bodies.

Mr Farrell is now head of group communications and government matters for Bank of Ireland.