Banking Inquiry report: Word ‘Solvent’ removed from statement announcing guarantee

Government ministers were assured by the Central Bank and the financial regulator that all six lenders covered by bank guarantee were solvent on September 29th, 2008, the night before the measure was announced.

However, according to the banking inquiry report, the word “solvent” as it pertained to the six covered banks was removed from the final official Government statement announcing the blanket guarantee, which is likely to cost the taxpayer nearly €30 billion.

The report also found that prior to the meeting on September 29th, European authorities made it clear to the Fianna Fáil-led government that no bank was to be allowed to fail and that no euro zone-wide measure, aimed at halting the emerging crisis, was coming

In the section dealing with the bank guarantee, the inquiry's report noted that the Department of the Taoiseach did not keep minutes of the meetings on the night of the guarantee and was unable to provide any drafts of the proposed guarantee as it evolved.

It concluded that the information available to the government and financial authorities on the night of the guarantee about the underlying health of the Irish banks was inadequate.

Aggressive lending

The advent of a new and aggressive lending culture within the Irish banking system linked to increase competition was pinpointed as the one of the principal reasons for the crash here.

In its section on banks, the report said the introduction of new mortgage products, including 100 per cent mortgages, had “masked the accumulating difficulty” of purchasing a property amid the year-on-year increase in prices.

When the global financial crisis struck in 2008, Irish banks had already moved “very far from prudent lending principles”, the report found, while there was also a culture of “excessive executive remuneration in the banks”.

The report also noted that in the nine years up to the State's bailout, three auditing houses KPMG, EY and PwC dominated the audits of Ireland's financial institutions, while Deloitte, the other Big Four practice, audited Ulster Bank.

The financial regulations that prevailed at the time also did not oblige banks to make disclosures about the provisions being set aside for the future loan losses. This ultimately delayed the recognition of loan provisions when the crash came, the report said.

The inquiry’s report recommends that the capacity for direct reporting of critical business risk to the regulatory authority by an external auditor of banks should be strengthened.

Independent audit

It also suggests that financial institutions should be obliged to obtain an independent audit of their regulatory returns.

In the section dealing with property developers, the inquiry said many developers had become heavily reliant on bank debt to fund their developments.

“In many cases, developers adopted a business model in which a bank would bear all of the risk of a transaction, either through 100 per cent financing or using so-called ‘paper equity’ to fund any element of developer’s equity.”

The report also found that the “soft landing” theory, cited frequently as the most likely outcome to the property boom from as early as 2000, was delivered without proper analysis or research.

“The failure to take action to slow house price and credit growth must be attributed, at least in part, to this shortcoming.”

The report found that the Financial Regulator had sufficient powers to deliver "prudential supervision of the banking sector if had been minded to take action.

“The Central Bank and Financial Regulator could have required banks to hold additional capital to absorb losses that could arise in the event of a financial crisis,” it concluded.