Banking inquiry: ‘The system failed and I regret that’
Former regulator Patrick Neary says he relied on banks for risk analysis
The former financial regulator has said he regretted that the regulatory system within which he was working had failed.
He said: “The system failed and I regret that”.
Mr Neary confirmed before the committee that he relied on the banks for analysis of risk management, believing them to be best placed to provide such analysis.
Asked about the downturn in the property market, Mr Neary said warnings that had come from the Central Bank ahead of the crash had been “benign”.
He said the conclusion from a number of bodies was that there would be a “soft landing”, and the Central Bank’s analysis “gave us comfort”.
Mr Neary said there was no assessment that regulatory action was required because each individual bank was in compliance with its regulatory requirements.
Mr Neary said that “with hindsight, the supervisory measures taken by the authority were not sufficient to meet the challenges posed by the crisis and the recession that emerged and I am deeply sorry for that”.
“I regret that very deeply,” he added.
Mr Neary said he could not conceive of a situation where the regulator would intervene between bankers and clients.
He told the committee it was “inconceivable” that the regulator could confirm who did or did not get credit or loans from a bank.
He was being questioned by Sinn Fein finance spokesman Pearse Doherty, who had asked if he was not concerned that two financial institutions had become concentrated on 45 individuals.
Chariman Ciaran Lynch of Labour also asked Mr Neary if he was concerned.
Mr Neary said “of course there was a huge concentration on property lending” and that “was a concern”.
Under questioning from Socialist TD Joe Higgins, Mr Neary said: “The reality of this is this system failed.”
He said he had to accept that and could not describe the system as other than a failure.
However, when accused of having an “extremely cozy” relationship with the banks, he said he really did not know what that meant. He said there was dialogue but he would not go further than that to describe the relationship.
Fine Gael TD John Paul Phelan asked Mr Neary if he had an understanding of the “absolute anger” that existed among the general public following the consequences of the economic crash.
Mr Neary said he regretted what had happened but said it was important to get some balance into his response.
It was regrettable that shareholders had lost money, but the boards and directors of the banks had let them down, he said.
Mr Neary said the primary obligation of the regulator was to the depositors of the banks and thanks to the bank guarantee their deposits had been saved.
Under questioning from Independent Senator Sean Barrett, Mr Neary said “our colleagues in the Central Bank have to come into the equation”, adding that their assessment of the situation was “overly benign”.
Mr Neary accepted the principles-led approach to supervision and the structure of regulation at the time with the regulator and the Central Bank having separate roles was “flawed”.
He added that he now believes that a “clearer, more direct and specific allocation of responsibility for the oversight of financial stability within the organisational structure of the Central Bank would have been more appropriate”.
In response to a question from Fianna Fáil’s Michael McGrath as to whether he believed Irish banks lent too much money to the property sector, Mr Neary said: “I do, yes”.
Mr McGrath asked if the regulator had the tools to deal with this.
“We did have the power to set ratios. I would never try to defend ourselves by saying we didn’t have the powers. An intervention was necessary and we could have found a way,” Mr Neary replied.
There were “tools available” to the authority to deal curb the concentration of property lending, he said.
In relation to the bank guarantee in September 2008, Mr Neary said two options were considered on the night – “either nationalisation of Anglo coupled with a guarantee of the five remaining banks, or a guarantee of all the banks”.
Mr Neary said he raised a concern about whether there would be confusion in the minds of the market the following morning as to who was or was not guaranteed and that making a distinction between nationalised banks and guaranteed banks ran the risk of being “very confusing”.
He argued this would neither encourage the inflow of liquidity that would be expected to occur, nor would it stem outflows of deposits and that questions would undoubtedly arise as to whether the nationalised bank was stronger or weaker than the guaranteed bank and in that situation all banks would risk being adversely affected.
He favoured the guarantee being extended to cover the depositors in all banks concerned in the same manner.
“The effects of the guarantee were evident immediately,” he said. “The daily liquidity reports being submitted by the banks to the Central Bank showed inflows of both market and retail resources and an end to the pattern of outflows which had been occurring prior to the guarantee.”
In relation to its view of property lending by Irish banks in the years before the crash, Mr Neary said the regulator’s decisions reflected forecasts from the Central Bank which it was obliged to follow.
“These predicted a soft landing and if that prediction had been fulfilled, there would not have been a banking crisis,” he said.
He noted that IFSRA introduced a number of additional supervisory requirements on the banks in mid 2007 as a response to the strong appetite for credit for residential property purchases.
“The authority did not run the banks and these minimum standards did not excuse the boards from their duties to set appropriate policies,”he said.
Mr Neary said the authority relied on the Central Bank which maintained an economic services division with 86 staff, including a dedicated Financial Stability Department, to monitor and assess the overall health of the financial system.
“There were no economists in banking supervision department [OF IFSRA],” he said.
“Had these predictions held, there would not have been a bailout. I do not think, even with the benefit of hindsight, that the authority, in the context of the time, would have assumed a different approach to supervision.”
Mr Neary told the committee that he was a practitioner of principles-led regulation at the time. “I bought into that,” he said, adding that he felt at the time that a combination of legal requirements and responsible behaviour by the banks would “contribute to a stable financial system”.
“That clearly didn’t happen,” he accepted.
With hindsight, Mr Neary said it was to have a far more intrusive regime that was tough and adjudicated “more rigorously” on the behaviour of banks.
Lack of staff
Mr Neary also accepted that there was a lack of staffing resources at IFSRA in the years leading up to the crash.
“There is little doubt that staff were stretched very thinly in banking supervision and thus the capacity to react to the unfolding crisis was made more difficult,” he said.
Mr Neary joined the Central Bank in 1971 and became prudential director at IFSRA in 2003 before stepping up to the chief executive role in 2006.
He left in January 2009.