Banking inquiry told IMF provided ‘false comfort’

Ex-Financial Regulator CEO Liam O’Reilly: No conflict of interest in taking bank director roles

Former Financial Regulator CEO Liam O’Reilly appears before the banking inquiry.


The International Monetary Fund (IMF) provided “false comfort” by issuing positive reports about the Irish economy, the banking inquiry heard on Thursday.

Liam O’Reilly, former CEO of the Irish Financial Services Regulatory Authority, said the collapse was difficult to foresee.

He said: “It is now widely agreed that the event which occurred was a one-in-one hundred year event, and would have therefore had a very low probability of occurring.

“It would therefore have been practically impossible to predict. Again we were not alone in that this shock was not predicted anywhere in the world.”

Mr O’Reilly admitted the studies the Financial Regulator had commissioned were wrong but said it did express concerns at the time about various issues including 100 per cent mortgages.

He said: “All of these evaluations have now proven to be mistaken in that they all failed to recognise the extent of the credit exposure within the banking system.

“Neither did they anticipate the huge upheaval in the worldwide financial system which occurred in September 2008.

“In the period 2003 to 2005, the Central Bank and the Financial Regulator were concerned about the quality of credit and the level of indebtedness in the economy.

“The Central Bank and the Financial Regulator were continually voicing concerns on these issues to the lending banks. Communications were made to the banks and the general public reflecting these concerns.”

Mr O’Reilly said it had no evidence that a shock that happened in 2008 would occur and said international bodies did not either.

He said: “It is now clear that the IMF Article IV8 report was far too positive and, as a result, provided false comfort. Moreover the FSAP 2006 report from the IMF9 also provided a positive assessment of the Regulatory regime.

“At the time it provided the Financial Regulator and the Central Bank with assurance that we were discharging our obligations and functions satisfactorily.”

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Intrusive policy

The former CEO said the principles based system of regulation did not work and the Financial Regulator cannot trust the boards of the banks in the same way.

He said: “I agree that the Financial Regulator during my period in office could have adopted a more aggressive and intrusive policy. However this would have required more resources.”

Mr O’Reilly said there was no evidence during his time in office that market conditions might deteriorate to such a level that the financial system would “succumb to a traumatic shock of the magnitude” witnessed in the crash of late 2008.

“However the view emerged that property was becoming overvalued and there was a need for a correction,” he added. “At the time of my departure [IN 2006], that correction appeared to be under way. Fiscal policy was moving in the right direction with the removal of incentives for the building industry, interest rates were rising and house prices are stabilising.”

Mr O’Reilly now accepts that the principles-based approach to regulation during his time had “major shortcomings”.

“The Financial Regulator can no longer place the same degree of trust which had previously existed in the boards and senior managements of banks. In future, the Financial Regulator must adopt a more intrusive and aggressive approach.

“Moreover, the regulatory system did not appreciate the full extent of the credit exposures. I deeply regret that these failings in the system were not recognised during my tenure in office.”

When asked by committee chairman Ciarán Lynch if the crisis was already effectively underway in January 2006, the month when he left the regulator, Mr O’Reilly said: “I’m getting told by all the wise men… that it was. I didn’t have the sense as I left the Financial Regulator that we were in the beginnings of an imminent crisis.”

And now?

“In hindsight it looks like we were, yeah,” he said.

Mr O’Reilly later added that on his departure from office, he thought he’d left the regulator in a “good state” but said there was an “iceberg” on the horizon that he didn’t see.

‘Bank X’

Mr O’Reilly also detailed actions taken by the regulator against an institution that he called “Bank X”, which had corporate governance issues around 2002. The regulator felt these had been addressed by the appointment of a new chairman, two new directors and a chief operating officer.

“Unfortunately, within a year, the beginning of 2003 I think it was, the chief operating officer didn’t stay,” Mr O’Reilly said, saying the departure was due to personality differences.

“Matters came to a head for us in early 2004 with the arrival of a management letter from the auditors of the institution and concerns we had as regulators at the time. As a result of that we instituted a detailed investigation of that institution and we hired a firm of auditors to do that job.

He said the institution was required to carry out certain tasks: “In that case a sanction was applied to that institution. During the following year we have two sets of auditors in there trying to rectify that problem.

At the end of my tenure I thought that progress had been made. In hindsight, it wasn’t enough.”

Fine Gael TD John Paul Phelan questioned Mr O’Reilly as to why he accepted directorships with certain banks after leaving the regulator in January 2006 with a good pension.

Mr O’Reilly said there was no question of a conflict of interest following his decision to take non-executive director roles with Merrill Lynch bank in Ireland in 2007 and with Permanent TSB in September 2008.

“I must say deputy that I never, ever in my life worked to make a lot of money,” he said. “Financial gain was not top of my mind. At the top of my mind, I thought I might be of some use (to the banks). That’s why I did it.”

Mr O’Reilly said he could understand the public forming a negative perception of his decision to take these directorships .

“I’d just ask when one retires what is one to do? Am I to go down for the bread this morning and make a cup of tea? It’s still a constitutional right, the right to work,” he said.