Executives feared breaking from herd mentality

MAINSTREAM LENDERS:BANK EXECUTIVES feared they would be punished formally or informally if they broke with the herd mentality that dominated their industry and led to the financial crisis.

The report says that mainstream lenders began following the risky lending policies pursued by Anglo and Irish Nationwide out of fear that they would lose profits, customers and professional reputations.

Profits at Anglo and Nationwide and a consensus that the Irish property market would keep growing combined to create a herd mentality among Irish bankers. This led to a change of strategy at institutions such as AIB and Bank of Ireland, which began following similar strategies to Anglo and Nationwide without changing their internal systems to deal with the risks that such a change was likely to bring.

The report says the few people in these organisations who “admitted to feeling any degree of concern at the change of strategy often added that consistent opposition would probably have meant formal or informal sanctioning”.

Nyberg says his commission found some indications that concerns raised by anyone at operational level within the banks were discouraged.

“Early warning signs generated lower down in the organisation may in some cases not have reached management or the board. If so, the pressure for conformity in the banks has proven to be quite expensive.”

He also noted that, over time, managers known for strict credit risk and risk management were replaced.

Nyberg says that Irish bankers displayed a herd mentality similar to that which has played a key role in other financial crises. Its chief characteristic is a willingness on the bankers’ part simultaneously to invest in, lend and own the same type of assets while not gathering sufficient information or carrying out adequate analyses of what they are doing.

“Some of the participants in a herd have only a partial idea of the economic advantages and disadvantages of a particular course of action – for instance, investing or property lending. However, they assume that others have a clearer view and follow them, thus demonstrating what is commonly referred to as a bandwagon effect.”

He adds that it implies that management groups in different banks implicitly follow each other, with little or only modest analysis and discussion. In the Irish context, the motivation was to display similar profit growth to competitors.

Reacting to the report yesterday, Bank of Ireland said it had implemented the recommendations of an independent review of its risk management, and established a separate risk committee of its board, whose members are drawn from non-executives.

The bank added that a review of its risk management carried out by Boston Consulting, which completed the recent stress tests of the Irish banking system, found that Bank of Ireland’s approach is now broadly in line with best international practice.

AIB issued a statement shortly before Nyberg published his report. The institution, which is now largely State-owned, said it was carrying out a fundamental restructuring of its business. One of the most critical parts will be a series of changes to both the board and the senior management.

“AIB expects to announce the roles and some members of its new executive management team shortly when the approval of the financial regulator has been finalised. The AIB board currently includes three members who were appointed in 2007. In line with the bank’s determination to focus on the future, these members have decided not to seek re-election to the board at the 2011 annual general meeting. All other board members were appointed in 2009 or 2010.”