The former chief executive of Irish Life & Permanent plc accepts that the funding model in place at the end of 2006, just months before his retirement, was "absolutely inadequate" to cope with the subsequent crash.
This was in spite of the bank appearing to be "well funded, with easy access to a variety of apparently liquid capital market sources, long-term debt repayments well spread, relatively low use of securitisation, availability of secured repo and ECB eligible collateral together with approximately 30 per cent customer deposits", David Went told the Oireachtas Banking Inquiry on Thursday.
“Events subsequently proved this funding model absolutely inadequate,”
Mr Went said in his written statement to the inquiry. “External events together with negative views on Irish credit portfolios ensured that very rapidly all capital markets were closed to IL&P with the disastrous effects that we now know.”
Mr Went was also critical of financial regulation during his time in charge of IL&P, stating that there was a greater focus on consumer issues and a “low key” prudential activity.
“The regulator appeared reluctant to use its power of moral suasion that I believe it possessed, preferring to take a very legalistic view of its power,” he said.
“I recall contacting the regulator regarding the introduction of 100 per cent mortgages, which I regarded as an unnecessary and unwelcome development. It was made clear to me that the regulator regarded itself as powerless to intervene.
“In general, it is my view that the regulator failed to fulfil its prudential function. It is primarily a failure on the part of management and boards of banks that was responsible for the crisis that emerged.
“However, as with all participants in the creation of the crisis I am sure that different decisions at different times by the regulator could have reduced the severity of events.”
Mr Went, who is a former chairman of The Irish Times Ltd, served as IL&P’s CEO from 2000 to May 2007. The group emerged from the combination in the earlier years of Irish Life, Irish Permanent building society and TSB bank.
After the crash, IL&P received a €4 billion bailout from the State, which took a 99.2 per cent share in the company.
It has since being broken up with Irish Life sold to Canada's Great-West Lifeco for €1.3 billion and Permanent TSB focusing on retail banking with the State continuing to hold a 75 per cent share of the business.
Mr Went told the committee about how IL&P honed its business strategy to focus exclusively on the Irish market during his time in charge.
“The group exited virtually all its wide range of external investments, and by the end of 2006 consisted, with the exception of a relatively small centralised mortgage provider (CHL) in the UK, primarily on the provision of Irish house mortgages (both owner occupier and buy to let), together with a significant car finance business, and a commercial lending business focussed on financing investment properties, generally fully let on long leases,” he said.
Mr Went said IL&P did not become involved in “large ticket development/speculative property lending nor lending on raw land, nor were we involved to any significant extent in the SME market due to a combination of restrained risk appetite and skill deficits”.
While this strategy appeared logical, the bank did not anticipate the “savage downturn”, particularly in house prices and employment and the damage it would do to its chosen business models.
Mr Went said its loan-to-value (LTV) ratios were seen as reasonable, averaging 71 per cent at inception for residential home loans. The first time buyer LTVs reached 87 per cent in 2006 following the introduction of 100 per cent mortgages in 2005.
Mr Went said borrowers were tested for repayment capacity, including a stressed 2 per cent interest test.
Commercial loan policies primarily consisted of LTV ratios to a maximum of 75 per cent to 80 per cent with regular use of fixed rate loans for five to seven years to ensure “suitable cover for interest payments”.
Mr Went said that total pay for executives was “substantial” it was “not high” relative to the Irish market at the time.
“However, it is clear that public perception of remuneration in financial services at this time was that it was excessive and it is clear that this perception is reality for financial service executives including myself.”
Mr Went said he did not believe that the remuneration arrangements at IL&P led to a culture of excessive risk taking given the checks and balances within the overall credit approval system.
Mr Went said IL&P was a well run business when he retired from the business and he was “shocked and disappointed” by the difficulties experienced by the group after the financial crash in late 2008 and the impact it had on the company’s staff, shareholders and taxpayers.
Mr Went also accepted that “errors” were made on his watch, namely in relation to capital funding and in failing to recognise the possibility that house prices could fall by 50 per cent.
“They were two errors that were made and I take responsibility for them,” he said.
Mr Went said he was “fit to be tied” when he learned of the introduction into the Irish market of 100 per cent mortgages by First Active, a subsidiary of Royal Bank of Scotland.
He felt there wasn’t a “crying demand” in Ireland for the product and meant lenders were competing on credit quality rather than service and interest rate pricing.
Mr Went said he make his concerns known to the financial regulator Patrick Neary, stating they were a “bad product” and a “bad idea”. He said Mr Neary felt his “hands were tied” in terms of dealing with the issue.
In response to a question from Sinn Féin’s Pearse Doherty, Mr Went expressed his “regret” that IL&P itself introduced these mortgages but said the view at the time was that not competing in this space could have resulted in “serious damage to our institution”.