Nyberg blames crisis on all institutions involved

 

BANKING COLLAPSE:IRELAND’S BANKING crisis occurred because of lax oversight by external watchdogs and a move away from “time-honoured prudential limits and procedures” by the financial institutions themselves, the report by Finnish banking expert Peter Nyberg has concluded.

Mr Nyberg said responsibility for the spectacular collapse in our financial system lies with all of the institutions involved but stopped short of blaming any individuals.

He said the “mania in the Irish property market” created a consensus that few professionals were willing to challenge.

The 101-page report, which took six months to compile, involved more than140 interviews and cost €1.32 million, states that the Central Bank and the Financial Regulator had the powers to intervene in the governance and lending issues that arose in the banks in the last decade but failed to exercise them. “The real problem was not a lack of powers but a lack of scepticism and the appetite to prosecute challenges,” Mr Nyberg said.

He said the Financial Regulator was “fobbed off” by the banks, which had “full confidence” in the quality of their own systems.

The Finn concluded that had the Department of Finance taken a “greater interest in financial market issues early on, preparations for dealing with the financial crisis would have been more comprehensive”.

While “worries about the developing financial situation” were expressed internally from “time to time”, they were never acted upon as there was a view that the Central Bank and the Financial Regulator were responsible for stability in the sector.

In addition, the report found that the department did not have the “requisite professional staff” to fulfil its mandate.

Mr Nyberg said neither banks nor borrowers understood the risks involved, and he was critical of their governance structures.

“In some cases management information systems were weak and did not give managers and the board meaningful or complete information.”

He said the banks “embraced a lending sales culture at the expense of prudence and risk management”. The risk management structures proved “largely ineffective”.

Too often there was a “collegiate and consensual style with little challenge or debate” on bank boards, Mr Nyberg said, adding that the banking and lending expertise of non-executive directors was “insufficient”.

Mr Nyberg was particularly critical of governance at Irish Nationwide. “The society lacked a number of formal functions usually considered necessary in banks and, in addition, documentation was substandard.”

Mr Nyberg, who worked in Finland’s finance ministry at the time of its banking crisis in the early 1990s, said he was “widely assured” by bank management, non-executive board members and “others” that the problems in loan books came as a “complete surprise” to them.

The credibility of these statements was “increased” by the fact that a number of them “suffered substantial losses” from the crisis, which could have been avoided if advance warnings had been “available and recognised”.

“In Anglo, some board members had significant shareholdings in the bank, which indicates that they had particularly full trust in the operations and growth goals of the bank.”

Mr Nyberg concluded that external auditors interpreted their role narrowly while some “doubters” within the financial sector remained silent “in part to avoid possible sanctions”.

The report said if it were not for the international liquidity crisis, brought about by the collapse of Lehman Brothers in 2008, the Irish property market would have continued to expand and the crash could have been worse.

He said, given the information provided at the time, he “understands” the government’s decision to offer a broad bank guarantee.

Mr Nyberg suggested measures that could prevent such a crisis occurring. These include limiting the size and growth of banks and the banking system in relation to the economy. Other options include: a “high and progressive minimum capital requirement” (set nationally); limiting “implicit government subsidies to certain bank activity clusters only”; and raising the “potential default costs for investors in banks”.