Irish bank crisis 'homemade'

Ireland's banking crisis was influenced by global factors such as the collapse of Lehman Brothers but was in many ways a “homemade” crisis, an independent report has concluded.

The report, compiled by former International Monetary Fund officials Klaus Regling and Max Watson, concludes that Government policies and bank governance failings seriously exacerbated Ireland’s credit and property boom, and depleted its fiscal and banking buffers when the banking crisis struck in 2008.

The Regling/Watson report, published this afternoon along with an additional study into the banking crisis from Central Bank governor Patrick Honohan, examines the international banking environment prior to the crisis and policies pursued at local level.

It identifies a number of factors specifically pertaining to the Irish banking system which exacerbated the impact of the international financial crisis for Ireland.

“Official policies and banking practices in some cases added fuel to the fire. Fiscal policy, bank governance and financial supervision left the economy vulnerable to a deep crisis, with costly and extended social fallout,” it says.

"While global and domestic factors thus interacted in mutually reinforcing ways, it is feasible to disentangle the main ‘homemade’ elements in the debacle," it adds.

"The Government‘s procyclical fiscal policy stance, budgetary measures aimed at boosting the construction sector, and a relaxed approach to the growing reliance on construction-related and other insecure sources of tax revenue were significant factors contributing to the unsustainable structure of spending in the Irish economy."

The report concludes that fiscal policy heightened the vulnerability of the economy and says that more should have been done to dampen the powerful monetary and liquidity impulses that were stimulating the economy.

"Budgets that were strongly counter-cyclical could have helped to moderate the boom, and would also have created fiscal space to cushion the recession when it came. But budgetary policy veered more toward spending money while revenues came in.

“In addition, the pattern of tax cuts left revenues increasingly fragile, since they were dependent on taxes driven by the property sector and by high consumer spending," it says.

The Regling/Watson report says that during the boom years banking governance and financial supervision were weak, a situation which contributed to the crisis.

"Ireland’s banking exuberance indulged in few of the exotic constructs that caused problems elsewhere. This was a plain vanilla property bubble, compounded by exceptional concentrations of lending for purposes related to property – and notably commercial property," it says.

The Central bank also comes in for criticism with the report authors saying there was an absence of forceful warnings from the central bank on macro-financial risks.