Patrick Honohan: Cost of banking crisis ‘more than €100bn’

Central Bank governor says bulk of austerity measures could not have been avoided if different decision on banks had been taken

Professor David Farrell of UCD speaks to the Oireachtas inquiry into the banking crisis.

 

The entire cost to society of the fallout from the banking crisis has been more than €100 billion, Central Bank governor Patrick Honohan has told the Oireachtas Banking Inquiry.

Mr Honohan was giving evidence to the third session of the inquiry on Wednesday, having asked to appear before it in order to clarify evidence he previously gave.

He told the inquiry the cost of the whole “debacle” were greater than estimated, but that he could not put an exact figure on it because nobody had really done the work “in a way that is robust”.

Mr Honohan also has said he created a “misleading impression” in relation to issues around the 2008 bank guarantee in evidence previously given to the inquiry.

He appeared before the committee on January 15th and was asked if his view of Anglo Irish Bank’s inclusion in the guarantee had changed since he produced a special report for the government in 2010, before he became governor of the Central Bank.

In a letter to inquiry chairman Ciarán Lynch, sent on February 12th, Mr Honohan said he had reflected on his discussions with the committee and while he does not think there had been “much evolution” in his thinking on the matter, he accepts that a “different impression might have been conveyed” to the inquiry.

When it was put to him on Wednesday by Fianna Fáil finance spokesman Michael McGrath that his previous evidence had given the “clear impression” that Anglo Irish Bank should have been allowed to fail, Mr Honohan said he thought this must have been a “senior moment”.

He had “leapt from one scenario to another” in his responses to the committee, he said.

In his opening statement, Mr Honohan said the need for austerity measures could have been “reduced somewhat, but not all that much” by anything done at the time of the bank guarantee the end of September 2008.

Banking inquiry live

“As I have remarked recently, the boom and the bust both damaged our economy. The boom, and the decisions that were taken during it, meant that Ireland had to adjust down from living standards that could never have been sustained, with sizeable and capricious shifts in the distribution of wealth.”

Prof Honohan said the style of banking in Ireland, its regulation and broader economic policy were “strongly influenced by comparable styles adopted at that time in countries often used as exemplars for Irish decision makers, and in particular the US and UK”.

“But the scale of the excesses in Ireland put its banking crisis in a different

league (though not as bad as Iceland). The extent and nature of the guarantee decision frustrated subsequent efforts to minimise the costs and speed the recovery.

“But the bulk of these costs could not have been avoided by a different course of action on the night of the guarantee.”

Prof Honohan said at least 80-90 per cent of the overall hardship was “albeit unbeknownst to the decision makers that night (the night of the bank guarantee), already “inescapably embedded in the situation”.

He said the decisions on the night of the guarantee “did of course have consequences for Ireland”.

“But there has been a tendency to overstate the extent of the impact of that night’s decisions on the subsequent welfare of the nation.”

Asked by Fine Gael TD Kieran O’Donnell what his motivation was for writing to the committee four weeks after his appearance before it, Mr Honohan said one of the reasons was that he had spoken to people who suggested his evidence had not been understood the way he intended.

Prof Honohan confirmed he had been contacted by former secretary general of the Department of Finance David Doyle, who had seen the transcripts of his appearance before the committee and had contacted him.

Mr Doyle had disagreed with Mr Honohan about the date of a specific meeting.

Asked by Mr O’Donnell for his professional opinion of what should have been done with Anglo Irish Bank and Irish Nationwide on the night of the bank guarantee, Prof Honohan replied: “By the end of that week they should have been nationalised.”

Earlier, the committee heard the Oireachtas performed “poorly” during the period of the banking crisis and lacked sufficient organisational and structural fire power to provide effective scrutiny.

Prof David Farrell of UCD told the committee the parliament lacked too “the political will to use what powers it did have, indicating ‘cultural’ shortcomings. He said the “closed culture” of government in Ireland did not help matters.

“It was hindered by a governmental system that places great emphasis of secrecy particularly in its dealings regarding budgetary matters. There is little evidence to suggest that things are any different today,” Prof Farrell said.

Prof Farrell and his colleague Niamh Hardiman appeared before the committee as it continued its context-phase hearings on relationships between State authorities, political parties, elected representatives, supervisory authorities, banking institutions and the property sector.