'The right calls have consistently been made to deal with this distressing situation . . . '


Edited extracts from the speech delivered by Taoiseach Brian Cowen to the North Dublin Chamber of Commerce, DCU, last night.

“. . . This evening, I want to spend some time looking at the banking crisis in Ireland. I want to talk about its root causes, the measures we have taken to resolve the crisis, and the next steps we will take to ensure it can never happen again . . . There are six fundamental questions which I believe need to be addressed.

Were the causes of the Irish banking crisis internationally determined or self-inflicted?

. . . I believe that if the unprecedented global financial collapse had not happened, there would have been a soft landing for the Irish economy.

However, the overvaluation of properties, and related vulnerabilities within banks, put Ireland in a weaker position when we had to face the global crisis.

I accept that ongoing actions would have been required to address these vulnerabilities even in the absence of the global crisis. To suggest otherwise would, in my opinion, be to bury one’s head in the sand . . .

Does the balance of evidence suggest that banks had or did not have sufficient capital to absorb likely losses?

. . . We now know grave mistakes were made in the judgement of the capital adequacy of the Irish banks and the assessment of future loan losses. It is, however, important to note that no one in the independent authorities ever advised the Government that the capital adequacy was not sufficient or that higher capital adequacy ratios should be imposed.

What actions were taken to minimise potential vulnerabilities?

. . . It has been alleged that no action was taken by the Government to deal with these risks. This is simply not true.

The facts are that prior to any signs of an emerging international crisis, there were four important actions taken to attempt to minimise the potential vulnerabilities in the banking sector related to the dependence on highly valued property.

It has since been alleged that no action was taken by the Government to deal with these risks. This is simply not true.

The facts are that prior to any signs of an emerging international crisis, there were four important actions taken to attempt to minimise the potential vulnerabilities in the banking sector related to the dependence on highly valued property.

The four actions taken were as follows:

A) The decision in December 2005 to abolish a very wide range of property based tax incentives.

. . . In my budget of December 2005, I decided to immediately restrict the ability of the use of property-based tax incentives by those on high incomes.

I also decided to undertake a fundamental dismantling of the property-based tax incentives which had developed over many years.

I did this because I was concerned that these incentives were contributing to an overvaluation of property with resultant vulnerabilities. This decision did not gain favour with many interested parties in the property market. It also represented a decisive policy shift because over a long period successive governments had added more new property incentives rather than engage in a wholesale abolition of existing incentives . . .

B) The refusal by the Government to abolish or dramatically reduce stamp duty.

. . . I was also the subject of sustained criticism for my decision as minister for finance to resist widespread demands to abolish or dramatically reduce stamp duty on property.

At that time, I accepted that the levels of stamp duty in Ireland were among the highest in the world and that this meant real consequences for people buying houses.

. . . There is no doubt abolishing stamp duty at that time would have been politically popular. But it also would have increased the vulnerabilities of the banking system and the Irish economy to overvalued property. I therefore refused to go down this route. I was subject to much criticism for this . . .

C) The decision of the regulator at the start of 2007 to increase the capital requirements on banks for speculative property lending from 100 per cent to 150 per cent.

. . . I accepted that this brought the capital requirements on Irish banks for speculative property lending to one of the highest in the developed countries, but I believed it was totally appropriate given the vulnerabilities of Irish banks to property prices.

D) The decision by the Government to allocate every year 1 per cent of GNP into a National Pensions Reserve Fund.

With hindsight, were mistakes made prior to this crisis?

. . . I believe the key factors which were relevant are as follows:

(1) Fundamental errors were made within the management of individual banks, which led to excessive risk taking.

(2) Banks became too dependent on wholesale funding.

(3) Inadequate financial regulatory controls were implemented.

(4) There were property tax incentives in place over the period from the mid-1990s which should have been abolished many years prior to my decision in December 2005 to abolish them.

(5) Individuals were left in dominant positions within individual financial institutions for too long. There were stunning failures of corporate governance.

(6) There was a failure to impose international stability risk assessments.

(7) There was a failure to implement more intensive compliance regulation of financial institutions. I believe that auditors, regulators and governments all take responsibility.

(8) The higher capital requirements on speculative property loans in Irish banks which were introduced at the start of 2007 should have been imposed many years earlier.

These lessons have now been fully taken on board and policies implemented to ensure that a banking crisis can never happen again in Ireland . . .

Did policymakers make the correct decisions and judgement calls to respond effectively to the crisis?

. . . I know that the Government’s response to the banking crisis has not been popular. I am, however, confident that the right calls have consistently been made to deal with this distressing situation.

The Government response to the banking crisis has involved the following 10 actions:

(1) Guarantee of Irish banking liabilities;

(2) Establishment of Nama;

(3) Appointment of a new governor of the Central Bank and a new Financial Regulator;

(4) Integration of new Central Banking Commission and Financial Regulator structure;

(5) Setting of higher capital requirements for Irish banks;

(6) Requirement of banks to increase lending to enterprise sector;

(7) Restriction on bankers’ pay;

(8) Supporting the gardaí and the legal system in their independent investigation and prosecution of any criminal actions in the banking sector;

(9) Introduction of a radically changed regulatory system;

(10) New rules on bank directors and corporate governance.

What are the lessons which must be learned?

. . . The regulation of banks in Ireland must reflect more fundamentally the absorptive capacity of the banks to respond to losses arising not only from any unexpected downturn in the Irish economy but from the contagion impact of any international financial crises.

Bankers in institutions of systemic importance must never again be allowed to set their remuneration policies in a manner which incentivises excessive risk taking and short-term gain.

A cap on bankers’ pay and pensions must remain for as long as is necessary to ensure the long term sustainability of any expected financial gains.

The Central Bank’s stability role must be given absolute primacy in the regulation of the financial sector. The new integrated Central Bank/regulatory organisation is the best way to achieve this.

Governments must never again intervene in property markets via tax incentives or other measures to a degree which may make possible property bubbles.

The banking crisis has done untold damage to the country. The full rigour of the law must be independently and vigorously implemented where applicable. This means that any banker who has engaged in fraud or other criminal actions which are subject to custodial sentence can expect the gardaí and the courts to pursue legitimate convictions with determination.

There is a need for much more intensive and risk-based supervision of financial institutions and the new regulatory system which has been put in place has the full support of my Government.

The capital requirements on Irish banks must be set to ensure that the need for the exceptional support of the Irish State is never again required.

For this reason, I fully support the new capital requirements imposed on the Irish banking sector, which I believe are among the highest in the world.

There is also a need for a radical change in culture in Irish banks. Regulation, and legislation underpinned by the gardaí and other regulatory agencies, must effectively police this on an ongoing basis. The trust that was given to the banks was misplaced and it will take many years for banks to re-earn that trust.

We must also ensure that there are new standards of corporate governance including limits on the timescale which any chief executive or chairman can serve in a bank. If legislation is needed to achieve this, it will be introduced.

In conclusion, I believe that unacceptable levels of non-compliance and excessive risk taking took place in the Irish banking system and that grave mistakes were made within the management of individual banks.

This was facilitated by insufficient international and Irish regulation which gave too much responsibility to the banks and which did not implement adequate risk-based frameworks.

The Government in 2006 took decisive and unpopular action to reduce the vulnerabilities of the Irish economy and without this action we may not have been in a position to stabilise the system.

We have learned hard lessons and have taken difficult decisions. Our economy is now emerging from recession and Ireland is strongly fighting back.

If we continue on this road, we will emerge from these tough times with a renewed unity of purpose and with a nation poised to regain the momentum that we knew not long ago.

I am determined to lead a government that will get us there as quickly and as wisely as possible. That is the way that together we can and will secure Ireland’s future.