Cliff Taylor: Jailing Drumm will not prevent another crash – vigilance might

No certainty that revamped institutions and rules will prove effective

As she sentenced David Drumm during the week in Dublin Circuit Criminal Court, Judge Karen O’Connor said: “This court is not sentencing Mr Drumm for causing the financial crisis. Nor is this court sentencing Mr Drumm for the recession that occurred.”

The former chief executive of Anglo Irish Bank was sentenced for a fraud involving €7.2 billion in deposits, designed to mislead the market and part of last-gasp attempts to cover up how bad things had got. The damage had already been done, in the shape of the huge lending blitz which Anglo had undertaken, which ultimately cost us the guts of €30 billion to clean up. This was not the sole cause of the economic crisis, of course, which involved a unique cocktail of trouble from home and abroad. But the massive lending to the commercial property sector from Irish banks was central and Anglo was right at the heart of this.

The sweeping changes to the banking rules and regulations in the meantime – both domestically and in the euro zone – are designed to ensure that the same thing will not happen again. And there have been legislative changes with updated company law, extended central banking powers and new measures – and proposals – to tackle white-collar crime.

But while the new firewalls are welcome, whether they work will depend, as ever, on people doing their jobs – the key failure last time. There was nothing to stop bank boards blowing the whistle, or regulators stepping in back in 2007.

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Indictable offences

While the Drumm conviction is inevitably discussed in the context of the financial and economic collapse, it was not about this. It is about a specific offence which happened as the writing started to appear on the wall. Busting a bank, or messing up regulation of the sector, are not crimes, unless specific parts of what were done fit into the narrow box of indictable offences. A long-running inquiry by the chartered accountants’ regulatory board into EY’s auditing work on Anglo has been on hold while the trials ran their course. In the meantime, all the accountancy firms involved in auditing the banks before the crash have been happily making hay from consultancy work related to the clean-up.

Not only in Ireland, but internationally, few bankers have been jailed as a direct result of the financial crash. Even in the United States, known in the past for its tough approach to white-collar crime on Wall Street and the home of the “perp” walk, many of the big players took heavy fines as part of deals with prosecutors, which avoided criminal indictments for peddling highly dodgy mortgage-backed securities. Similarly in Ireland, sanctions for the more recent tracker-mortgage crisis have come via financial penalties – ultimately a cost to bank shareholders, rather than its executive or board members.

Legislation was introduced in the UK after the financial crash to try to capture just this – creating an offence "relating to a decision causing a financial institution to fail". The Central Bank has called for something similar here, telling the Law Reform Commission consultation on corporate law and regulation that a new offence of " egregious recklessness" should be created, which could be considered if a bank or insurer went under.

This might indeed make bankers think twice. But the danger here – as so often after something goes wrong – is of fighting the last war. The next crisis is unlikely to look like the last one – if its does, we have really failed.

Revamped institutions

Since the crisis, the institutions and rules have certainly been revamped. From being captured by the financial sector in the nonsense of “soft-touch” regulation, the Central Bank has been beefed up and is now much more assertive. The question is whether it can target the real risks – or could uncover the kind of criminality which was the subject of in the Drumm trial .

There are, of course, the dangers caused by mismanagement and the ever-present risk of banks or insurers doubling their bets when they run into difficulties – giving out more loans, writing more policies, or whatever, in the hope that something will turn up, so-called gambling for redemption. But you would think in a shrunken domestic financial sector the risks of another largely home-grown crisis are more limited, even if bank loan books remain exposed to a notoriously volatile Irish property market.

The bigger risks, as a recent Central Bank report concluded, come from our close international links and the well-rehearsed exposure to a hard Brexit, changes in international tax rules or some kind of upheaval in financial markets. The unwinding of the huge period of monetary stimulus and rock bottom interest rates after the crash is a possible trigger for problems in stockmarkets and possibly more widely. Movement in international capital are also big factors for Ireland, whether driven by multinational activity or by funds invested in our property market.

Perhaps the most important regulatory lesson of the crisis it to assume the worst – in terms of the international risk and the willingness of bankers to push the envelope too far in chasing profits. The next crisis is – let’s hope – unlikely to be as cataclysmic as the last, but could still cause damage if banks have to restrict lending again.

As banks leave State ownership there is a heavy responsibilty on the regulator. This is particularly the case as euro-zone reforms have failed to fully extinguish the risks of bank collapses undermining sovereign states. We remain responsible, ultimately, for keeping our own house tidy.

Over the last few years, credit growth has been modest, but it is starting to pick up. This is normal, but with the banking sector so exposed to property it does require monitoring,

The first job, of course, is to ensure another unsustainable lending boom does not take off over the next few years, driven by an Anglo-style gung-ho mentality. That really would be repeating history as farce.