Cliff Taylor: What we’ve learned from the Banking Inquiry
Ajai Chopra, former Deputy Director, IMF leaves the Oireachtas Banking Inquiry in Leinster House, Dublin. Photograph: Gareth Chaney Collins
Watching the banking inquiry has been both frustrating and fascinating. Your view of the hearings will depend on what you expected. If you were looking for retribution and bankers being slowly roasted on the spit, you will have been disappointed. If you had more limited expectations, your view may be more positive.
As an inquiry into the State’s response to the banking collapse, the committee hearings did some useful work, as shown again in its final few days. As an investigation into the banks and why they got into such a horrific mess, the hearings did not add greatly to our knowledge, although they did at least show us the whites of the bankers’ eyes.
The bankers, regulators and politicians all trooped in to discuss what happened as the bubble inflated. Some were contrite; others blamed it all on the collapse of Lehman Brothers. They didn’t see it coming and slid inevitably towards disaster. They wished they had done things differently.
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But the format of the inquiry and the constraints under which it operated meant we did not learn a lot that was new about the extraordinary growth of the bubble that was to end up costing us so much.
The committee format was best suited, instead, to examining the specific events surrounding the response to the crisis. Here, because we were dealing with limited time periods and particular decisions, the inquiry worked better.
We heard interesting accounts of the run-up to the guarantee in September 2008 and the bailout two years later – and there are some key conflicts to be judged as the committee finalises its report.
There are lessons here about the crucial importance of having the right people in key positions, of the vital role of regulation being independent of government and of the closed nature of our administrative and regulatory system, which simply failed to see what was coming, even when the signals were flashing red.
Take the evidence this week of independent economist Alan Gray, for example. Gray was a member of the Central Bank board and read into the record minutes of an emergency meeting of the Central Bank and Financial Regulator on September 25th, a few days before the guarantee. It shows clearly the guarantee of all six institutions was then pretty much the only option on the table and had, in Gray’s view, been on the table for some time.
At the Central Bank meeting, it appeared to be left to Gray to ask how this might sit with EU law, how long the guarantee might last and whether the banks would be charged for it. That all this was put before Central Bank directors only a few days before the decision was taken was truly remarkable.
Gray fired off letters to senior figures at the Department of Finance and Central Bank immediately afterwards and was, of course, phoned by then taoiseach Brian Cowen on the night of the guarantee. He subsequently wrote to the department and the bank in October, warning of the need to time-limit the guarantee, and in January, expressing disagreement with the PwC view that the banks would, at most, need a small amount of extra capital.
We already knew about ECB president Jean-Claude Trichet’s letter to then finance minister Brian Lenihan, and of his refusal to allow the new Fine Gael/Labour government to impose losses on bondholders. The evidence of former IMF official Ajai Chopra and Minister for Finance Michael Noonan have put this all on the inquiry record, even if it is a bit galling that Chopra and his IMF colleagues did not say a word in public at the time.
The inquiry hearings told us a lot more about the €8 billion question – the amount Chopra estimates we lost from not burning senior bondholders – than about how the €64 billion hole emerged in the first place. As Noonan said, the cash cost will fall closer to €30 billion over time, but the wider economic costs were enormous.
Whether the lessons have been learned is another question.
Will the Government appoint the best person to head the Central Bank, or one who they think will do their bidding? Will this Government and the next spend the fruits of growth wisely and prioritise the improvement of the public finances? Is the regulation regime for the banks now truly robust?
The real lessons are the obvious ones: take steps to avoid the next crisis and above all don’t make the same mistakes all over again.