Plenty of questions about the banking crisis, but few answers

From kathleen barrington: 10 January 2010

By Kathleen Barrington

Minister for Finance Brian Lenihan’s position on a banking inquiry appears to be one of putting it on the long finger. On the one hand, he said last week that he supported calls for an inquiry into the circumstances that led to the banking crisis but, on the other, he insisted such an inquiry should wait until the National Asset Management Agency (Nama) had completed its work and the state’s banks had been recapitalised.
Lenihan appears to be singing from the same hymn sheet as Taoiseach Brian Cowen, who earlier said his priority was to implement Nama and clarify how much extra capital the banks needed to return to health.
The reality is that Lenihan and Cowen have not acceded to the demand from Central Bank governor Patrick Honahan for an inquiry, or to set a date for such an inquiry to be established. Honahan said such an investigation was necessary for society at large, as many questions remained unanswered.
You can say that again. As far back as April last year, it had become clear that the all-party Oireachtas committee on Economic and Regulatory Affairs was hampered in its investigations by the fact that the top brass on whose watch the banking crisis happened were not answering questions as clearly as the public might like. There was also the problem that the committee did not have the power to compel witnesses to attend.
In any case, there is the suspicion that an Oireachtas committee – which inevitably includes many members drawn from the coalition government – may be tempted to put the spotlight on bankers and regulators, rather than on current and former ministers on whose watch the banking crisis happened.
Journalists may be freer than Oireachtas committees to ask hard questions of government politicians, but they lack the crucial power to force politicians, bankers or regulators to appear before them to answer questions. They also do not have the power to sanction those who would deliberately mislead them.
It is striking that, despite the numerous books, articles and TV programmes produced by journalists about the banking crisis in recent months, we still know so little about how Ireland’s banks ended up with one of the worst financial strength ratings in the world.
At the business level, for example, we have yet to hear from the senior risk managers, the group internal auditors and the members of the credit committees of the guaranteed institutions whether they raised any red flags in relation to the risks the banks were assuming.
What were the risk managers, the credit committees and the internal auditors saying internally about property concentration risks, overexposure to individual borrowers and the reliance on short-term inter-bank money to fund the banks’ long-term activities?
If they raised any concerns, with whom were those concerns raised and what actions were taken?
If their concerns were legitimate and they were overruled, shouldn’t their superiors be asked to explain themselves? If some of the superiors who overruled them have since been elevated to more senior positions, shouldn’t they now be forced out? If the risk managers didn’t raise any concerns, why not and what price should they now pay?
What roles did the boards of the banks play in supervising the management’s activities? Did they understand the risks the management was assuming? If they did, why didn’t they act? If they didn’t, why were they on the board in the first place? And should the composition of bank boards be altered in the future to ensure that directors are competent, independent and willing to ask hard questions?
It is important to stress that some in the banking community are as shocked as the general public about the scale of the reckless lending in which our banks engaged.
Privately, one former senior banker told the Insider that, in his day, the bank never had more than 20 per cent of the loan book in commercial and development lending and never more than 20 per cent in mortgages, resulting in an overall maximum property exposure of 40 per cent.
He said that Anglo Irish Bank’s property loan concentration was ‘‘an accident waiting to happen’’.
He appeared to be totally shocked and very angry that his own bank and others had jettisoned those prudential requirements, and he was at a loss to understand why the regulator had not intervened.
The question also arises as to whether the banks were reporting accurately to the Financial Regulator about the composition of their loan books and other matters. If they were reporting accurately to the Financial Regulator, why did the regulator fail to act?
Certainly, it would appear from information obtained by reporter Oonagh Smyth for RTE’s recent Prime Time investigation into the banks (on which this writer was a researcher) that the Financial Regulator did have concerns in relation to Irish Nationwide, but failed adequately to act on those concerns.
We still don’t fully understand how former Anglo boss Sean FitzPatrick was able to conceal large bank loans from his shareholders for years without auditor Ernst & Young or the Financial Regulator raising a red flag.
We still don’t know the full circumstances in which businessman Sean Quinn built a secret stake in Anglo, and why the Financial Regulator didn’t initially require transparency in relation to building stakes in banks using contracts for difference.
Nor do we know the full circumstances in which Anglo lent hundreds of millions to the ‘Golden Circle’ of investors to buy shares in the bank, at a time when those shares were crashing.
We don’t know the precise circumstances in which Anglo’s balance sheet was boosted at its last financial year-end by multibillion euro deposits from Irish Life & Permanent.
We still don’t know what role the Financial Regulator and the government may have played in these Golden Circle and balance sheet arrangements.
We have yet to be offered an explanation as to why, if the government itself had concerns about house prices being unaffordable as far back as 1998, it became heresy to say so several years later, by which time Irish house prices were among the highest in the world.
We need to know why, in 2001, the government caved in to property interests and reversed the brakes it had put on the property market, following the publication of a report by economist Peter Bacon on the already overheated property market.
We also need to know whether any politicians received favourable treatment from banks or from property developers and whether such favourable treatment may have dulled their enthusiasm for reining in the banks’ lending to those developers.
It is simply not possible to answer these questions adequately through the medium of journalism, or through Oireachtas committees.
If Cowen and Lenihan refuse to set up an inquiry along the lines proposed by the government’s own newly-appointed Central Bank governor, what message does that send out to investors about Ireland’s willingness to learn from the mistakes of the past?
© Thomas Crosbie Media 2010.