Findings and Recommendations

Chapter 1: Banks

Findings of the Joint Committee

Bank lending had traditionally been funded from customer deposits, but the banks became over reliant on the wholesale markets in borrowing short term to lend long term. This made banks more vulnerable to a liquidity risk which was not recognised.
The arrival of foreign banks into the Irish market increased competition for Irish banks in the late 1990s. New and more aggressive lending products and practices in the commercial real estate and residential mortgage sectors changed the competitive environment in a marked and decisive way.
The introduction of new and aggressive lending arising from increased competition in the period leading up to the crisis ultimately adversely affected the customer.
The introduction of new mortgage products masked the accumulating difficulty of the year on year increases in house prices, while facilitating a situation whereby affordability could be met in purchasing the mortgage product.
When the crisis struck in 2008, banks had already moved very far from prudent lending principles in their dealings with the property development sector in favour of a riskier asset value based lending model.
Exposures resulting from poor commercial property related lending not only threatened the business and viability of the individual financial institutions but also the financial system itself.
Commercial real estate lending was concentrated among a small number of debtors and in many cases lending was inadequately secured by paper equity and personal guarantees. In addition the practice of interest roll-up further exacerbated risk.
There was a culture of excessive executive remuneration in the banks.
Bank failure, which required the intervention and support of the sovereign, was the responsibility of senior executive management and the boards of directors.
No one single event or decision led to the failure of the banks in the lead in period to the Crisis, but rather it was the cumulative result of a series of events and decisions over a number of years.
Internal Audit is a key line of defence in a bank, whose role and function was not fully utilised by the banks in some key risk areas.
The introduction by the banks of tracker mortgages to the Irish market was based on a false presumption by banks of the stability of available funding at or near the ECB rate.
The reliance on moral suasion and protracted correspondence by the Financial Regulator set the culture in which banks in practice operated.

Recommendations of the Joint Committee

The Competition and Consumer Protection Commission should conduct an immediate review of the impact on consumers, due to the perceived lack of competition in banking in Ireland.
A full review should take place of section 33Ak of the Central Bank Act 1942, to ensure that only documents deemed ‘secret’ which are independently reviewed by a High Court judge are withheld from any future Oireachtas inquiry.
All members of bank boards should have requisite financial skill sets and experience and should undergo ongoing compulsory Continuing Professional Development (CPD) appropriate to banking, to include risk and governance.
A personal remuneration clawback provision linked to medium term performance should be part of the employment contract for senior executive management and board members.
A fit for purpose standard certification for Management Information Systems (MIS) in banks should be required annually and conducted by an independent party to a standard set by the Financial Regulator.
Governance structures in banks must ensure that the risk function has an independent, senior position in the management structure with direct access to the chairman and board.
Risk appetite in banks should be clearly defined at board level and should be the key driver for defining overall strategy.
A full risk assessment of new bank products on both the lending and deposit side should be carried out by the risk function and approved by the full board, prior to being introduced to the market.
The risk of a mismatch between liabilities and assets in terms of composition, stability, currency and tenure should be reviewed regularly at full board level.
Regular reviews of the internal audit function in banks should be strengthened to ensure that it conforms to best practice. A particular objective of such reviews should be to ensure that the internal audit focuses on the areas of highest business risk, including loan concentration levels, capital and liquidity risks, and the management of the organisation.

Chapter 2: The Role of External Auditors

Findings of the Joint Committee

In the 9 years up to the Troika Programme bailout, KPMG, EY and PwC not only dominated the audits of Ireland’s financial institutions, but they audited particular banks for extended, unbroken periods. During the same period, Deloitte audited the accounts of Ulster Bank.
It was open to the banks to make voluntary disclosures of potential future provisions for loan losses, which was not required under IAS 39.
IAS 39 delayed the recognition of loan loss provisions when the downturn came.

Recommendations of the Joint Committee

The European Commission’s recommendations on audit changes for banking, which include: mandatory audit rotation of audit firms (originally a maximum engagement period of 6 years with some exceptions was proposed but this was subsequently increased to 10 years), compulsory tendering for audit services, prohibition on audit firms providing non-audit services and European supervision of the audit sector should be implemented.
The capacity for direct reporting of critical business risk to the regulatory authority by an external auditor of banks should be strengthened.
Financial institutions should be obliged to obtain an independent audit of their regulatory returns. The external audit function would be strengthened significantly by such an independent audit, bringing it into line with practice in insurance companies. An independent audit should highlight any inconsistencies between the annual audited Financial Statements and the regulatory returns submitted during the year.

Chapter 3: The Property Sector

Findings of the Joint Committee

In the lead up to the crisis, many developers had become heavily reliant on bank debt to fund their developments. In many cases, developers adopted a business model in which a bank would bear all of the risk of a transaction, either through 100% financing or using so-called ‘paper equity’ to fund any element of developer’s equity.
Property or land valuations were not carried out in all cases, even in the case of some large developments. As the property boom took hold, reliance on informal ‘desktop’ and ‘drive-by’ valuations, which did not involve any physical inspection of a property, became more prevalent. However, a number of developers gave evidence that they continued to rely upon professional valuations.
Relationship banking, where some developers built strong relationships with particular banks, was a part of the Irish banking system. In some cases, both parties became business partners in a joint venture.
Revenue from the property sector was a significant source of income for some media outlets, accounting for as much as 14% or 17% of all revenue for some newspapers. Editors denied that editorial independence was affected by their advertising relationship with the property sector.

Recommendation of the Joint Committee

A detailed and comprehensive commercial property price register should be introduced.

Chapter 4: State Institutions

Findings of the Joint Committee

The ‘soft landing’ theory was cited frequently as the most likely outcome to the property boom from as early as 2000. No evidence was provided that this expectation was tested, let alone validated, through robust analysis or research. The failure to take action to slow house price and credit growth must be attributed, at least in part, to this shortcoming.
The Financial Regulator had sufficient powers to deliver their prudential supervision of the banking sector in a more intrusive manner through, for example, imposing conditions on banking licences, revoking a licence, suspension of banking business and (after late 2005)administrative sanctions for breaches, including lending limits.
While the recommendation of the European Commission to ECOFIN in 2001 to censure the Irish Government for their proposed fiscal strategy was withdrawn, this early warning about pro-cyclical fiscal strategy was a missed opportunity as the underlying message remained valid in the following years.
The Central Bank had sufficient powers to intervene in the banking sector to manage both the risk posed to the financial stability of the State by individual financial institutions and the banking sector as a whole, through the regulation of key ratios, the composition of assets and liabilities and the issue of guidance to the Financial Regulator that it was required to implement.
The Central Bank and Financial Regulator could have required banks to hold additional capital to absorb losses that could arise in the event of a financial crisis.
The new CBFSAI organisation created in 2003 was unnecessarily complex and led to a real or perceived ambiguity in the respective roles of the Central Bank and Financial Regulator. Once the new structure, which represented a material change in the delivery of financial supervision in Ireland, was in place, the Government should have carried out an independent review and assessment of its effectiveness and the delivery of its functions. However, it was the execution by the CBFSAI of their mandate and the absence of interventions that directly contributed to the Crisis.
The Financial Stability Reports monitored and provided analysis of the key risks to the financial system and financial stability. The reports did identify key risks. However, the overall assessment and tone of the reports were too reassuring and did not identify or warn of the systemic and macro prudential risks in the banking sector as well as the structural imbalances in the Irish economy despite specific, escalating and repeating risks.
The Central Bank and Financial Regulator were aware as early as 2003 that the Irish banking sector was placing increasing reliance on lending to the property sector, and that different lending practices were being adopted. Neither the Central Bank (at a macroprudential level) nor the Financial Regulator (at a microprudential level) intervened decisively at the time or in the years prior to the crisis.
Breaches of prudential limits and requirements, as well as other prudential weaknesses were identified by the Financial Regulator. However, they relied on moral suasion and protracted correspondence, (sometimes for as long as a decade) rather than an escalation in the level of formal enforcement action. In the years 2000 – 2008, there was no enforcement action taken against any institution for prudential breaches. This reflected an aspect of regulatory capture.
In the years leading up to the crisis, the Financial Regulator did not identify the systemic risk that was building up in the banking sector, did not identify the emerging risk to the financial stability of the overall system and, therefore, did not escalate these issues to the Central Bank. There was poor assessment by the Central Bank of the build up of micro prudential systemic risk and they continued to believe and report that the banks and overall sector could withstand and manage the building risks in the system.
Banks in Ireland were allowed, through the inaction of the Financial Regulator, to breach sectoral lending limits on property, without fear of any consequence. The Financial Regulator could have used its powers to enforce those limits. In doing so, it may have controlled the scale of lending to the property and construction sector. This could potentially have reduced the impact of the eventual fall in asset values.
The Department of Finance relied on the Central Bank Financial Stability Reports as the basis for assessing risks or threats arising from the banks. The Department relied on the overall assessment in the reports rather than responding to the specific risks identified in the reports. The Department did not carry out adequate independent analysis of the risks.
The Department of Finance was too reliant on external agencies such as the IMF, OECD and European Commission (who all in turn relied, to some extent, on information sourced from the Department of Finance and Central Bank) for economic forecasting and did not do sufficient analysis to successfully challenge or form an independent review on some of the key risks identified in these reports. This included, in some instances, editing and reducing the risks highlighted in the international reports and in speaking notes for the Minister.
The International organisations (European Commission, IMF and OECD) and ESRI assumed that the high output levels of the Irish economy and the related boom in tax revenues were permanent structural features. They relied too much on Ireland’s compliance with the limits set out in the Stability and Growth Pact in assessing the true fiscal position of the Irish State before the fiscal and banking crisis emerged. The risk identification, while highlighting some key risks, was insufficient and too positive in overall assessment and conclusion.
The Joint Committee found that the CBFSAI stress tests of the banks in 2006 were inadequate. The model used in conjunction with the IMF for the stress tests as well as the scenarios tested did not reflect the emerging risks.

Recommendations of the Joint Committee

The membership of the Board of the Central Bank, appointed by Government, must include sufficient expertise and relevant direct experience in financial stability and prudential regulation.
While final decisions are matters for Government and often urgent, a formal process with clear procedures should be established (through legislation) in situations where there are conflicts between the advice provided by the Department of Finance on matters where exceptional risks are involved and the decision proposed by the Minister.
The Joint Oireachtas Committee on Finance, Public Expenditure and Reform, should be tasked with bringing forward proposals to ensure the Oireachtas can apply adequate oversight to the budgetary process, and to hold the Executive to account.
An Independent Budgetary Office, possibly as part of the Irish Fiscal Advisory Council, to provide independent costings of budgetary and pre-election proposals of political parties and members of the Oireachtas, should be established.
The Enforcement Division of the Central Bank should attend before the Joint Oireachtas Committee on Finance, Public Expenditure and Reform, on at least an annual basis, to give an account of the enforcement activity undertaken and advise of any further legislation or powers required to address emerging risks. The Enforcement Division should also report to the Committee on whether sectoral lending limits have been breached by any institution during the period, and if so, to summarise what actions have been taken to address these breaches.
The exemptions specified in the Freedom of Information Act 2014 should be reviewed by the Minister for Public Expenditure and Reform with a view to increasing public access to advice provided by civil servants and special advisors.
The banking division in the Department of Finance should be periodically subjected to a performance review by an independent third party to ensure fiscal, capital market, and banking expertise is adequate to challenge information and assumptions provided to it by the Central Bank of Ireland.
Clear guidelines should be developed on best practice on the recording, minuting and documentation management of meetings in the civil service. Monitoring of compliance with best practice should be the responsibility of the Information Commissioner.

Chapter 5: Government Policy and the Oireachtas

Findings of the Joint Committee

Taxation policy choices made by the Government contributed to the development of a Structural Deficit. The Structural Deficit which had been building in the years leading up to the crisis, had not been fully recognised until the crisis hit. Taxation policy reduced direct taxes (such as, income tax) and prompted the transfer of fiscal revenue sources to pro-cyclical taxes – this led to a vulnerable fiscal balance in the event of an economic downturn.
The Government’s fiscal policy resulted in significant, long-term expenditure commitments being made on the back of cyclical, transaction-based revenue streams that ultimately proved to be unsustainable.
The erosion of the income tax base in the years leading up to the crisis did not give rise to sufficient concern at Government level at the time, primarily for two reasons:

i. the significant increases in transaction taxes, such as stamp duty and capital gains tax, which compensated for the declining share of income tax as a proportion of total tax revenue.
ii. the absolute increase in income tax revenue from approximately €4 billion in 1990 to €15 billion in 2007.

Fiscal policy after 2001 was not focused on mitigating and managing the property price increases. If steps had been taken, for example through reducing or abolishing property tax incentives, as originally planned from 2002 to 2004, the severe overheating from 2003 to 2007 could have been mitigated, at least to some degree. Tax incentives were introduced and extended without sufficient analysis of the costs, benefits and impacts. They fuelled an already strong construction industry during most years from the mid-1990s up to and including 2006.
The Budget Strategy Memorandum produced by the Department of Finance each June, and signed off and brought to Cabinet by the Minister for Finance, was exceeded, with the exception of one year, by the actual Budget package introduced by the Minister on Budget day. This Budget Strategy Memorandum did, in varying terms, frequently highlight the risks of pro-cyclical fiscal policy but this was not generally reflected in the Budget package agreed by Government. No evidence was provided that the Department of Finance cautioned on the ultimate fiscal impacts of the property downturn.
The oversight, challenge and effective scrutiny by the Oireachtas of the Government and its policy decisions in relation to fiscal policy, financial stability and the system of financial regulation was inadequate in the pre-crisis years.
The Constitution allows significant decision-making powers by Cabinet to make far-reaching decisions without any prior engagement with the Oireachtas. Members of the Oireachtas, including the Opposition are constrained, with the added issue of limited resources, in their ability to influence the decision-making process.
Government, including individual Ministers, made policy decisions, based on a range of considerations, including having regard to, but not always accepting the advice of the Department of Finance, Central Bank and International organisations, and ultimately accepted overall responsibility for decisions made.
All the main political parties, whether in opposition or in government, advocated pro-cyclical fiscal policies, including increasing expenditure and reducing taxation, in the years leading up to the crisis, as evidenced by their election manifestos in the 2002 general election and, especially, the 2007 general election.

Recommendations of the Joint Committee

Acceptable bands should be agreed with regard to the proportion of total State taxation revenue accounted for by defined cyclical, transaction-based taxes, including triggers for follow-up action when these limits are breached.
Members of Oireachtas committees should receive appropriate training and support in technical content, if they do not already possess the required skill set.
The Houses of the Oireachtas Commission should carry out a detailed analysis of the resources allocated to support Oireachtas Committees, and of its potential impact on the capacity of Committees, to carry out effective oversight.
The Public Service Oversight and Petitions Committee should review the most recent relevant reviews undertaken of the Irish parliamentary system and identify, along with an implementation plan, the key reforms necessary to improve accountability and oversight.

Chapter 6: Preparation for the Crisis: July 2007-29 September 2008

Findings of the Joint Committee

The Minister for Finance, Brian Cowen, confirmed that he saw the ‘Financial Stability Issues’ paper prepared by the Department of Finance in January 2008.
In February 2008, in a follow-up to the January Financial Stability Issues Paper, a Department of Finance presentation warned that to ‘provide an open-ended legally binding state guarantee would expose the Exchequer to the risk of significant cost and should not be regarded as part of the tool kit’. The paper also stated that a State guarantee to underwrite a bank’s solvency position could only be justified when the entire financial system was at risk of collapse.
In August 2007, the NTMA decided to stop placing deposits with any Irish bank. The Joint Committee further found that the NTMA was legally obliged by a Minister for Finance direction of 19 December 2007, to place deposits with AIB, BOI, IL&P and EBS. Two days later it was directed to place deposits in Anglo. In August 2008, further letters of instruction were issued by the Minister for Finance in this regard. The Joint Committee found that NTMA had €790 million of deposits in Irish banks.
The Joint Committee found that a joint approach was made to the banks in March 2008 by the Central Bank and the Financial Regulator to seek ‘liquidity support’ from some banks for others. It remains unclear if this approach was ever communicated to Government. It is also unclear if the approach failed because one bank asked for some form of government guarantee if it were to participate.
No independent in-depth ‘deep dive’ investigation of the banks had been commissioned by the authorities before September 2008.
Despite the work of the Domestic Standing Group in the period from July 2007 to July 2008, crisis management preparations never advanced to a level capable of dealing with a major bank crisis.
Bank nationalisation legislation had been drafted prior to the night of the guarantee. Bank resolution legislation which would have allowed for the winding up of a financial institution and which could have allowed for another legislative option had been discussed by the relevant authorities in July 2008. However such legislation had not been requested from the Attorney General or the Office of the Attorney General.
Legislation for a blanket bank guarantee was available on 30 September 2008.

Recommendation of the Joint Committee

Legislation governing the powers of the Minister for Finance relating to directions to the NTMA should be reviewed.

Chapter 7: The Guarantee

Findings of the Joint Committee

The option of guaranteeing the banks did not arise for the first time on the night of the guarantee meeting on 29 September 2008. The option of introducing a guarantee was first formally noted in January 2008, again in February 2008 and again in June 2008.
A draft press release announcing a six-month bank guarantee had been prepared by the Central Bank prior to 21:10 on the night of the guarantee. The draft release only covered deposits and interbank lending.
The Department of the Taoiseach did not keep minutes of the meetings on the night of the guarantee and was unable to provide any drafts of the proposed guarantee as it evolved.
The word ‘solvent’ as it pertained to the status of the covered banks was removed from the final official Government statement, announcing the guarantee.
Bank executives from AIB and BOI when leaving Government buildings on the night of 29 September 2008 had differing views on whether the Government was going to proceed to guarantee 4 or 6 banks.
Conflicting evidence was provided as to whether representatives from BOI and AIB did provide their own written guarantee proposals to the meetings on the night of the guarantee.
In the absence of a bank guarantee, the Central Bank had put in place sufficient measures to ensure that all banks would have opened on the 30 September 2008, and no default of any bank would have taken place that day. However, the Joint Committee found that it was the strong view of the Governor that a guarantee was necessary.
The information available to decision-makers on the night of the guarantee about the underlying health of the Banks was inadequate.
Prior to the meeting it was made clear by ECB authorities that there was no Eurozone wide initiative coming and the Sovereign was to ensure that no bank was to fail.
The Government was advised by the Central Bank and Financial Regulator that all 6 banks were solvent on the night of the guarantee.

Chapter 8: Post-Guarantee Developments

Findings of the Joint Committee

One consequence of the crisis and the ensuing bank restructuring efforts was the almost total cessation of new lending for businesses over the period 2009 to 2013.
The reasons that PwC’s Project Atlas Report (September/October 2008) did not reveal the true extent of the capital requirements of the banks were:
- the wider assumptions for the economy, taken from official forecasts and on which the work was based, did not materialise,
- there was insufficient time for loan reviews given the fragility of the banking system,
- the analysis was based on the management accounts of the relevant banks and not an independent verification of the loan books.
In October 2008 BOI had internal discussions about the bank’s possible need for a capital injection by the State as one of a number of options reviewed by the bank at that time.

Chapter 9: Establishment, Operation and Effectiveness of NAMA

Findings of the Joint Committee

The acquisition of all loans, good and bad, gave NAMA full control to make decisions on the basis of a borrower’s overall exposure to multiple lenders. However, the acquisition of good loans, as well as the bad, was not well received by all borrowers.
The review of NAMA’s effectiveness was limited by the fact that only events up to December 2013 could be examined by the Joint Committee. Furthermore, it will not be possible to fully assess NAMA’s performance and effectiveness until an evaluation based on medium-term property price movements is carried out.

Recommendation of the Joint Committee

The operation and effectiveness of NAMA should continue to be reviewed, in particular when medium term property price movements can be taken into account. When NAMA completes its work, it should be the subject of a further comprehensive and final review.

Chapter 10: Ireland and the Troika Programme

Findings of the Joint Committee

The Irish authorities were in discussions from September 2010 with the individual Troika partners prior to a government decision to enter into formal negotiations on a Troika programme.
The letter from the ECB to Minister Brian Lenihan on 19 November 2010 threatened that it would not continue to provide ELA support for Irish banks if Ireland did not enter into a bailout programme.
The Deauville Declaration pushed up Irish bond yields, reducing the possibility of Ireland’s re-entry to sovereign bond markets at the time.
The National Recovery Plan was the basis for agreement between the Irish Government and the Troika.
By October of 2010 Ireland’s entry into a bailout programme was inevitable, but the timing of the entry into the programme was determined by factors outside of the Government’s control.
The possibility that Ireland might need external assistance from the IMF at some point in managing the economic crisis, was first considered in September 2008 by Second Secretary of the Department of Finance, Kevin Cardiff.

Chapter 11: Burden Sharing

Findings of the Joint Committee

IMF mission staff favoured imposing losses on senior bond holders in October/November 2010 as part of Ireland’s negotiations for a Troika Programme. That position was also held by the Irish Government.
The Attorney General explored the possibility of burden sharing with senior bondholders with legal assistance from the IMF in November 2010.
There would have been no Troika Programme agreed in November 2010 if the Government proceeded with the imposition of losses on senior bondholders.
In March 2011, the NTMA prepared a report for the Department of Finance which suggested that a scheme of burden sharing with junior and senior bondholders be introduced.
The withdrawal of ELA was used as an explicit threat to prevent the Government from imposing losses on senior bondholders in March 2011.
The ECB position in November 2010 and March 2011 on imposing losses on senior bondholders, contributed to the inappropriate placing of significant banking debts on the Irish citizen.

Recommendation of the Joint Committee

The Irish Government should seek to have the relevant European statutes examined and if necessary amended to allow the ECB to participate in parliamentary inquiries.

Chapter 1: The Banks

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