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Following the issuance of the Guarantee, the Financial Regulator issued a letter to all Covered Institutions, advising them that the existence of the Guarantee should not be used as a marketing or advertisement tool to attract funding which could potentially create liquidity distortions in the banking markets.1
In the short-term, the Guarantee had stabilised and improved the liquidity position of the Covered Institutions.2 However, by January 2009 the Guarantee was “just about” working with regard to providing non-ECB liquidity to the banks.3
In testimony to the Inquiry, former Group Chief Executive of Ulster Bank, Cormac McCarthy, in response to questioning on the impact of the Guarantee on Ulster Bank, said that it was:
“Very significant. Within a period of weeks there were billions of wholesale customer deposits and a degree of retail deposits flowed out of the institution.”4
This was reiterated in the RBS Group Annual Report and Accounts 2008, which stated:
“The governments of some of the countries in which the Group operates have taken steps to guarantee the liabilities of the banks and branches operating in their respective jurisdiction. Whilst in some instances the operations of the Group are covered by government guarantees alongside other local banks, in other countries this may not necessarily always be the case. This may place subsidiaries operating in those countries, such as Ulster Bank Ireland Ltd, which did not participate in such government guarantee schemes, at a competitive disadvantage to the other local banks and therefore may require the Group to provide additional funding and liquidity support to these operations.”5
In October 2008, the British Government announced that they would recapitalise Ulster Bank’s parent company, RBS.6 By December of that year Great Britain owned 58% of the shares.7 Therefore, according to Richie Boucher, Group Chief Executive in BOI, Ulster Bank “…had been, effectively, nationalised by the British Government, so the depositors had an implicit guarantee.”8
The Joint Committee considered whether or not the Guarantee could have been rolled back in part or rescinded for one or more of the Covered Institutions as the scale of the potential liabilities in the Covered Institutions were discovered during Project Atlas.9 This is also discussed in Chapter 7.
Notwithstanding the moral obligation, there was an opportunity between the announcement of the Guarantee and the formal designation by the Minister for Finance of the Covered Institutions under the Credit Institutions (Financial Support) Scheme 2008 (CIFS)10 on 24 October 2008, to change the terms and scope of the Guarantee. For example, one of the banks could have potentially been excluded. When questioned about this option, Kevin Cardiff said:
“…remember, a lot of new money came in on foot of the guarantee but it didn’t come in four weeks later. It started coming in immediately. So, that you would pull out of the guarantee with hundreds of millions, billions and millions of deposits, based explicitly on it, would’ve created a ... would’ve created ... I don’t know. It would’ve been extraordinarily risky. But, no, … I don’t recall a discussion about pulling out at that stage. I think we’d gone beyond that point. In practical terms, we were beyond the no return point.”11
On the question of what might have had happened had a bank such as Anglo been kept outside of the Guarantee in the first instance, Paul Gallagher, former Attorney General, said:
“…you could have let Anglo go on its own, you didn’t have to do anything, but the judgment was made that leaving a bank that, I think Governor Honohan in his report says was ‘of systemic importance‘, systemic not that we needed this bank but systemic importance in terms of the consequences. And one of the things that was apparent from the information given to the Government by the other banks was the other banks were distinguishing between Anglo and INBS and themselves and understandably so. But the report that they gave us of the reactions from the money markets was Ireland was untouchable. And if you have one bank go, given what was known as the overexposure to property, the ready consequence I assume … was they’d say, ‘These other banks have huge exposure to property. There may be distinctions but we’re not convinced and the whole lot goes.‘ … and that was the calculation made with regard to Lehman Brothers and it went so badly wrong and I think there was a huge fear that if that gamble is taken, that things would just be out of control. And those are the judgments that have to be made and were made.”12
There was a power in the CIFS to revoke the Guarantee under certain conditions. Section 8 of the CIFS provided:
“The Minister may review and vary the terms and conditions of this Scheme from time to time, at no later than six-month intervals, to ensure that it is achieving the purposes of the Act of 2008. At such a review, the Minister shall consider, inter alia, the continued requirement for the provision of financial support under this Scheme with regard to the objectives of this Scheme and section 2(1) of the Act of 2008. The results of any such review shall be provided to the European Commission.”13
When questioned about this, Paul Gallagher said:
“There’s a power to revoke it in the guarantee scheme if, for example, the conditions of the guarantee weren’t being complied with, otherwise it was intended to last for two years, subject to a review. And it was conditional on the basis which … or, sorry, it was conditional on the circumstances which required the giving of the guarantee continued, and if they didn’t continue, then the Minister was entitled to bring it to an end and would be required to do so by the EU.”14
However, rather than being shortened, the Guarantee was actually extended beyond the original end-date of 2010 through the Eligible Liquidity Guarantee Scheme.15
Separate, but related to the need to recapitalise and restructure the Covered Institutions, was the question of whether or not the Guarantee delayed vital bank restructuring. Governor of the Central Bank, Patrick Honohan stated the following in oral testimony:
“We were in suspended animation for two years. One of the things the guarantee did, and we were talking about the subordinated debt, but guaranteeing the senior debt had a double effect. It is not just a question of not paying those guys, but any restructuring of the banking system, like liquidating or closing, would have triggered immediate payment under the guarantee from the Government. That meant that doing something with Anglo Irish Bank or with INBS, all these things, could be considered at leisure, because there was nothing one could viably do until the end of September 2010 and by that stage the damage was done.”16
This was supported by Marco Buti, Director General for Economic & Financial Affairs, European Commission, in his evidence to the Joint Committee, where he said: “…the banks had to be restructured and, from that viewpoint, the blanket guarantee clearly did not help.”17
Michael Noonan, the Minister for Finance, said that the Guarantee should have been “…accompanied by a restructuring and a recapitalisation of the banks…” thereby possibly guarding against Ireland’s need to enter into a Bailout Programme two years later.18
In October 2008, Patrick Neary, former Chief Executive, IFSRA, appeared on RTE’s ‘Prime Time’ Programme. He said that Irish financial institutions were well capitalised in comparison to European banks. He was confident they would be able to deal with loan losses incurred during the ordinary course of business into the foreseeable future.19
That assessment had been supported only a few days previously by Merrill Lynch. In their advice to the Minister for Finance, relating to the liquidity and strategic options available to the Government on 28 September 2008 Merrill Lynch stated: “It is important to stress that at present, liquidity concerns aside; all of the Irish banks are profitable and well capitalised…”20
The then Taoiseach, Brian Cowen had also advised the Dáil on 30 September 2008 that: “while Ireland along with all developed economies has experienced a sharp decline in its property market, there is very significant capacity within the institutions to absorb any losses…”21
The then Minister for Finance, Brian Lenihan, met with the Governor of the Central Bank and the Financial Regulator to discuss the PwC reports generated for Project Atlas, which confirmed that the capital position of each of the institutions reviewed was in excess of regulatory requirements as at 30 September 2008.22
However, notwithstanding these positive assertions, over time, the Project Atlas reviews started to uncover evidence of a markedly different and less positive situation. In addition, the Minister for Finance was aware that international capital market expectations relating to capital levels in the banking sector had altered and that an injection of capital, by the State, would be required.23
Having completed their Project Atlas 1 review in September 2008, PwC24 were engaged once again on 9 October 2008 to review the financial and capital positions of the six25 financial institutions covered by the Guarantee (the Covered Institutions). This examination was known as ‘Project Atlas 2’ .26 PwC concentrated on reviewing a sample of loan books and losses, focusing initially on the top 20 borrowers in each Covered Institution, but this was subsequently extended to the top 50 borrowers, when evidence was found that a large number of borrowers had loans with two or more lenders.27
Part of the Project Atlas 2 review consisted of examining scenarios showing the impacts which various asset write-downs would have on Tier 1 Capital.28 However, these scenarios were based on unrealistically low impairment levels with the fall in asset values accelerating.29
The scope of Project Atlas 2 was further broadened in November 2008 to include a review, known as Project Atlas 3, of land and development loans and related loan security. On this occasion, PwC were tasked with assessing the top 75 land and development loans within the Covered Institutions as at 30 September 2008. As part of the process, Jones Lang LaSalle (JLL) were engaged to carry out a review of valuations on the underlying assets supporting the top 20 land and development exposures in each Covered Institution.30
The results of Project Atlas 3 showed significant differences on land and development loans between the Covered Institutions’ own valuations of €27.405 billion and the JLL valuations of €19.568 billion – a difference of €7.837 billion across the five of the Covered Institutions reviewed.31
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