27/05/2015: Mary Burke – Central Bank of Ireland/IFSRA

AN COMHCHOISTE FIOSRÚCHÁIN I DTAOBH NA GÉARCHÉIME BAINCÉIREACHTA

JOINT COMMITTEE OF INQUIRY INTO THE BANKING CRISIS

The Committee met at 09.30 a.m.

MEMBERS PRESENT:

Deputy Pearse Doherty,	Senator Sean D. Barrett,
Deputy Joe Higgins,	Senator Michael D’Arcy,
Deputy Michael McGrath,	Senator Marc MacSharry,
Deputy Eoghan Murphy,	Senator Susan O’Keeffe.
Deputy Kieran O’Donnell,
Deputy John Paul Phelan,

DEPUTY CIARÁN LYNCH IN THE CHAIR.

 

Central Bank-Financial Regulator – Ms Mary Burke

Chairman

I now call the committee back into public session. Is that agreed? Agreed. We now commence with session 2 of today’s public hearings with Ms Mary Burke, Central Bank of Ireland IFSRA. The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I remind members and those in the public Gallery to ensure that their mobile devices are switched off? Today we continue our hearings with the Central Bank of Ireland and the Financial Regulator. At our first session this afternoon we will hear from Ms Mary Burke, a senior official at the Central Bank IFSRA. Later this afternoon we will hear from another Central Bank IFSRA witness, Mr. Con Horan.	888
Mary Burke joined the Central Bank of Ireland in 1984 and has worked in financial services regulation and supervision since 1998 across various industry sectors. In May 2006, she was appointed to the position of head of banking supervision at the Financial Regulator. She is currently head of prudential policy at the Central Bank, a position she has held since 2010. Ms Burke, you’re very welcome and I would also like to acknowledge that you are accompanied today by your legal representative, Mr. Niall Michelle.	889
Before I hear from you this afternoon and the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect to their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry and, therefore, the utmost caution should be taken not to prejudice those proceedings.	890
In addition, there are particular obligations of professional secrecy on officers of the Central Bank in respect of confidential information they have come across in the course of their duties. This stems from European and Irish law, including section 33AK of the Central Bank Act 1942. The banking inquiry also has obligations of professional secrecy in terms of some of the information which has been provided to it by the Central Bank. These obligations have been taken into account by the committee and will affect the questions asked and the answers which can lawfully be given in today’s proceedings. In particular, it will mean that some information can be dealt with in a summary or aggregate basis only such that individual institutions will not be identified.	891
Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.	892
The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry.	893
So, if I can now ask the clerk to administer the affirmation to you.	894

The following witness was sworn in by the Clerk to the Committee:

Ms Mary Burke, Head of Prudential Policy, Central Bank.

Chairman

So once again … thank you very much, Ms Burke, for being before the committee this afternoon and can I invite you to make your opening comments, please?

896

Ms Mary Burke

Thank you, Chairman. And good afternoon to members of the joint committee. I have, as requested, submitted a written statement to the inquiry under two broad categories of themes on which I have been directed to give evidence: regulatory, supervisory and Government; and banking.	897
For the purposes of this statement and in the interest of time, therefore, I propose to focus on particular aspects of my commentary on the regulatory and supervisory themes. It may also assist the committee if I clarify again that my personal knowledge of, and involvement with, those themes dates from my appointment to the head of banking supervision department in May 2006. It may further save time if I reiterate that while I may take issue with some of the fine detail of the respective Honohan and Nyberg reports, I accept generally the thrust of the findings contained in them. As with the commentary I have already provided to the inquiry in writing, the commentary I will now give is necessarily generalised, given the constraints already mentioned by you, Chairman, and, in particular, the strict non-disclosure requirements to which I am subject by virtue of section 33AK of the Central Bank Acts.	898
My opening commentary briefly centres on five issues which are as follows: IFSRA’s regulatory approach and philosophy; the regulatory and supervisory toolkit; effectiveness of regulation and supervision; any relationship between macroeconomic policy and prudential policy; and prudential policy itself.	899
In terms of regulatory approach and philosophy, the regulatory regime implemented by IFSRA was positioned as principles-based. The approach to regulation appeared to me to be broadly similar to that previously applied by the Central Bank and did not represent a significant shift in prudential regulation or supervision. From my perspective, the focus on defining it as principles-based seemed driven by a desire to brand the organisation and its strategy rather than any fundamental change in approachper se, beyond the changes associated with consumer protection. As articulated at the time, principles-based regulation placed an emphasis on seeking to require regulated entities themselves to abide by good governance and on the responsibilities of the boards in management of such institutions to have, and maintain in place, appropriate governance as well as controls and risk management measures in order to appropriately manage their institutions.	900
However, principles-based regulation was not without rules. The cornerstones of banking regulation in May 2006, the point at which I was transferred to BSD, were the capital adequacy directive, the Central Bank Acts and the building societies Acts. A key document supporting the regulatory regime was the licensing and supervision standards. However, it should be noted that these standards were non-statutory and not enforceable as such. EU legislative initiatives also changed the regulatory landscape. The capital requirements directive became fully effective in on 1 January 2008. This was a complex framework which, amongst other things, facilitated the use of banks’ internal models for the calculation of regulatory capital and mandated supervisory co-operation through colleges of supervisors, particularly in the context of capital decisions for EU banks and banking groups. Since the emergence of the crisis in 2007, and given the scale of changes to the regulatory framework at international, EU and domestic level, it is only reasonable to accept, albeit with the benefit of hindsight, that the pre-existing regulatory regime, both domestically and internationally, was not fully appropriate in terms of the areas covered, the detail prescribed and the regulatory tools available. However, in my view, revision of the regulatory framework in and of itself is not, and would not, have been a panacea. In fact, given the nature of the issues we now know to have arisen in Irish banks, I would suggest that the regulatory powers available to IFSRA and the bank before it, were broadly sufficient, aside from those with respect to crisis management and resolution.	901
In my view, the issues were the strategic approach, and the willingness or otherwise, as well as the logistical wherewithal, or lack thereof, to use those powers to prescribe detailed rules or to challenge and intervene in a manner which would impact banks’ business models. The strategy was, I believe, influenced by external factors, including international approaches to regulation and supervision, Government policy and its better regulation agenda, the promotion of Ireland as a financial services centre, industry influence and costs. The effectiveness of the regulatory regime is directly linked to the culture of the supervisory authority and the resources allocated to supervision. Unlike the regulatory framework, which is set out in legislation and published requirements, these are tangible aspects which are not necessarily visible and can be lost in statistics and in the prose of formal strategy documents and annual reports.	902
However, importantly in my view, a more onerous or prescriptive regulatory framework would, in and of itself, not necessarily have delivered a significantly different outcome if, as was the case, the supervisory resources, both in terms of staff numbers and specialist expertise, were not in place to monitor, challenge and enforce where compliance was not delivered. If there are insufficient people to do the work, the work simply cannot be done. In that regard, in 2006, BSD had an approved staff complement of only 53.5, with actual numbers averaging around 50, to supervise approximately 80 banks, 50 Irish-licensed and 30 EU branches. The level of resources, and the available specialist expertise, was not such as to be capable of delivering intrusive supervision, even in a business-as-usual mode of operation. Added to that, during my tenure in BSD, a business-as-usual scenario never in fact applied. Initially, there was the additional burden of implementing the CRD, and from August 2007, the crisis mounted with ever-increasing issues and problems heaped upon an already under-resourced and over-stretched department.	903
While an additional complement of three staff was agreed in 2007, my request for additional staff in May 2008, in the face of the financial crisis and the demands being placed upon the department, was effectively refused. A subsequent oral request that staff who had previously worked in BSD be re-assigned to the department was also rejected. It is difficult to convey the sheer scale of pressures management and staff in BSD were working under, particularly from autumn 2007 onwards. It was not a question of somehow multi-tasking: it was a question of dealing with an unrelenting onslaught of demands, with staff working unreasonably and unsustainably long days, and ultimately weeks, with no let-up. Resource constraints were such that IFSRA was unable, although required by the CRD, to conclude on ICAAP assessments for banks by the end of 2007. Throughout 2008, staff were, on an almost daily basis, being assigned additional responsibilities. Every new issue or new request was a priority on top of existing priorities, and issues with one institution were dealt with at the expense of issues with others. It was only immediately following the introduction of the Government guarantee that an increase of 20 in staff complement was agreed, and a separate department dealing with the Government-guaranteed banks was established. Over the following years, BSD was restructured on a number of occasions, with overall staff numbers for banking supervision increasing to approximately 140 approved in 2010. From 2010 onwards, supervision was also supported by the newly-established policy enforcement directorates.	904
In terms of the use of powers, even where regulations were sanctionable under the administrative sanctions process, in the period 2003 to the end of 2008, no prudential enforcement cases were pursued against credit institutions. I consider there were a number of factors in this: strategically, the authorities saw the sanctioning process as being primarily a tool in consumer protection; there were concerns regarding market reaction as the crisis mounted; and BSD did not have the resources to mount and pursue such cases. It was only as the resources issue started to be addressed, from 2009 onwards, that prudential enforcement cases became more routine.	905
In assessing the effectiveness of the supervisory regime, it is also important to understand the culture of the organisation and the different levels of industry engagement. IFSRA’s relationship with banks appeared to me to operate at two levels: at a frontline level with BSD and at a senior executive level. Senior banking executives had direct contact with senior executives in IFSRA, often without the knowledge of, not to say engagement with, supervisory staff. Staff were regularly requested by senior IFSRA executives to review decisions or issues based on these discussions, or were told by contacts in banks that the issues had been or would be discussed with our senior executives. To me, at its most benign, this indicated a disconnect between BSD and senior IFSRA executives. I believe it also signalled a manifest lack of support for staff, undermining them in their dealings with banks.	906
In terms of any linkage between macro-economic and prudential policy, when working in BSD, I saw no evidence of a strong link in that regard. Given the demands placed on resources, as a result of the implementation of CRD, at some time prior to my arrival in BSD, a decision was taken that the department would cease to be actively involved in work relating to the financial stability review. However, this would have been in the knowledge that the relevant economic department within the Bank had access to data regarding individual banks. The financial stability committee was a formal structure for co-operation between IFSRA and the bank on financial stability-related issues. However, the main focus of meetings tended to be on drafting of economic articles and publications.	907
In terms of prudential policy, IFSRA took a number of policy measures aimed at strengthening the regulatory framework, including the introduction of liquidity requirements. In implementing options and discretions, under the CRD, it took a conservative approach to the exercise of discretions in relation to property-related lending. The proposals on all options and discretions were subject to a public consultation in October 2006. In addition, the Governor of the Central Bank confirmed that the proposals represented the best that could be achieved in the circumstances. While these interventions can now be seen to have been insufficient, it is worth noting that IFSRA was the only public authority which took measures to try and cool the property-related lending.	908
Further detail on these and other lines of inquiry is provided in my written statement. In addition, I have not dealt with the specifics of the regulatory framework and supervisory arrangements as I am aware the Central Bank has provided significant detail on these to the inquiry. Again, thank you for the opportunity to make this opening statement. I hope it is useful in providing additional background and context on the wider issues under consideration by the inquiry.	909

Chairman

Thank you very much, Ms Burke, for your opening statement, and if I can now ask Senator O’Keeffe to lead off the questions this afternoon. Senator, you have 15 minutes.

910

Senator Susan O’Keeffe

Thank you, Chair. Ms Burke, at what point did you begin to be concerned about the liquidity of the Irish banking system?

911

Ms Mary Burke

From late 2007, I think. We had introduced new liquidity requirements which took effect on 1 July, the first reporting date for that would have been at the end of September, it was quarterly reporting as we originally implemented it, but the concern was such regarding market reaction of circumstances of the time that from, I think it was 14 September, we required them to report to us weekly. So there were concerns at that point that we needed to be aware of what was happening in terms of bank liquidity, but there was no immediate urgent concern, it was just an escalation of monitoring.

912

Senator Susan O’Keeffe

And so, as things escalated, do you recall a point at which it became more urgent than it had been previously?

913

Ms Mary Burke

I would say, from April 2008 we started to feel it was more urgent … probably sooner than that, but certainly I remember personally feeling it at that time, I probably did feel it earlier, but at an emotional level, I felt it at that time.

914

Senator Susan O’Keeffe

And then, if you like, we saw it all, if you like, unravel, unfold, right all the way through until September, in terms of banking and the banking system in the country. Is that a long time or a short time, that many months? Because it’s very hard, I think, for members of the public, when we talk about millions and billions and loans, to know … you know, if I have a crisis in my own bank, I know in an afternoon, I need some more money to pay my bills, but it seems, people might construe that as a long period of time. But perhaps it’s not, perhaps it’s short.

915

Ms Mary Burke

Yes, I appreciate, I suppose, it does seem, as you say, if you compare it to your own personal finances, but obviously, that isn’t what we were dealing with. In terms of my feeling, it was more urgent. I mean, we had had Northern Rock, we’d had Sachsen and we’d had Bear Stearns … so, we were monitoring it, marketing conditions were certainly more erratic, might be a good phrase. I wasn’t at that stage conscious or thinking, you know, we were going to run out of liquidity, but the possibility for … more so for an individual bank, I think, than … I certainly never saw the system seizing up at that point.

916

Senator Susan O’Keeffe

Is it the case that when banks are illiquid or there’s a problem with liquidity that there is always a risk to solvency, or is that … is that a fair or an unfair statement?

917

Ms Mary Burke

I wouldn’t say there’s necessarily always a risk. I think it depends on the circumstances that would give rise to the liquidity. It is possible that those circumstances might be something relatively short-lived or something unexpected happens. The very fact that central banks around the globe provide a facility for emergency liquidity certainly implies that there is an expectation that it might happen and not that it was something that would … obviously a central bank can’t give emergency liquidity if the bank is insolvent, so the two are not necessarily one following from the other.

918

Senator Susan O’Keeffe

In that period of time that we … that you’ve outlined, sort of maybe April, May, June, do you recall whether then at that point the issue of solvency and liquidity were being talked about at the same time, being talked about together, or was the focus entirely and solely on liquidity?

919

Ms Mary Burke

I don’t recall that at that time we were talking about solvency. I certainly don’t recall that I was talking about solvency or that people in banking supervision were talking about solvency. We were very much focused on liquidity. The weekly reporting had come in, as I said, late in the previous year. We were moving to … we had started with daily calls with banks, we were now at intra … you know, intra-day calls, talking through the position with their treasury teams. So our focus was very much on liquidity. Now, there was also some work being done in inspecting banks and looking at property-related lending, but … and there were contingency plans being developed, given Northern Rock had collapsed. But I can’t say that I was particularly engaged on that. Now, I will say, in terms of the meetings and the planning that was going on at the time, it was particularly chaotic and, from where I sat, it felt chaotic in terms of the amount of work we were trying to do. I was conscious that there were meetings on the seventh floor. Sorry for my use of the vernacular, that’s our executive floor. I tended to be … occasionally I get parachuted into a meeting because they need a second person there. You wouldn’t be seeing that issue through. So, the extent to which I can create a sort of a narrative as to what was happening is influenced by the fact that I was sort of parachuted in and out of meetings. But at BSD level I was not particularly focused on solvency at that point.

920

Chairman

That’s the banking supervision department.

921

Ms Mary Burke

Sorry, I beg your pardon.

922

Senator Susan O’Keeffe

Yes, it’s okay.

923

Chairman

Yes, that’s okay.

924

Ms Mary Burke

I’m afraid it’s so built in it just keeps coming out, its the banking supervision department.

925

Chairman

That’s all right, no, no, you’re fine.

926

Senator Susan O’Keeffe

We’ll help you. So in 2006, when you became head of that department, the banking supervision department, was there enough evidence about … at that point building up of the shortcomings in lending and other controls with banks that you could see systemic risks were building up, or not?

927

Ms Mary Burke

I can’t say that when I came in at that point I saw systemic risks building up. I … when I came into BSD we were very focused … I mean, obviously you have to do a sort of getting to know what the remit of what job you’ve been handed is. But we were very focused on trying to bring in the capital requirements directive. So we were quite forward looking, I suppose. I did not set about, at that point, to start revising all the current procedures, I was more in terms of developing procedures for the regime that was coming. But, no, I can’t say that I say systemic risks building up at that time, nor can I say that anybody else that I was dealing with in the bank, either reporting to me or that I was reporting to, was indicating concerns about systemic risks.

928

Senator Susan O’Keeffe

You say in your statement, written and verbal, that you were … that there was a shortage of people … actually, of resources for … in your department to supervise and you talk about the expertise … available specialist expertise is on page 5 of the written statement. There was not enough … “available specialist expertise was not such as to be capable of delivering intrusive supervision”. What do you mean by that term “intrusive supervision”?

929

Ms Mary Burke

What I mean is the sort of supervision that I suppose we have now, the sort of supervision that comes with the SSM. It means people who are experts in lending, in treasury, in risk management being able to sit across the table from the banks and deal with them on their own level, on their terms, on the issues. We simply didn’t have that sort of support system in place. Most, I think, regulatory authorities probably would have. I think the FSA at the time had a specialist support team, and we do have that sort of a team now. It’s the sort of … as banking … it’s an extremely complicated industry. It’s not something that you can have a general knowledge of all of these things. You can have that knowledge but I don’t think you can expect a supervisor with that level of general knowledge to argue the issue with the director of lending of an institution and tell him why you believe his policies and his decisions were the right ones or the wrong ones.

930

Senator Susan O’Keeffe

Okay. And so you say that that has changed now but you did ask in 2008 for some additional resources. You didn’t get them. Is that … that’s correct?

931

Ms Mary Burke

That’s correct.

932

Senator Susan O’Keeffe

You didn’t get the extra people that you asked for. Do you know at what level in the bank that was refused? Was it at … right … up next … or did it go all the way up to the board or the Governor or do you know?

933

Ms Mary Burke

Well, I’ll give you a flavour of the system—–

934

Senator Susan O’Keeffe

Yes.

935

Ms Mary Burke

—–and perhaps that will help. The manpower planning in the Central Bank was such that some time around the first quarter you got an e-mail saying, you know, “Please fill up these various templates, setting out the staff you need and why”. You would have had to submit that to the next level. You would have had to get the approval of your director and your director would have to endorse it. In this particular occasion, in fairness, my director did endorse that decision. That request, however, was made in the face of being told, while we were being asked to complete the forms, that there would be no increase in staff that year. Nonetheless, it didn’t preclude the possibility, of course, that the staff could be reassigned. I certainly didn’t believe that I could go through that year without asking for additional staff. I should say that in May ‘08 you would have been projecting staff for the next year because that’s how early the budget process started. I did self-centre … or self-censor, I beg your pardon, somewhat in what I asked for because, having worked in the organisation as long as I did, I knew the reaction to looking for large numbers. We were also in the throes of a review by Mazars and I felt very confident they would flag we were under-resourced. We’d also had Northern Rock and the FSA had produced a report, the name escapes me, but The Collapse of the Rock, or something to that effect, where they indicated that they had three staff supervising Northern Rock, supported by, as I said earlier, a specialist team, and they considered that inadequate for the supervision of a bank that required close and continuous scrutiny. So those were the sort of details I put into my supporting memo.

936

Senator Susan O’Keeffe

But you don’t know at what level ultimately it was turned down, do you?

937

Ms Mary Burke

I don’t know at which level—–

938

Senator Susan O’Keeffe

But it was turned down.

939

Ms Mary Burke

—–I know, as I say, my director supported the request the staff.

940

Senator Susan O’Keeffe

Okay. Do you recall a document that was delivered by the banking supervision department called the “Outlook for Liquidity – Irish Domestic Institutions” on 10 September 2008? So this would have been right up in the crisis time?

941

Ms Mary Burke

I recall the document. I don’t think it was in the list of documents I was provided with—–

942

Senator Susan O’Keeffe

No, it wasn’t.

943

Ms Mary Burke

—–but I have some recollection of the document.

944

Senator Susan O’Keeffe

You’ve some, yes. Really rather than ask you the detail because you don’t have it … but, broadly speaking, do you recall how serious at that point, if you now … you’ve come through from 2007 to April 2008, this is now mid-September 2008 … how serious were things now for the banks that you examined in this document? And what … I mean, we have some of it, some of it’s been redacted.

945

Ms Mary Burke

They were very serious at that point.

946

Senator Susan O’Keeffe

And what does that mean then when you guys say “very serious”? Is that a big red flag or ten red flags or how would you—–

947

Ms Mary Burke

I’m not sure how many red flags makes it too many red flags, but certainly for two banks in particular we felt … or two institutions rather, it was very serious, I think. Less so for the others. I’m not conscious that we did see obviously that if you have contagion in one it could spread. As I say, I haven’t read that document, Deputy, in quite a number of years, so that’s more my instinctive reaction.

948

Senator Susan O’Keeffe

But you do recall that there were two and that it was very serious and that you would have been saying to anyone who asked … when they asked about it—–

949

Ms Mary Burke

Yes, I mean, at that point we had a regular committee or an internal committee chaired by the … one of the deputy directors … the deputy director general, actually, I think, there was only one, where we met with our people from the financial markets department on a regular basis, weekly at least, reviewing the liquidity. We would have been at that stage, I think, probably ringing each bank and talking to them a number of times during the course of the day as to what sort of access they had in the market, etc., and conscious that all banks … we were trying to ensure they maximised their collateral for ECB purposes as well. So, it was very intensive monitoring of liquidity.

950

Senator Susan O’Keeffe

Can I—–

951

Ms Mary Burke

It was being escalated to the most senior levels within the bank and the regulator.

952

Senator Susan O’Keeffe

And at point in terms of the ECB borrowing, would you have been recommending or did this fall into your bag that banks would be reducing their dependence on ECB, or do you remember?

953

Ms Mary Burke

Well, certainly you would never have been encouraging a bank to be dependent on the ECB. What you would have been recognising, however, was that they needed to have, to the maximum extent possible, access to the ECB if they needed it. So you would have been encouraging banks to make sure that they had eligible collateral for Central Bank purposes, but I don’t think any regulator would be saying if you have an alternative, you know, access to liquidity that you should be going to a central bank … that wouldn’t have been … but at that point, we would have been looking for liquidity for banks wherever they could get it, to be quite honest.

954

Senator Susan O’Keeffe

Wherever you could find it. So, so you wouldn’t be … how … you wouldn’t be comfortable if a number of your banks were all knocking on the ECB door. You wouldn’t be thinking that was a good thing.

955

Ms Mary Burke

In the normal course of events, you would not be thinking it was a good thing. I can’t say I think that September 2008 was necessarily normal.

956

Senator Susan O’Keeffe

Okay. On page 47 of Vol. 2 of Mary Burke’s own documents, this is the letter that was written to you by the head of … by the Bank of Ireland Group, and this is in relation to them being in breach of their limits, and they’re replying to you, as your letter notes:	957
…Bank of Ireland exceeds the 200% limit in Real Estate, Renting and Business category. Bank of Ireland remains comfortable with the exposure in this category because of the diversification of the loan book, in terms of both lending type and geographical spread—–	958

Chairman

You need to be general on that there, Senator.

959

Senator Susan O’Keeffe

I’m sorry. And then at the end they ask for, to be allowed to, that those limits should be reconsidered. So, I’m just wondering what would … what was the view then of that kind of letter? And there were others, I know, but what was the dialogue going on here at that time between your department and the banks—–

960

Ms Mary Burke

Okay, well I—–

961

Senator Susan O’Keeffe

—–and their breaches?

962

Ms Mary Burke

That letter was a reply to a letter that I sent out, I think, as part of positioning a general review of policy on sectoral concentration and I will have to take this back a slight step. I’m sorry if that sounds cumbersome.

963

Senator Susan O’Keeffe

It’s all right.

964

Ms Mary Burke

When I came to banking supervision, we did … we had licensing and supervision standards and requirements. They were described as a guide. I knew they were unenforceable under the administrative sanctions procedure. When I came to the department, in terms of the banks this committee is looking at, any of them that breached those limits were already in breach of the limits at that point. In the case of one institution, it had exceeded the limits for almost a decade. In inquiring into the history to those limits, I understood that they had been, in effect, disapplied, in the sense of the particular sectors that the Central Bank had set out. If you look back … I mean I obviously can’t give you all of the details on this but there is a Central Bank board paper from 2003 that acknowledges that in the case of a particular institution, and, more generally, mortgage lending institutions, that the Central Bank had accepted the argument that there was diversification within sectors. That was … I think that’s an April ‘03 paper, which predates the establishment of the regulator, so it was very much a Central Bank position.

965

So, as I understood it, the Central Bank and the regulator, subsequently, was accepting the argument that there were … was diversification within sectors. So if you take property, there’s a difference between, I don’t know, an office block in London and a semi-d in Midleton, to pick somewhere, so, you know, those … that diversification was there. The sectors themselves were not prescribed in the licensing standards. We didn’t say what we counted as a sector. What was used was ESCB, which … sorry, European System of Central Banks statistical return, and various categories were the sectors that were used. Interestingly, personal lending, which would have included lending for residential mortgages, so if I bought a house, even to let as opposed to rent, or let as opposed to live in, that lending was excluded; that wasn’t considered in looking at the sectoral limits.

966

Chairman

Thank you very much.

967

Senator Susan O’Keeffe

Thank you, Chair.

968

Chairman

Senator Sean Barrett. Senator, you’ve 15 minutes.

969

Senator Sean D. Barrett

Thank you, Chairman, and welcome to Ms Burke. The memorandum of understanding between the CB and the FR, was there clarity in that division of labour between the two bodies?

970

Ms Mary Burke

Again, I haven’t looked at that memorandum in quite some time. From my perspective, I was clear. I know there has been quite an emphasis on perhaps … it was, it was maybe a cumbersome arrangement. I will accept that, certainly not the most elegant arrangement one could have come up with. It was, however, the arrangement that was put in place. I felt I was clear. I certainly didn’t feel there was any lack of clarity at that point.

971

Senator Sean D. Barrett

Was it more or less the same people who used to do the job in … before 2003, got a different administrative structure, wasn’t that right, that there was about, I think in Honohan, there was about 30 people did prudence work beforehand on the Central Bank and it went to about 50, as you say? So there were no new people. So it’s kind of strange that, to the outsider, that people who’d been doing the job suddenly saw themselves as different and the … Did you come across that?

972

Ms Mary Burke

I can’t say that I felt it was radically different. I mean, come 1 May 2003, if you want to call it D-Day or whatever you want to call, I was in the same office that day as I was the previous day. I was not conscious of some radical change. I amn’t in a position to say, because I don’t have the details nor do I recall whether there was any increase in staff. The one difference there would have been was, I think, there was more focus on the consumer protection aspect.

973

Senator Sean D. Barrett

Your 50 that you mentioned in your presentation to us, that’s out of a staff of, what, 1,200 or something? Is there anything to assist the committee in why … what we’re investigating seemed to be so small overall in the allocation of staff in the organisation?

974

Ms Mary Burke

I, well, I don’t know, to be quite honest, Deputy. I mean you inherited … when I went in there I inherited a certain number of staff. When I was asked to transfer to that department, it was described to me as being “in good shape”; I think was the phrase that was used, and we had recruited two senior staff who were experts in CRD and modelling. Unfortunately, we lost both of those staff to the private sector within 12 months, which added to the problem.

975

Senator Sean D. Barrett

Do you—–

976

Ms Mary Burke

I don’t know why. I can only assume that people felt it was adequate to deal with principles-based regulation, but you would need to ask people who made that decision.

977

Senator Sean D. Barrett

I’ll come to that in a minute, if I may. The European aspects: was it the regulator’s job to communicate with Frankfurt and the ECB, or how was that connection made?

978

Ms Mary Burke

The regulator would not generally have dealt with the ECB, Senator. It was … that was very much the Central Bank side. I don’t know that anything precluded us from having a discussion with them, but, in my time, I don’t recall ever having the need to, or being asked to sit on any ECB committee.

979

Senator Sean D. Barrett

Thank you. Now, Senator O’Keeffe referred to the correspondence you had with the Bank of Ireland. Now, if … I may refer to other correspondence in the Vol. 2, Mr. Chairman, and there’s page 15, that’s a communication to the EBS. There’s page—–

980

Chairman

Just in general terms now, Senator.

981

Senator Sean D. Barrett

Indeed. Thank you. Thank you, Chairman. And there’s page 43, AIB. There’s the reply from Bank of Ireland on page 47 that Senator O’Keeffe has referred to, and there’s a … there’s another one to Bank of Ireland mortgage bank, page 57; and Ulster, page 61; and AIB, page 69. Only one bank seems to have replied to you. I see your letters out, and they’re very comprehensive, telling you what you’ve found that concerns you. Are there letters of reply to all of that correspondence or are our files complete in the volume you have in your hand?

982

Ms Mary Burke

Okay. Well … sorry, I did slightly lose track of all the page numbers, but if I start with a number of them.

983

Senator Sean D. Barrett

Yes.

984

Ms Mary Burke

The one on page 15, which is from February ‘06, was—–

985

Senator Sean D. Barrett

That’s right.

986

Ms Mary Burke

—–was actually written before my time. I didn’t arrive until May ‘06. That seems to me to be setting out the parameters for a system-wide stress test, which is different from the issues I was raising with the banks if you’re looking at page 43—–

987

Senator Sean D. Barrett

Okay, thank you.

988

Ms Mary Burke

—–which was the general policy review of how we dealt with sectoral concentration limits, which was the issue that Senator O’Keeffe was referring to earlier. If you want to give me further page numbers, but I think some of the correspondence is … they’re dealing with different issues.

989

Senator Sean D. Barrett

Yes. There’s 57 and 61 and 69 and—–

990

Ms Mary Burke

57—–

991

Senator Sean D. Barrett

—–and there are advices to them and no replies. That was what was interesting. Thank you.

992

Ms Mary Burke

Okay, I can’t speak to the one in February ‘06 because that was issued by the director general, Liam Barron, and I assume the replies would have been to him. The Central Bank, rather than the regulator was dealing with the system-wide stress test, so I presume there were replies but I just can’t speak to them. In terms of the February ‘07 letter, which was our policy review of sectoral concentration limits, my understanding is there were replies received by us. I think something like nine banks replied. I haven’t gone to check whether that was a reply to every single … from every single bank. When you come to page 57, that is a letter from me, it’s a standard letter. It would have issued to all mortgage lending institutions, and yes, I appreciate it refers to stress testing in there but that should not be confused with the system-wide stress test that I referred to earlier that was run by the Central Bank. This was guidance that we had in place where we expected banks to … it was in the context of the affordability of a mortgage that a customer might take on, so every mortgage should have been stress test and the applicant assessed as to whether or not they could handle a 2% increase in the interest rate. So again, those are three separate issues and in the context of that letter on page 57, I would have expected no more than a reply to say yes, they were aware of it and they would comply.

993

Senator Sean D. Barrett

Yes, and then the last … 61 and 69, thank you for those, yes.

994

Ms Mary Burke

Sixty-one is and, sorry, I’ll get to 69, both of those are following up on a themed inspection that was done by the Financial Regulator in December ‘07 across a number of institutions looking at commercial property lending. So those letters are to individual institutions giving them findings of inspections. Again, it’s not a policy … it’s not the wider policy review I spoke of earlier. It’s not the system-wide stress test and it’s not the individual mortgage stress test.

995

Chairman

The point, Ms Burke, is that the evidence books are examples and not the full set of letters that would have gone back and forth, I assume, yes?

996

Ms Mary Burke

Yes, they are, I mean, and in the time available I have not sought to find and track every single reply or otherwise.

997

Chairman

Senator?

998

Senator Sean D. Barrett

So, thank you, Chairman and thanks again, Ms Burke. So, the Bank of Ireland reply that you spoke about with Senator O’Keeffe … “we felt comfortable” … I mean, that seems very strange to the outsider, you know, if—–

999

Chairman

Can we speak in general about institutions?

1000

Senator Sean D. Barrett

Yes. Just to … I appreciate what Ms Burke was attempting in the letter but, I mean, would I say to a policeman “I feel comfortable driving down the middle of the road. You know, thank you for the advice that I should really be on the left”. I mean, it is normal way to react to a regulator to say “Well, we feel comfortable doing something else”?

1001

Ms Mary Burke

Okay, well, I suppose I’ll deal with that in two aspects.

1002

Senator Sean D. Barrett

Thank you.

1003

Ms Mary Burke

One, this was not the Bank of Ireland’s supervisory team taking up a particular issue and pushing Bank of Ireland on their view of it … sorry, I beg your pardon, pushing the bank on their view of it. It was positioned as a general policy review, we were trying to do in the context of the requirements that were coming in CRD, which is Basel II. So in that context, perhaps the language they used as to whether they were comfortable or not might not be the language you would use normally but they were trying to explain to us the policy they had to inform our thinking on the policy we would develop. In terms of your analogy of a policeman, I suppose, what I’m saying is this wasn’t the policeman roleper se.

1004

Senator Sean D. Barrett

Was there a general reluctance to be regulated in the industry?

1005

Ms Mary Burke

There was a general reluctance, in my view, in the industry that we would be prescriptive in terms of rules. They very much liked principles and at a certain point, if you pushed it too far to rules, there was a reluctance, yes.

1006

Senator Sean D. Barrett

And as you say on your statement to us … sorry, mine hasn’t got page numbers. It’s on page—–

1007

Ms Mary Burke

Mine doesn’t have page numbers either, Deputy.

1008

Senator Sean D. Barrett

It’s on page 3, “it should be noted [the] standards were non-statutory and [therefore] not enforceable”. Was it ever considered that we’d better get around to Leinster House and get some legislation, because if this is not enforceable, well, we couldn’t have predicted what happened in 29 September 2008 but was a more organised system ever considered?

1009

Ms Mary Burke

Okay. I should say when I refer to the standards, I mean those particular … that particular document called the “Licensing Standards and Requirements” or the other way around, that was not in itself enforceable under our administrative sanctions procedure. It could, with some work and probably some considerable rewriting, have been put in an enforceable position but it wasn’t at that time. It was not imposed as a condition, for example, on banks’ licences nor was it issued under any statutory power. Had IFSRA or the bank before it wanted to put some of those requirements and standards on an enforceable footing, I don’t believe it would have been necessary to come to the Oireachtas to seek a legislative change.

1010

Senator Sean D. Barrett

You say, “I saw no evidence” of a strong link between macroeconomic and prudential policy. Is that still your view, reflecting back on that time?

1011

Ms Mary Burke

Reflecting back on that time, that is still my view, yes.

1012

Senator Sean D. Barrett

And what difference would that have made if we had a better connection?

1013

Ms Mary Burke

I don’t know whether it would have made any difference, Deputy. I mean, I can’t, sort of, predict a past that didn’t happen, if you follow me. However, had there been a closer connection and had the Central Bank, in terms of its financial stability role, been able to foresee the consequences that we’ve subsequently seen, then I would have thought they would have been in the position to effectively … I mean, I appreciate the terminology and I think it’s 33D, is again not the most elegant. It talks about guidance which the regulator had to follow in terms of policy but my view is that they could have effectively instructed us on policies, had we not seen fit to do so ourselves.

1014

Senator Sean D. Barrett

You’ve had to, I think, advise banks on loans-to-deposit ratios, sectoral concentration and even keeping better records. Would that be a reflection on some of the work you’ve done in your communications with banks?

1015

Ms Mary Burke

I’d say that’s a reasonable reflection that some of that would have emerged in post-inspection letters and been issued to banks, yes.

1016

Senator Sean D. Barrett

And again, it’s strange to the outsider that you as the regulator would have to say, “Look, you’d better keep accounts of the possible repayment capacities of these borrowers”, and so on but you actually had to do that on occasions, is that correct? Recommend that they had better records on their lending?

1017

Ms Mary Burke

Yes, certainly I am aware that some post-inspection letters issued with words to that effect or certainly messages to that effect.

1018

Senator Sean D. Barrett

And just before your signature on the last page, you noted that the role of external auditors, saying that “where such deficiencies are not flagged, auditors may be taken as indicating to the board and to [the] management that they have not identified any significant risk exposures, including in relation to property”, and you go on to say, I would like a more root and branch approach to auditing. Was that something you’d like to deal with in regard to this committee?

1019

Ms Mary Burke

Sorry, I don’t think I said I’d like a more root and branch review. I said that they would not be identified absent a more root and branch review, if you follow me.

1020

Senator Sean D. Barrett

Yes.

1021

Ms Mary Burke

I wasn’t espousing that auditors should necessarily do that.

1022

Senator Sean D. Barrett

I’m grateful for your observations. Do you think now that you’d see the role of external auditors … I think it was mentioned this morning that some—–

1023

Chairman

Time now, Senator.

1024

Senator Sean D. Barrett

—–some auditors had 200 staff and 20 partners in a bank, you had only three, I think, for Bank of Ireland and AIB combined, so would you see a role for external auditors and your office in the future? And thank you, Chairman, that is my last question.

1025

Ms Mary Burke

I do see a role for external auditors and for engagement between the regulator and external auditors but not in fundamentally changing the role of external auditors. The Central Bank … Act 2013 has given us a more flexible framework for engaging with auditors regarding what they may uncover during their audit but I think banking regulation has moved on very significantly since the period that I was reviewing in my statement or commenting on in my statement. So, we have a more intrusive regime of supervision. The SSM is a game-changer, frankly, in terms of supervision of systemically important banks within the euro area, so I don’t, personally, at this point see a need to change the role of auditors, certainly in the context of supervision if you wish to their role in some other respect, that is—–

1026

Senator Sean D. Barrett

How many staff do you have now?

1027

Ms Mary Burke

I don’t deal in … I’m not directly in banking supervision now. I think their numbers are … approximately approved numbers are something like 120 in banking supervision but you also have to bear in mind that’s overlaid with staff in Frankfurt.

1028

Senator Sean D. Barrett

Thank you very much.

1029

Ms Mary Burke

I stand to be corrected on the numbers … it’s just an estimate.

1030

Chairman

Thank you very much, Senator. If I could deal with a couple of matters before we move on to the next question? Just following the lead’s engagement with you, Ms Burke, and maybe if you’d care to comment further on the balance of consumer versus prudential focus and adequate resources during your tenure?

1031

Ms Mary Burke

I can’t actually remember the number of resources that were devoted to consumer protection and I have no issue with the consumer directorate … or consumer protection directorate being adequately resourced. I think all directorates, both prudential and consumer, need to be adequately resourced. There was a particular focus in IFSRA post its establishment on the consumer protection area. I think, even in the documents you’ve given me, I chose to look back at the agendas of various authority meetings … and, yes, there probably was a greater focus at that level at that time on consumer protection. But I think it needs to be borne in mind that IFSRA was a new authority, so there was a lot of agenda items to do with establishing that authority and budgeting, etc. And, perhaps, not unsurprisingly there was a particular focus on consumer protection at the time. But we do have to remember why IFSRA was set up. I suppose, it was in response to consumer protection issues.

1032

Chairman

And looking back on that period when there was the two separate institutions under the … following the 2003 Act, would you have a view now on how principles-based regulations actually worked and would you have a comment to make upon them?

1033

Ms Mary Burke

Well, I think … I mean, history tells its own story. I think we can clearly say that prudential … that principles-based regulation, certainly as it was implemented here, did not work … it would be rather foolish to be arguing for anything else at this point.

1034

Chairman

Okay. And who in the IFRSA would have been the sort of … engagement point with the banks on that regulation? What side of the IFRSA would have been the most engaging side on principles-based regulation? Who would have been monitoring that and who would have been having the discussions as to the interpretation of these principles?

1035

Ms Mary Burke

I’m not really sure that anybody would have been having discussions with the financial services industry on the … sort of … that strategic level. Each department dealt with the particular industry sectors and they supervised within the framework they were given. To the extent that there was a pressure, if that’s what you are looking at, to have principles-based regulation, I think that probably came from industry. You have the Clearing House Group, the Government’s better regulation agenda … the industry panel was another part of the architecture of the IFSRA regime. And all of those would have pushed for principles-based regulation. But, in fairness, it was also an international theme of, you know, lesser regulation, for the want of a better term.

1036

Chairman

On your opening statement in page 7, and I had to number mine as well just so we are on the same … it is … it is in the very last paragraph … sorry, in the very last couple of sentences there in the last … in the first paragraph. But just before I get into that, could you maybe explain, Ms Burke, that you … this paragraph is talking about you looking for additional resources, additional staff and so forth. If the additional … request for … staff had been provided, what would they have been doing and what may have been done differently?

1037

Ms Mary Burke

I looked at that point for what I would have describe as ade minimus number. I was clear in my communication that I didn’t believe it was the right number but I knew I had to get over various hurdles, including the process, the fact that Mazars were in reviewing, etc. So six was by no means the sort of numbers that would have made any … I don’t believe it would have made any fundamental difference to the outcome. What I had hoped to do was to establish dedicated two-person teams for each of the main banks. Now, given what we now know, that would still have been inadequate. And, as I say, I wasn’t saying it was adequate. I … at that point, I don’t think it would have made any fundamental difference. My vision was that people would not be distracted from one bank to … issues with another bank. But it still wouldn’t have given us the resources to do intrusive supervision. And, I suppose, to the extent that I can take any comfort from things, I think Governor Honohan said in his own report that even if you had a brilliant idea at the end of ‘06, it was probably too late. I don’t think my request for six staff was a brilliant idea but even, I think, if we had put in an army at that point, an awful lot of the damage was already done.

1038

Chairman

And it just brings me to a final question now before I move onto the other questioners. At the very end of that paragraph, this is the response that you give to your request:	1039
To me, at its most benign, this indicated a disconnect between the [banking supervisory … supervision division … or department] and senior IFSRA executives which, in practice, banks used to their advantage. I believe that [this is signalled or this] … also signalled a manifest lack of support for staff, undermining them in their dealings with bank …”.	1040
Could you talk to us some more about how maybe this gave the banks … banks an advantage and also how you see that this may have been undermining them in their dealing with the banks?	1041

Ms Mary Burke

I think if you are the … leading a team dealing with a bank, you should be the main point of contact with that bank. I don’t have an issue with the fact that institutions might choose to escalate something. And if they choose to do so, I think the executive in the regulatory authority should engage with the supervisory staff and they should be part of informing that discussion. Personally, I believe they probably should be at the meetings or certainly some of them should be at the meetings. And that’s very much the framework we have now. We have more directors, in fairness, so the responsibility at the executive level is more widely spread. And for want of a better term they are very much “embedded” in the supervisory regime. And that’s my view as to how it should work. In terms of undermining staff – and I have had personal experience of this – if you are talking to a bank and they say to you, ‘’Oh well, we discussed that issue on the seventh floor”, you’re immediately wrong footed. You’re in a position where, one, you don’t know whether they did discuss it, you don’t know what they discussed, you don’t know what the outcome is. And you’re already very much already seen, from the bank’s perspective, as somebody who’s not in the loop.

1042

Chairman

And does that imply—–

1043

Ms Mary Burke

And that, I think, undermines staff.

1044

Chairman

And does that imply a disconnect in the structure that there was a two-tier structure … or that there was a disconnect—–

1045

Ms Mary Burke

I don’t think it was a … a problem with the structure, I think it was simply a problem with the culture.

1046

Chairman

Okay.

1047

Ms Mary Burke

I don’t think the structure was the issue, it was simply how people operated.

1048

Chairman

Okay, thank you very much. Senator D’Arcy. Senator, you have six minutes.

1049

Senator Michael D’Arcy

Thank you, Chairman. Ms Burke, you’re very welcome. Thank you for coming. One of the objectives of the Financial Regulator was the promotion of the financial services industry in Ireland. Did the objective get in the way of correct prudential supervision?

1050

Ms Mary Burke

I think, technically, our view on this is it probably wasn’t an objective,per se, in law. I think that probably applied to the Central Bank but we obviously had to be conscious of any Central Bank objectives in the manner in which we went about our work. Yes, I think it did. I think it put a huge emphasis … or a disproportionate emphasis is probably a better way of putting it … on competitiveness … on the level playing field. We had the added complications in two respects … one, we had an International Financial Services Centre, where we were trying to attract in industry. We very much wanted to keep them on the same regulatory regime. There was one regime for banking in Ireland. We also had the difficulty that, under the European provisions regarding freedom of services, certain institutions operated here on a branch basis. And, therefore, in terms of prudential regulation, they were supervised by a different regulator. They were supervised by us for conduct of business but not for prudential. So, if we imposed particular rules or regulations on Irish licensed banks that weren’t imposed on the passport … the branches, then the issue of level playing field and competitiveness immediately raised its head. But it was a … from looking back at documents – and I have had the dubious pleasure of doing so for coming in here in terms of my research – the term ‘’competitiveness’’ and ‘’level playing field’’ comes up repeatedly. It comes up in IFSRA’s own strategy statements, it comes up in industry panel, it comes up in … even the Minister, when he announced the consolidation … proposals to consolidate financial services legislation – I think that was in ‘06 sometime – even that press release talks about how it is important to do so for competitiveness and recognising the … we have such a large international banking presence here. So it was a repeated theme.

1051

Senator Michael D’Arcy

And was the single regime a mistake?

1052

Ms Mary Burke

You mean the single regime for—–

1053

Senator Michael D’Arcy

For both—–

1054

Ms Mary Burke

——regulating banks?

1055

Senator Michael D’Arcy

—–international and … for both, yes.

1056

Ms Mary Burke

I don’t know that it was a mistake. I certainly … we still have one regime. I think we were probably unduly influenced by the fact that the single regime was … we were focusing too much on what it might mean for the International Financial Services Centre. I’m not sure there would’ve been any dire consequences in the international sector had we been … taken a different approach. But I mean, again, I can’t predict the past in that sense.

1057

Senator Michael D’Arcy

Can I ask you, Ms Burke, your … your view in relation to guidance? You quoted the section 33 from the Central Bank in relation to guidance between the Central Bank and their role in financial stability.

1058

Ms Mary Burke

Yes.

1059

Senator Michael D’Arcy

And it’s something that I am trying to get a handle on. Can I ask your view in relation to guidance, what guidance means? We’ve had former Governor Hurley in here previously and we had Mr. Grimes in this morning. Could you give the committee what your knowledge of guidance means, of guidance from the Central Bank board to IFSRA—–

1060

Chairman

To Ms Burke now Senator to make time.

1061

Ms Mary Burke

My interpretation of that particular provision which is 33D, again, I mean it is an oddly phrased piece of legislation I have to admit but when something refers to guidelines, as to policies and principles that the authority is required to implement, I’d place the emphasis on the “required to implement”, and my interpretation of that is, that in the context of financial stability, the Central Bank could effectively have required us to implement certain policies. I appreciate there are other interpretations of that, and different people have different opinions, but to the extent that there is a need to reconcile those different opinions I will have to leave that to the committee.

1062

Senator Michael D’Arcy

Did you hear former Governor Hurley’s view that this piece of legislation was theoretical?

1063

Ms Mary Burke

I heard quotes to that effect, I didn’t have the opportunity to listen to all of the Governor’s, or former Governor’s testimony.

1064

Chairman

Governor Hurley was referencing the correspondence that came from Professor Honohan which had earlier said that it was theoretical, or it could have been interpreted as theoretical. Okay. Ms Burke.

1065

Ms Mary Burke

Sorry, have I answered the question, I’m not sure?

1066

Senator Michael D’Arcy

I am not sure if you had. You heard the quotation about … from Governor, former Governor Hurley?

1067

Ms Mary Burke

I heard words to that effect, I may not have heard it.

1068

Senator Michael D’Arcy

Do you have an opinion upon his view that it was theoretical?

1069

Ms Mary Burke

I would look at it as … in terms of what is written in the legislation. I’m not concerning myself with why it was put there or whether people … what people thought they meant when they wrote it. I can only tell you what my view and opinion is on that piece, and it says what it says.

1070

Senator Michael D’Arcy

Thank you.

1071

Chairman

Thank you very much, Senator. Deputy Doherty ten minutes – or six minutes.

1072

Deputy Pearse Doherty

A Chathaoirligh … fáilte. Can I ask you first of all who was responsible for creating and updating the stress tests scenarios and why weren’t they effective in predicting the banks’ failures?

1073

Ms Mary Burke

Looking at the correspondence that you have provided me with, in 2004 the stress test seems to have been run out of banking supervision, because I can see a letter that was issued. As I say I didn’t go there until May ‘06. By then it was a Central Bank responsibility to run the stress tests and my recollection of the presentation of the financial stability committee at the time was, it was described as an innovation in terms of ‘06, was that the responsibility had moved to the CBFSAI.

1074

Deputy Pearse Doherty

So you would have had no role in relation to the stress tests during your period as head of—–?

1075

Ms Mary Burke

Well I … whether I would have had, had I been the deputy or have been the head when the stress tests were being done and formulated – I don’t know. I certainly didn’t at that point, it was all of those stresses and scenarios were developed before I got there and in ‘06 I think they were done in consultation with the IMF but I’m open to correction on that.

1076

Deputy Pearse Doherty

Okay, but no consultation with your own division?

1077

Ms Mary Burke

I wasn’t in that division at that point.

1078

Deputy Pearse Doherty

No, in ‘06 sorry.

1079

Ms Mary Burke

In ‘06 I still wasn’t in the division at that point, I only went in in May ‘06 and I think those stress tests were done earlier in that year, certainly in terms of setting out the parameters and the scenarios. I think the correspondence, if I had to find it, issued in February and I think there’s replies in April.

1080

Deputy Pearse Doherty

Okay, okay. Can I ask you in relation to the inspection of commercial property lending exposures in December 2007 on the financial institutions? Can I ask you did this cover all of the financial institutions that were eventually guaranteed by the Irish State and what was the purpose of these inspections?

1081

Ms Mary Burke

I can’t answer your first question Deputy – I don’t know whether it covered all of them, it certainly covered some of them. I don’t actually have the list to hand of the particular institutions. And the purpose of it was to look across the system to some degree, so it would have covered, it certainly I think it covered the key ones in terms of their management and controls around commercial property lending.

1082

Deputy Pearse Doherty

And what was the general findings in relation to the inspections?

1083

Ms Mary Burke

I think there was a common finding across the industry – if I could find the letter – but certainly I know the net worth statements, we felt, were not reliable and not consistently sought across the system and there was one other key finding. If someone could direct me to the particular—–

1084

Deputy Pearse Doherty

It’s there on pages I think 62 on.

1085

Ms Mary Burke

And am I in Volume—–

1086

Deputy Pearse Doherty

Vol. 2.

1087

Ms Mary Burke

Vol. 2 … Yes sorry, that particular one also dealt with the perfection of security and the extent to which property developers could withstand a downturn.

1088

Deputy Pearse Doherty

And can I ask you, Ms Burke, what did you do when you figured out that this is what was going on within the financial institutions, that there were issues, as you say, about property developers being able to withstand a downturn, exposures, no net-worth statements. What did you do, as head of banking supervision?

1089

Ms Mary Burke

We issued post-inspection letters to all of those institutions flagging them and flagging the issues both – there would have been individual issues within the institutions as well as the general broad themes across the institutions. It was also escalated both through the executive and to the authority and my recollection is the CEO report to the authority in early ‘08 flagged that there were issues across the system and one of the issues in particular that I recall was the issue of net worth statements and the extent to which they were validated by third parties. So it was escalated internally and the standard procedure for issuing letters to banks was followed.

1090

Deputy Pearse Doherty

But beyond writing to the banks and saying this … these are the areas that we’re concerned about, was there any other action taken?

1091

Ms Mary Burke

No there was not any other action taken. I mean if the action you’re considering is something like an administrative sanction procedure, for example, in terms of inadequate internal controls, I’ve already said in my statement that we didn’t have the resources to do that. The approach to administrative sanctions had been established in, I think it was probably ‘05, following the Act that was brought in. Each department went through the rules requirements, whatever … that were sanctionable, and identified the priority they attached to them. I did it for the department I was in at the time, you graded them either one to five or A to D, something like that. In fairness, in banking supervision, that assessment was done. What was interesting was that even in ‘05 the opening paragraph of that policy noted that BSD was not in a position to have the resources to pursue an ASP case. That was the case in ‘05 Deputy, it was even more the case in ‘08.

1092

Deputy Pearse Doherty

Okay. I want to go to, again Vol. 2 of the documents and it’s page 86 and it’s actually from … it’s from the “Misjudging Risk: Causes of the Systemic Banking Crises in Ireland”, and then paragraph 4.3.5. It says however, it talks about:	1093
In the same vein, inspection reports on Anglo during the Period (both in 2004 and 2007) correctly identified a number of more important problems in the bank at the time. However, there is no indication that these internal reports led to either a reconsideration of supervisory practices or serious consideration of regulatory action. Had the FR [Financial Regulator] rigorously enforced its recommendation to improve structures and processes, it is possible that Anglo would have grown its property lending in a more prudent manner.	1094
And it goes on to say that that could also have had an impact on other banks’ lending. Do you subscribe to this view that because the Financial Regulator, and the division which you were head of, did not follow up on these issues, that Anglo was allowed to – and I’m paraphrasing here in my view, I’m asking you for a view on this – that Anglo was allowed to continue to grow in a more imprudent manner?	1095

Chairman

The question was made. Ms Burke.

1096

Ms Mary Burke

I can’t speak for 2004, that was before my time. In terms of the 2007 inspection, yes issues were identified. I have already explained why we didn’t take administrative sanctions procedures. I can’t tell you whether, you know, that would have resulted in the outcome. It is clearly the view of, and I presume this is Mr. Nyberg’s report, that it is a possible outcome. I’ll accept it as a possible outcome. There are other possible outcomes. I mean if things had been different, Deputy, things would have been different but I can’t tell you precisely in terms of a systemic failure, which particular levers, if we pulled them differently or did things differently, would have resulted in a fundamentally different outcome.

1097

Chairman

Thank you very much. Just as a supervisor, Ms Burke, do you have any view on the quality of the Central Bank’s stress tests, as to their quality?

1098

Ms Mary Burke

At the time, the discussion of the financial stability report, and it was in very much my early days in banking supervision, and you will appreciate there is a learning curve, given what happened—–

1099

Chairman

I’m on a big one myself.

1100

Ms Mary Burke

Well, I’ll tell you, given the financial crisis that hit in ‘07 it was a fairly steep learning curve for me as well. My recollection of the discussion is that it did note that there was areas for improvement. I think the IMF commented that there had been some improvement but there were more areas for improvement, and there were certainly caveats to the extent that we should acknowledge the limitations of the stress test. I think the regime for stress testing has moved on in leaps and bounds, if you look at, you know, the PCAR and the PLAR that were done subsequently, and the more recent SSM as a quality review, they were very different animals in terms of stress tests.

1101

Chairman

And having completed a very, very steep learning curve, do you now have a view on the quality of those stress tests?

1102

Ms Mary Burke

At the time, in ‘06?

1103

Chairman

Well … even on reflection now … how would you view them?

1104

Ms Mary Burke

On reflection, I don’t think they were severe enough and … but, in fairness, people, I don’t think at that time, foresaw a complete closure of the inter-bank markets and the consequences that followed on from Lehman’s.

1105

Chairman

Okay. Thank you very much. Deputy Eoghan Murphy.

1106

Deputy Eoghan Murphy

Thank you, Chairman, and thank you, Ms Burke. You’re very welcome. You were head of banking supervision from 2006 to 2008 … May 2006. So, did that come with supervisory powers of the banks?

1107

Ms Mary Burke

Well, it came with the powers that we had imposed on the banks, if you follow me. It came with the power to supervise the banks in line with the approach and the strategy the Central Bank had taken … or, sorry, the regulator had taken, I beg your pardon.

1108

Deputy Eoghan Murphy

Okay. In evidence …in evidence from Mr. Hurley he said that the Central Bank was divested of supervisory powers over financial institutions after the 2003 Act. So, would you agree with that statement?

1109

Ms Mary Burke

The supervisory powers, the direct micro-prudential supervisory powers were a matter for IFSRA, which was, as far as I’m concerned, a constituent part of the wider CBFSAI.

1110

Deputy Eoghan Murphy

Okay, but as head of banking supervision, did you have supervisory powers of the banks?

1111

Ms Mary Burke

Yes, I had the powers that the authority gave me, not all of the powers that were necessary delegated to my level, if you follow me, but I had powers.

1112

Deputy Eoghan Murphy

So after the 2003 Act, the Central Bank still had supervisory powers over the financial institutions?

1113

Ms Mary Burke

No, the … the supervisory powers were with the authority, the IFSRA, but it was a constituent part of a wider organisation.

1114

Deputy Eoghan Murphy

Okay, but … just trying to clarify—–

1115

Ms Mary Burke

I’m … I’m obviously losing the plot here slightly.

1116

Deputy Eoghan Murphy

With … with banking supervision, and you were involved with stress tests. I know you weren’t, but the role was. You had the power to set the parameters for stress tests with the banks, to get them to conduct a stress test and to set the scenarios by which they’d do that.

1117

Ms Mary Burke

Okay, I … I can’t speak for how the scenarios were developed in 2006 because it was before my time. The overall responsibility for running the stress test had moved from banking supervision, which seemed to be taking the lead – again, I can only deduce this from the documentation provided to me – in ‘04; the correspondence was issuing from banking supervision. By the time we got to ‘06, that responsibility was with the Central Bank. The extent to which they engaged with the then management in banking supervision as to the scenarios and the stresses, I can’t speak to. I am, however, aware that the IMF also had input, but I can’t speak to you as to how much input BSD had.

1118

Deputy Eoghan Murphy

And then, as head of banking supervision, were you involved in the domestic standing group at all?

1119

Ms Mary Burke

I wasn’t. I was asked to attend one meeting at some point because … I think it’s my reference earlier to being parachuted into meetings. I think they wanted two people from the regulator there for that meeting and there was nobody else in the building, or, I was the next most senior person might be a better way of putting it. There were clearly people in the building. And I was asked to attend.

1120

Deputy Eoghan Murphy

And did you take part in the crisis simulation exercise in late 2007, which dealt with the collapse of a bank?

1121

Ms Mary Burke

I didn’t in any meaningful sense. There was various functions assigned to people. My recollection is that I was asked to be responsible for the co-ordination of gathering any information requests that may emanate from the authority. So, there were people in various rooms. The Department of Finance was in one room, the boardroom was used by the authority and senior executives from the regulator. I wasn’t in there as part of that discussion so I don’t know the cut and thrust of the debate. I was in, for the want of a better word, an ante-room dealing with any requests that may emanate from them for information.

1122

Deputy Eoghan Murphy

Okay. Were you involved in preparing or reviewing the scoping paper that was prepared by the Department of Finance in late 2007 that dealt with possible nationalisation, liquidation, or guaranteeing of a bank?

1123

Ms Mary Burke

Not in any meaningful way that I can recall. Now, there were—–

1124

Chairman

Two minutes.

1125

Deputy Eoghan Murphy

Thank you.

1126

Ms Mary Burke

Pardon?

1127

Deputy Eoghan Murphy

It’s just he’s said me two minutes.

1128

Ms Mary Burke

Okay. That’s fine by me, Deputy. Not in any meaningful way. I have said earlier that there were so many meetings at that time and you were parachuted in and out of meetings. I cannot say to you that I wasn’t at some meeting where something was discussed but I certainly wasn’t a hands-on in developing it.

1129

Deputy Eoghan Murphy

Okay, and then, were you consulted on Mr. Hurley’s approach to the banks in March 2008, where he asked the banks to continue lending to each other?

1130

Ms Mary Burke

No … no.

1131

Deputy Eoghan Murphy

You weren’t, okay. I’m just curious, as head of banking supervision, that you weren’t involved in the domestic standing group as an active member, or regular member. You weren’t in the room for the crisis simulation exercise, you didn’t have a direct role in the scoping paper prepare, looking at the nationalisation or liquidisation … or liquidation, excuse me, or guaranteeing of a banks, and you weren’t aware that the Governor was approaching the banks directly to ask them to lend to each other. Can I ask why that is?

1132

Ms Mary Burke

I’m not sure I can tell you why that is, Deputy. You would need to ask some of the people that didn’t approach me on various things. In fairness to people at that time, it was very fast moving. There was a lot of issues being dealt with my impression was, strategically, at the level of the seventh floor. The more issues came, the more BSD became operational, and much less strategic. We were literally fire-fighting and there were constant demands for information, be it why we didn’t regulate conduits, to what the liquidity position on a particular bank was, etc., and I think, given the resource constraints within the wider organisation, the seventh floor and our executives became far more involved in those sort of strategic discussions where, in a more calm, business as usual mode, perhaps you might have expected the head of banking supervision to be involved. I can only tell you my evidence is I was not involved.

1133

Deputy Eoghan Murphy

And can I just clarify how many positions were above you, between yourself and, say, Mr. Grimes, the deputy governor?

1134

Ms Mary Burke

Well, I wasn’t on a direct reporting line to Mr. Grimes. Above me there was the prudential director, there was the CEO, and they reported directly into the authority. Mr. Grimes was on the other pillar, for the want of a better word.

1135

Deputy Eoghan Murphy

Okay, thank you.

1136

Ms Mary Burke

Thank you.

1137

Chairman

Thank you very much, Deputy. Deputy Joe Higgins.

1138

Deputy Joe Higgins

Ms Burke, who was on the seventh floor?

1139

Ms Mary Burke

The seventh floor, I’m not sure I can remember all the names, we’ve had various—–

1140

Deputy Joe Higgins

No, I know, but the level of responsibility.

1141

Ms Mary Burke

The level of responsibility … it was directors, the term “director” was on the regulator side, on the Central Bank side, they were deputy director or assistant director generals.

1142

Deputy Joe Higgins

So the very senior people in both the regulator and the Central Bank were on the seventh floor?

1143

Ms Mary Burke

Yes, they shared the executive floor.

1144

Deputy Joe Higgins

The … the top brass, one might say, perhaps.

1145

Ms Mary Burke

Yes.

1146

Deputy Joe Higgins

Yes. Ms Burke, what impact, in your opinion, did the size of the supervisory teams in … on the banks have on the supervision of some of the key prudential issues, especially issues of liquidity and capital considerations?

1147

Ms Mary Burke

I think the size of the teams meant we were spread extremely thin. I don’t believe we could have delivered … we didn’t deliver intrusive supervision. If you are a team of three people and you have two of the major banks in the country and you are trying to supervise them through the worst financial crisis since nineteen twenty whatever, there was only so much those people could do, and it was not intrusive supervision, and, in fairness to those people in BSD, I think I should say that they went above and beyond in terms of the effort they put in.

1148

Deputy Joe Higgins

But with … for example, you say in your evidence, three people looking after Bank of Ireland and Anglo combined, and another three looking after Allied Irish Banks and IL&P combined.

1149

Ms Mary Burke

Correct.

1150

Deputy Joe Higgins

You … you say that it was impossible for them to really track the serious issues that was going on in the banks.

1151

Ms Mary Burke

It … we could identify issues and, certainly, I think we could identify, and we did identify, serious issues. I mean, the reports … the one that was quoted to me earlier on Mr. Nyberg, that was quoted by Deputy Doherty, notes that we did identify issues. I think we did identify issues and they did identify issues. They didn’t necessarily see the consequences because, as I said earlier, people did not see the seizure of the … the markets. But our ability to follow through, our ability to challenge, our ability to then enforce … and there’s not much point in threat making … making a threat of following through if you know you can’t ultimately do that. That was not there.

1152

Deputy Joe Higgins

Yes. Did you hear the auditors’ evidence to this inquiry?

1153

Ms Mary Burke

No, I didn’t hear that, no.

1154

Deputy Joe Higgins

Would you be shocked, or not, to hear that in the audit of one of those institutions – AIB – the auditor had up to 200 staff necessary, they felt, to do the audit?

1155

Ms Mary Burke

Very little shocks me at this point, Deputy. I would not be surprised to know that a professional services firm had up to 200 staff to do an audit.

1156

Deputy Joe Higgins

Would that cast into a very cold light the paucity of resources that the regulator had previously?

1157

Ms Mary Burke

Absolutely. I am crystal clear here. We did not have the resources that were needed to supervise these banks. You won’t get any dispute from me on that one.

1158

Deputy Joe Higgins

Okay. Can I go very quickly to your written statement, page 3, and this relates to the International Financial Services Centre and I quote, which you did already, some of it:	1159
Other factors which I consider influenced the approach to regulation and supervision were [the Financial Regulator’s] mandate to promote the financial services industry and the existence of the International Financial Services Centre … The desire to portray Ireland as business friendly led, I believe, to a reluctance to introduce prescriptive rules and a particular focus on keeping costs down [and then continue a little while on] … In addition, the strategic decision that there should not be two different regulatory regimes – one for domestic firms and another for those in the IFSC – meant that a different approach was not taken to the domestic financial services sector. This decision was driven by a concern that the IFSC might otherwise be categorised as an off-shore centre with associated negative connotations.	1160
Could I ask you, Ms. Burke, would it be fair or unfair to interpret that statement as meaning something like this, that in order that the IFSC was not seen as an offshore island-type financial centre with a more lax regime than normal domestic banking and an unsavoury reputation, perhaps, that regulatory standards for the domestic banking sector as a whole were significantly lowered to avoid making what was happening in the IFSC look bad?	1161

Chairman

Just ask a question.

1162

Deputy Joe Higgins

I did.

1163

Chairman

Yes, I know. I’m just restating.

1164

Ms Mary Burke

I thought very carefully, Deputy, about the words I used in my statement and, I suppose, I would say I would use the words I used in my statement. You may choose to use different terminology and that’s a matter for yourself.

1165

Deputy Joe Higgins

No, I … putting a … I was posing just a theoretical question to you in the event was … well … did this play into the fact thatThe New York Times in 2005 could refer to Ireland and its financial system as the wild west of European finance?

1166

Ms Mary Burke

I don’t know whether it played into it, Deputy, and I wouldn’t necessarily use your language. It’s more eloquent and colourful, perhaps, than mine but, perhaps, being from the Central Bank I tend to play it more low key. Yes, the wild west reference did … was something people had in mind. It certainly was something people felt defensive about. I don’t know that the standards were lowered for domestic banks by virtue of the IFSC but there was very much a view that we needed to have one regime and sell the regulatory regime in the context of the promotion of industry as being a one regime for supervising banks.

1167

Chairman

Last question, Deputy Higgins, quickly.

1168

Deputy Joe Higgins

Yes. Okay, let me sum up so, Chairman. In page 7 of Ms Burke’s written statement again – and the Chairman alluded to this – and you are speaking about the relationship between what I would call perhaps rank and file members … workers in the IFSRA and more senior executives. Could I put it to you, Ms Burke, that what you portray there to an ordinary person might seem as an extraordinarily dysfunctional relationship … that it would seem that hard work by rank and file – or whatever you would refer to – I’ve no doubt hard-working members of the regulator were undermined by a cosy relationship between regulators at the top and the banks? And, just the last thing, you say at its most benign this indicated a disconnect between the banking supervision department … or division and the senior regulator executives. If that was benign, what would a malign explanation be do you think?

1169

Ms Mary Burke

I again will stick to the terminology I have used. I have not talked of a cosy relationship … it’s your phrase that it was dysfunctional. I would say it was frustrating for people at an operational level to feel they had to not only argue the issues with the banks they supervised but also have to argue … some of them, not all of them … it wasn’t every decision we ever made just to be clear on that … but if you’re already arguing with the banks, to have to argue with the people that you feel should be on your side was frustrating. I think people felt undermined by the fact that you would see the CEO of a bank in at reception. It was a bank you supervised and you would come to me and say “Do you know why they’re in?”and I would go “No, I have no idea.” I think that did undermine people. Whether … I don’t … it wasn’t … it didn’t feel … and perhaps you just become used to the system you’re trying to work within. It didn’t feel, you know, hugely dysfunctioning … dysfunctional, I beg your pardon, it felt frustrating. I’m not suggesting there was anything inappropriate in the relationship. I’ve already explained that I don’t have an issue with senior executives escalating matters internally within the bank or within the regulator, but I do feel that the people at the front line dealing with it should have been involved in any subsequent discussions with those senior executives.

1170

Deputy Joe Higgins

Could things have been—–

1171

Chairman

Sorry, Deputy, I’m going to have to move on.

1172

Deputy Joe Higgins

Could I listen to—–

1173

Chairman

Deputy, Deputy, Deputy, please.

1174

Ms Mary Burke

Other than saying my same comment earlier, Deputy, you know, if things had been different, things would have been different. I can’t tell you what the different outcome might have been.

1175

Chairman

I just want to move to the discussion with you, Ms Burke, just going to one level here before bring in Senator MacSharry. There’s the Financial Services Centre, there’s the Central Bank, there’s the auditors, there’s the regulators, the boards and all the rest of it. But, as a supervisor, you would have … you would be gathering an intelligence and an awareness and a cognisance of things from a broad observation. Now, one observation … or things that could have been observed during the time was loan-to-value ratios were tightening, we saw income ratios and borrowers increasing, going from two or three times’ an income up to seven or eight times and beyond that, we saw schedule extensions from 20 years out to 35 and 40 years on mortgages and we saw 100% mortgage products and all the rest of it coming on the line. Did that in any way find its way into the thinking of your role and travel up the line in terms of that we need to do something about this?

1176

Ms Mary Burke

We were aware of a lot of those issues and there were discussions on them in various places. I mean, some of the things like the 100% mortgages actually would probably also have been discussed with … the consumer context. So there were general discussions around those issues. In terms of banking supervision, other than doing the various inspections that we did, etc., I’m not conscious that we were … and we were very busy, as I said earlier, dealing with operational issues – much less so strategic as time went on – and that really was probably from the end of ‘07 onwards. So they would have been considered, and probably discussed also at the financial stability committee, but I don’t recall that any definitive particular courses of action were agreed as a result.

1177

Chairman

Okay. Senator MacSharry.

1178

Senator Marc MacSharry

Thanks very much, and thanks, Ms Burke, for being here. Can I ask … you were talking about staff and requests were declined. Who declined your requests for staff?

1179

Ms Mary Burke

I’m … sorry, I’m conscious that I’m trying to keep things as general as possible. I don’t have an issue naming people—–

1180

Senator Marc MacSharry

Great.

1181

Ms Mary Burke

—–if the committee believes that’s appropriate.

1182

Chairman

No. If you could give us the—–

1183

Ms Mary Burke

Well, let’s put it this way, I can deal with it as generally as possible.

1184

Senator Marc MacSharry

Okay.

1185

Ms Mary Burke

In looking for staff, things were escalated up the line.

1186

Senator Marc MacSharry

Okay. Were they on the seventh floor?

1187

Ms Mary Burke

Well, we’ve already discussed with your colleague as to what “up the line” meant in my context and how many people were above me, so I will need you to deduce from that … yes, they were on the seventh floor.

1188

Senator Marc MacSharry

As opposed to the Department of Finance, say, or—–

1189

Ms Mary Burke

Oh, sorry, yes. No, I certainly … it was internal. It was the seventh floor.

1190

Senator Marc MacSharry

It was internal. Okay, that’s fine. In the period – and I know some of it predates yourself – records of the Financial Regulator indicate that no enforcement action was taken on any institution for regulatory breaches from 2003 to 2008. I know you only came along post-2006. Why was that?

1191

Ms Mary Burke

Well, I can only speak in the context of prudential regulation. I can’t actually recall what might have been done in terms of sanctions for consumer issues so you’ll have to excuse me on that.

1192

Senator Marc MacSharry

No, no. No, sorry, I mean that very specifically to do with prudential regulation. I’m not that interested in the consumer side just for now.

1193

Ms Mary Burke

From my perspective, it was … at an operational level, it was a resources issue. We didn’t then, I beg your pardon, have a separate enforcement directorate as we have now. We actually have a directorate with two enforcement departments who in fairness carry … do Trojan work and carry the lion’s share of responsibility in terms of taking a sanction and pushing it through. Sanctions … you know, the initiation and the pursuit and the successful conclusion of sanctions, which is a very time-consuming process, was left with the supervision departments. It wasn’t peculiar to banking supervision. It was the same if you had investment firms, or funds, or whatever, insurance, it was the same and we didn’t have, in either of the two departments I was in, the resources to divert people that … from doing the day job of supervision to, say, take time out, which would have been a number of people, for weeks on end, to pursue a sanctions case and, as I said to Deputy Doherty earlier, in as early as ‘05, the banking supervision department – that was before my time – in its policy had indicated it did not have the resources to pursue a sanctions case.

1194

Senator Marc MacSharry

On prudential regulation specifically, was it the practice, therefore, or not, that, due to lack of resources, no action was taken?

1195

Ms Mary Burke

Well, that is what happened. Whether … if one … that is the reality. I didn’t have the resources, therefore, I did not propose to take sanctions that I knew I didn’t have the resources to do.

1196

Senator Marc MacSharry

Okay. And again not specifically to you, because obviously this was the case before your time as well, was it a policy choice, “I’m not going to go down the sanctions route on prudential regulation but I am going to go down the sanctions route on the consumer side”?

1197

Ms Mary Burke

At a more strategic level, at the level of the authority, I don’t know it was ever made that absolutely definitive that sanctions were only for consumer policy and they were not for prudential, but certainly if you look at minutes of certain authority meetings, you will see – and it may even have made its way into strategy documents, I can’t recall – that there was a view that they were primarily consumer and that they would only be for the most egregious issues on prudential.

1198

Senator Marc MacSharry

Okay.

1199

Ms Mary Burke

They hadn’t in course … in terms of that policy considered whether we could do it on the ground and they emphasised the importance of the ongoing relationship in prudential supervision in resolving issues.

1200

Senator Marc MacSharry

So that was kind of seventh floor department again, was it, in terms of—–

1201

Ms Mary Burke

Well, no, the authority would also have been the board of the regulator—–

1202

Senator Marc MacSharry

Okay.

1203

Ms Mary Burke

—–and the … most of the executives—–

1204

Senator Marc MacSharry

But the board—–

1205

Ms Mary Burke

—–were on the board.

1206

Senator Marc MacSharry

—–and the senior executives.

1207

Ms Mary Burke

Yes.

1208

Senator Marc MacSharry

Kind of … just this was the situation. It was kind of decided, “Look, we’re going to focus more on the consumer side than the prudential regulation side”.

1209

Ms Mary Burke

Well, I wasn’t party to … I didn’t sit in at those meetings. I can only tell you what I’ve seen in minutes and strategy documents.

1210

Senator Marc MacSharry

But the outcome of those meetings, as you understood it, was to pursue that line, was it, or not?

1211

Ms Mary Burke

Yes, that was the outcome.

1212

Senator Marc MacSharry

Okay.

1213

Ms Mary Burke

It didn’t absolutely preclude it for prudential.

1214

Senator Marc MacSharry

So, in essence, was principle regulation, when it came to prudential regulation, like having a football match and FIFA but no referees?

1215

Ms Mary Burke

I probably wouldn’t use the FIFA reference today, Deputy.

1216

Senator Marc MacSharry

Oh, okay.

1217

Ms Mary Burke

I’d perhaps prefer the garda reference earlier.

1218

Senator Marc MacSharry

Maybe the FAI. The FAI then.

1219

Ms Mary Burke

I think if I was mixing metaphors, perhaps it would be like having the FIFA without the guards that the Deputy referred to earlier.

1220

Senator Marc MacSharry

Okay.

1221

Ms Mary Burke

It was … it was very much in the moral suasion space. There was theoretically, to use a term that was applied earlier, the possibility of administrative sanctions, but I don’t believe that the industry saw that as a credible threat.

1222

Senator Marc MacSharry

Can I ask—–

1223

Chairman

Final question, Senator.

1224

Senator Marc MacSharry

Yes. Any chance of some of Deputy Higgins’ time there?

1225

Chairman

If you’re pursuing … if you’re pursuing a good line, we’ll give you a bit of it.

1226

Senator Marc MacSharry

The … you mentioned in your statement, and I’ll paraphrase somewhat but you can correct me if I’m wrong, that at times you would be dealing with an issue with a bank and, similar to the issue that was mentioned to Deputy Higgins there, that it was maybe somewhat passed off and, “Look, I’ll be talking to so-and-so”, perhaps on the seventh floor, or higher, your superior, I think you mentioned in your statement about that?

1227

Ms Mary Burke

Yes. I wouldn’t say it was passed off. The examples that I can think of in that context were when banks were frustrated with either the depth or the number of inquiries we were making on an issue, particularly if it was a complex or innovative proposal—–

1228

Senator Marc MacSharry

Yes.

1229

Ms Mary Burke

—–and things weren’t moving quite fast enough for them, I certainly am aware of a number of occasions where staff said to me, you know, “Joe Bloggs in bank X says they’ll raise that on the seventh floor.” Now, I wouldn’t say they … we weren’t passing it off. It was more being suggested by the bank, let’s call it, as an incentive for us to, you know, speed up our process—–

1230

Senator Marc MacSharry

Okay. Without … and this is the very … this is the very last thing—–

1231

Chairman

Yes, go on.

1232

Senator Marc MacSharry

Without naming names, or banks, or institutions, was there ever an instance that you would consider serious, that you were dealing with a bank on, that their retort was, “Leave it to me. I’m dealing with so-and-so”?

1233

Ms Mary Burke

No. In fairness to both the regulator … or the executives in IFSRA and the bank, it wasn’t … it wasn’t that tone necessarily, you know. They would engage with us on issues but where, as I say, it wasn’t moving fast enough, or they began to be concerned about the outcome, or in a number of occasions where they didn’t like the decision, they would escalate it. It was not necessarily their first port of call. They would go through the process of engaging with us and it was not every decision that was ever made, but I have a number of examples in my head which I found particularly frustrating and annoying and I know people in BSD did as well.

1234

Senator Marc MacSharry

Okay.

1235

Ms Mary Burke

So, it was that kind … and, as I said earlier, I’m not suggesting any impropriety. They simply felt they were escalating it and moving things along.

1236

Senator Marc MacSharry

Okay, thanks.

1237

Chairman

Deputy O’Donnell.

1238

Deputy Kieran O’Donnell

Thank you, Chairman, and I welcome Ms Burke. Can I just go to … it’s … I don’t known what page. It’s the second-last place of your statement where you speak about … that “Senior banking executives [and I’m assuming seventh floor executives] had regular direct contact with senior executives of IFSRA, often without the knowledge of, not to say engagement with, supervisory staff.” Now, you took it upon yourself, in October 2006, to ask that the support staff would advise us of the agendas, of whether briefings were required and whether the supervision staff were to be present. “In practice”, you said, “this resulted in marginal if any difference, particularly as the crisis escalated” and then you spoke about, saying that:	1239
Staff were regularly requested by senior IFSRA executives to review decisions/issues based on their discussions, or told by contacts in banks that issues had been, or would be, discussed with [other] senior executives. To me, at its most benign, this indicated a disconnect between [the supervision staff] and the senior [seventh floor] IFSRA executives which, in practice, banks used to their advantage. I believe that it also signalled a manifest lack of support for staff, undermining them in their dealings with banks.	1240
Can you expand on that, please, Ms Burke?	1241

Ms Mary Burke

Well, I can … other than, sort of, the commentary I’ve already given, where your colleagues explored that, there were regular meetings with certain bank executives and with industry representative bodies. I’m not saying that every one of those meetings resulted in a request for us to change a decision or do anything different.

1242

Deputy Kieran O’Donnell

Were there occasions where it did?

1243

Ms Mary Burke

There were occasions where we were asked to look at a decision again. The number of ones I’m thinking of, we did look at them again, but we maintained our decision. I can think of one where there was an application for a bank authorisation which we were fundamentally opposed to and it felt like a war of attrition to persuade our executives that—–

1244

Deputy Kieran O’Donnell

And was that a new bank, or was that an existing bank?

1245

Ms Mary Burke

No, that was an application for a new bank licence—–

1246

Deputy Kieran O’Donnell

Okay.

1247

Ms Mary Burke

—–not from an existing bank, from a new entity. And those engagements were frustrating. They were also time-consuming. I had no—–

1248

Deputy Kieran O’Donnell

Did you find it impeded and frustrated the supervision division on their day-to-day work?

1249

Ms Mary Burke

I think it took resources that we could ill afford to be arguing things internally when we probably should have had the support of our executives and certainly had less questioning on them. If … I had no issue if they wanted to be involved in making the assessment and the decision and then, you know, embed themselves in the decision-making process, but if you delegate the decision to somebody and they make it and you have given them the responsibility, I think you support them in that decision.

1250

Deputy Kieran O’Donnell

And do you feel—–

1251

Ms Mary Burke

That doesn’t——

1252

Deputy Kieran O’Donnell

Yes.

1253

Ms Mary Burke

Sorry, just, Deputy, that’s not to say that every decision we made was right and that it didn’t preclude the possibility that somebody had to, you know, gracefully exit us from some decision we’d made, but I personally believe you do that in a manner which does not undermine your staff. The staff that deal with the banks, front and centre, have to be seen to have the support of the organisation that they work for.

1254

Deputy Kieran O’Donnell

And had … during the crisis, had a situation developed where it was the seventh floor executives and the supervision staff, that it had developed into a them-and-us-type situation?

1255

Ms Mary Burke

No, I don’t think it had got to that stage. I think it was very much … and I’ve said earlier this wasn’t every single decision and I didn’t see the organisation as dysfunctional, as Deputy Higgins suggested to me. I found it, in certain aspects, frustrating. I found, however, as the crisis proceeded, there was, certainly within BSD, very much a good team spirit in trying to work together. People were frustrated with the sheer workload they had to do. I don’t know that anybody felt, either from the seventh floor, looking down at us, or us looking at the seventh floor, that there was a them and us. Everybody was trying to do the best they could in an extraordinary situation. And I have no doubt that the executives felt, as they were doing what they were doing, that they were trying to do the best they could.

1256

Deputy Kieran O’Donnell

And the qualifications of staff that were working on the banks … I mean, when you took over, you had three executives looking after one and a half, Bank of Ireland and Anglo. You had three executives looking after AIB, divided one and a half each.

1257

Ms Mary Burke

Yes.

1258

Deputy Kieran O’Donnell

What were the qualifications of these people?

1259

Ms Mary Burke

There would be different qualifications. I can’t remember exactly. Accountants, people maybe with an economics degree. Usually the people at the more senior level – it didn’t always follow – had the higher qualifications—–

1260

Deputy Kieran O’Donnell

So typically what level they were at? What level—–

1261

Chairman

A question, Deputy.

1262

Deputy Kieran O’Donnell

This is a critical point, Chairman. What level were they at in terms of experience? The question really, I suppose, I’m getting at is … you were dealing with institutions like large institutions that had enormous internal audit set-ups, enormous regularity set-ups and was it David versus Goliath in terms of the supervision going out to effectively regulate and supervise the banks from your viewpoint?

1263

Ms Mary Burke

Yes, I mean some of the individuals would have had industry experience; some wouldn’t. Some would have come up through the ranks. Most of them would have had professional qualifications or third level degrees, etc. I don’t doubt the expertise of the individuals. In terms of one of the many … many analogies that have been put with me today, I am happy to agree with the David and Goliath analogy that you’ve put. But in terms of just numbers, the sheer … if you have one and a half people dealing with a bank, David and Goliath might even be optimistic.

1264

Deputy Kieran O’Donnell

Okay, thank you.

1265

Chairman

Thank you, Deputy, and thank you very much, Ms Burke. Deputy Michael McGrath.

1266

Deputy Michael McGrath

Thank you, Chair. You’re very welcome, Ms Burke. In his witness statement, John Hurley stated “No request for funding or resources from the Financial Regulator was ever refused.” Is that accurate?

1267

Ms Mary Burke

I don’t know. I wasn’t involved in discussions at the level of the authority and the board on that.

1268

Deputy Michael McGrath

Okay, who did you report to directly, Ms Burke?

1269

Ms Mary Burke

I reported directly to the prudential director.

1270

Deputy Michael McGrath

And who was that in 2006-07.

1271

Ms Mary Burke

In two thousand and … it would have been Con Horan

1272

Deputy Michael McGrath

Okay, and he then would have reported to the CEO—–

1273

Ms Mary Burke

Correct.

1274

Deputy Michael McGrath

—–Mr. Neary?

1275

Ms Mary Burke

Yes.

1276

Deputy Michael McGrath

Okay. So if Mr. Hurley’s statement is accurate, then your request for additional resources either fell at the hurdle of Mr. Horan or Mr. Neary.

1277

Ms Mary Burke

I have already said that my recollection is that my director supported my request on that occasion.

1278

Deputy Michael McGrath

Okay. So if what you’re saying is accurate, and what Mr. Hurley is saying is accurate, then it fell at the hurdle of the CEO, Mr. Patrick Neary.

1279

Ms Mary Burke

I don’t know that either. Mr. Neary reported into an authority and I don’t know where it went in the mix—–

1280

Chairman

We’ll clarify this tomorrow.

1281

Deputy Michael McGrath

Absolutely. He’ll have an opportunity to do so. I’m just trying to join the dots, Chairman. You have stated in your evidence and it has been confirmed that there are about 50 people working in the banking supervision areas. How many were employed overall by the regulator, the IFSRA, by the Financial Regulator?

1282

Ms Mary Burke

I’m not sure I can remember, Deputy. Over the years—–

1283

Deputy Michael McGrath

Yes.

1284

Ms Mary Burke

—–I’ve seen so many different figures. I have a figure of something like 350, is going around in my head—–

1285

Deputy Michael McGrath

Okay, yes.

1286

Ms Mary Burke

—–but I couldn’t guarantee that and I would suggest you would have to check—–

1287

Deputy Michael McGrath

Mr. Honohan’s report is referring to about 200 in prudential supervision—–

1288

Ms Mary Burke

Yes, and I—–

1289

Deputy Michael McGrath

—–and only 50 in banking.

1290

Ms Mary Burke

—–of course I would think of supervision as being consumer as well. So—–

1291

Deputy Michael McGrath

Yes.

1292

Ms Mary Burke

—–you know, it was certainly of that ilk somewhere between the 250, 350 kind of region—–

1293

Deputy Michael McGrath

So in the region of 50 out of a total of 300 or so?

1294

Ms Mary Burke

Yes, approximately.

1295

Deputy Michael McGrath

Of that order. Okay. Just on the issue of resources, your request in May 2008, was that your first request for additional resources since you became the head of—–

1296

Ms Mary Burke

No—–

1297

Deputy Michael McGrath

—–banking supervision?

1298

Ms Mary Burke

—–I had requested additional resources the previous year. I can’t remember how many I requested but I was given three the previous year.

1299

Deputy Michael McGrath

At your request?

1300

Ms Mary Burke

At my request, yes.

1301

Deputy Michael McGrath

And was your request met in full?

1302

Ms Mary Burke

I can’t remember the number I originally looked for so I don’t … I can’t actually recall, Deputy. But if it wasn’t in full, it was substantively met.

1303

Deputy Michael McGrath

Okay, and that was for the calendar year, 2008, and that request would have been put in during—–

1304

Ms Mary Burke

Yes.

1305

Deputy Michael McGrath

—–2007.

1306

Ms Mary Burke

Correct.

1307

Deputy Michael McGrath

And the request which you refer to in May 2008, that was for the calendar year, 2009.

1308

Ms Mary Burke

Correct.

1309

Deputy Michael McGrath

It was an early stage of … early of—–

1310

Ms Mary Burke

Yes—–

1311

Deputy Michael McGrath

—–early stage of the planning.

1312

Ms Mary Burke

—–the budget had to go to the Minister, my recollection is in October, and so, therefore, the process started quite early in the year.

1313

Deputy Michael McGrath

Okay. Okay. But to your knowledge that was the first request that was refused during your time as head?

1314

Ms Mary Burke

During my time at BSD, certainly the previous one was met, if not in full, partially. I can’t remember. And that one was effectively refused. Now I think I said on my statement it was agreed that I’d have had 0.4 of a person allocated to me but that was done … my recollection, is some sort of accounting for atypical people, you know, people that worked half days or whatever. So, in substance, it was refused.

1315

Deputy Michael McGrath

Okay—–

1316

Ms Mary Burke

I mean, 0.4 of a person is very difficult to recruit.

1317

Deputy Michael McGrath

Sure. You said a few moments ago that prudential enforcement cases weren’t taken or weren’t recommended because you simply didn’t have the resources to process them and to follow through. Is that accurate?

1318

Ms Mary Burke

Yes.

1319

Deputy Michael McGrath

Isn’t that quite an alarming point and quite a striking point? And doesn’t it go really to the heart of what your job was that you really weren’t in a position to do your job? Even if you felt that a prudential enforcement case should be taken against the bank, you didn’t pursue it because of a lack of resources. You simply weren’t able to do your job.

1320

Ms Mary Burke

Yes, we were not able to pursue administrative sanctions cases because of a lack of resources. That was not peculiar to me, in fairness. The previous manager had flagged as much when he developed the policy for ASPs for banking supervision.

1321

Deputy Michael McGrath

And who did you make this known to?

1322

Ms Mary Burke

It … I didn’t make it known to anybody, in that the policy for BSD had been developed in ‘05 by my predecessor and he had clearly stated it, that it was not resourced as a department to take and pursue administrative sanctions procedures. It was well known within my reporting line that we were not resourced to do that.

1323

Deputy Michael McGrath

But did that not basically mean you couldn’t do your job in full?

1324

Ms Mary Burke

Given that … and in talking to Senator MacSharry, we talked about the strategic approach … given that the strategic approach did not see administrative sanctions as a tool that would be regularly used, I presume people did not necessarily see a terrible inconsistency, but, at the end of the day, Deputy, I was not in a position to take administrative sanctions procedures and that is the heart of the matter.

1325

Deputy Michael McGrath

Okay. In your opening statement, you essentially say that a lack of powers wasn’t the key issue. Is that accurate?

1326

Ms Mary Burke

Yes, I don’t think it was. Other than for resolution and recovery, where I think, you know, we didn’t have a resolution regime—–

1327

Deputy Michael McGrath

Yes.

1328

Ms Mary Burke

—–but I think there were a number of powers available that could have been used to implement various measures.

1329

Deputy Michael McGrath

I think one of the key questions that a lot of people would like answered is: did the Financial Regulator have the power and if it wanted to do so, could it have halted the amount of lending that the banks were engaging in to the property and construction sector?

1330

Ms Mary Burke

My view is we had a number of powers. We could have set ratios; we could have set requirements regarding the composition of assets and liabilities; we could have imposed conditions on bank licences. I have already spoken about the fact that, obviously, there would have been the level playing field issue with the branches. The extent to which and how you would have gone about doing that I’d have to think imaginatively as to the wording of any particular rule or requirement but I presume … those are fairly broad powers and it certainly allows for the scope to do something. Whether it would have been able to halt it or not, I can’t say.

1331

Deputy Michael McGrath

But it wasn’t done.

1332

Ms Mary Burke

No, it wasn’t.

1333

Deputy Michael McGrath

Thank you.

1334

Chairman

Thank you very much, Deputy. Is that in essence putting theory into practice what you just said there?

1335

Ms Mary Burke

We had the powers, in my view – now that is very much my personal opinion—-

1336

Chairman

Yes, indeed.

1337

Ms Mary Burke

—–and others may disagree – to take various measures and impose various rules but we were applying a principles-based regime and, as such, those rules were not imposed.

1338

Chairman

Thank you. Deputy John Paul Phelan.

1339

Deputy John Paul Phelan

Thank you, Chair. Good afternoon, Ms Burke. I’ve a couple of brief questions. Firstly, I want to refer to your opening statement and I must confess I don’t have the page number but it’s a direct quote.

1340

Ms Mary Burke

That’s my fault, Deputy. I didn’t number the pages.

1341

Chairman

It’s actually numbered down in the right hand corner, Deputy, if you look at it.

1342

Deputy John Paul Phelan

I have the quote here. I just want to read it out.

1343

Chairman

Sure.

1344

Deputy John Paul Phelan

You’ll be familiar with it. “While work had been initiated in other areas such as directors’ compliance statements and a corporate governance code in 2004 and 2005, this did not lead to their imposition on the industry.” Why, in your view, were those compliance statements not introduced? And do you have a personal position as to whether they should have been introduced then?

1345

Ms Mary Burke

I wasn’t dealing with the compliance statement issued, directly, I have to say. At the time, there was a central unit dealing with it. My recollection is that it was brought in in the IFSRA Act – and I can’t remember what the full title is – modelled on proposals from the company law review group. There were less onerous provisions, I think, ultimately imposed in company law. Those provisions in company law allowed it for … allowed for a sort of a comply and explain mechanism. They had materiality thresholds. It was very much in terms of were the directors satisfied that they had procedures and processes. It was by no means an absolute statement that you were in compliance with everything—–

1346

Deputy John Paul Phelan

Okay.

1347

Ms Mary Burke

—–everywhere. I am paraphrasing here slightly. My recollection is that the industry had serious issues with the way the compliance statement from the Financial Regulator was structured based on what was in the legislation and not on some theory we had developed ourselves. And my recollection is also that the Department of Finance also had issues with it when it realised the consequences. I think industry, at one point, questioned the constitutionality of what was being proposed and ultimately, I think, it was agreed that the whole issue would be dealt with in the context of the consolidation of legislation project, which was launched by the Department of Finance in ‘06.

1348

Deputy John Paul Phelan

Do you have a view as to whether … I’m sorry to be rushing you but my time is nearly up now already.

1349

Ms Mary Burke

Sorry.

1350

Deputy John Paul Phelan

Do you have a view as to whether it should have been introduced as originally proposed?

1351

Ms Mary Burke

I certainly didn’t have an issue and my recollection at the time was that our … it was not us … for us to decide on the constitutionality or otherwise. Somebody could take it to the courts. However, I don’t believe that particular issue was fundamental to whether or not we had the collapse of the banking system.

1352

Deputy John Paul Phelan

To turn to another area, I want to refer to evidence by Mr. Gleeson, the former chairman of AIB. When he came before the inquiry, he said … it’s in relation to sectoral lending limits:	1353
[W]e would have been very well off not to have exceeded that sectoral limit. It’s a great shame that we didn’t.	1354
Do you have a view, yourself, from the position of the regulator as to regret or otherwise that you didn’t pursue those limits beyond some of the letters that had been referred to, I think, by Senator Barrett in his … his … his earlier question?	1355

Ms Mary Burke

I … you inevitably wonder about the ifs, buts and maybes, Deputy, and I have done that on a number of occasions. I regret that I didn’t pursue the issue of resources perhaps more strongly. I could have made different decisions on different occasions.

1356

Deputy John Paul Phelan

Specifically on sectoral limits?

1357

Ms Mary Burke

On sectoral, I think they should have been enforced, but by the time I got to banking supervision in ‘06, I don’t believe I could have made a difference in that regard.

1358

Deputy John Paul Phelan

I want to put one other brief quote. Mr. McCarthy, the former chief … or the chief executive of Ulster Bank, in evidence to the inquiry said, “There was a sense that [the sectoral limits were] honoured more in the breach than in the observance.” Do you accept that that culture may have existed within the banks at the time as regards the sectoral limits?

1359

Ms Mary Burke

Well, as I say, by the time I came to banking supervision, they were exceeded in a number of cases. It wasn’t peculiar, to be clear, to property-related lending in the domestic institutions. If you were a bank in the IFSC, you would have … and many of them would have had issues with the financial intermediation sector and it was known that if certain banks, even when you authorised them, they were inevitably going to hit an issue with these sectoral limits. So, you know, they were … there were issues with them, Deputy, and that’s as much as I can say.

1360

Deputy John Paul Phelan

Okay. Can I … I’ve a minute left and I’ve a few questions I want to run through. Do you remember identifying … following on from Deputy … or, Senator MacSharry’s questions, identifying breaches that occurred, that your unit identified, that weren’t pursued owing to lack of resources or owing to this sense that you expressed that, you know, such pursual wasn’t what was sought by the regulator?

1361

Ms Mary Burke

Well, in terms of the sectoral limits specifically, we could not have sanctioned for them, given the manner on which they were—–

1362

Deputy John Paul Phelan

Broader … outside issues.

1363

Ms Mary Burke

—–based. If I take broader issues, to the extent that we identified weaknesses in internal controls in this, I suspect a case could have been made under the capital requirements directive, that they failed to have internal controls adequate to manage their business. You would’ve had to make that case and pursue it through an administrative sanctions procedure. But … it wasn’t done but I suspect, theoretically, it could have been done.

1364

Deputy John Paul Phelan

Okay … yes … I just wanted also then finally to ask, outside of – and I accept your statements that you sought additional staff yourself … did you yourself or anybody else that you’re aware of on the seventh floor, to use that phrase, seek to have legislative change or regulation … regulatory change that would allow you to use, in your own words, you know, that ability to follow through … that it would actually come into play? Was there an attempt by yourself or by others to seek those changes?

1365

Ms Mary Burke

There was … in my view there was no need for a regulatory change. And, I’ve said it previously, I think we had an administrative sanctions procedure, we had various rule making powers. The issue was not, to my mind, beyond resolution and recovery regimes. The issue was not the legislation, it was the manner in which supervision was approached.

1366

Deputy John Paul Phelan

Thank you.

1367

Chairman

Thank you very much. I’m now going to move to wrap things up and inviting the two leads in. It will be about three minutes each, with a question and to include a supplementary. I just want to deal with some matters first, Ms Burke, before I do. You seem to be consistent in your answering this afternoon that by 2006, regardless of the number of staff and other resources that might’ve been available to you … that it may have been too late at that stage. Could you maybe indicate to us as to when would have been the optimum period to actually have made an intervention and what would have been the interventions that you would have put foremost to your mind at that time?

1368

Ms Mary Burke

I am taking comfort in respect of my reference to ‘06 from the fact that that was a reference to Governor Honohan’s assessment and I think Professor Nyberg probably had … or Mr. Nyberg had similar themes. I think the time to do something would have been in the early 2000s. You might’ve been able to do something up to 2005 but even then, I think, it probably would have been late in the day. In terms of … as a regulatory regime, leaving aside what we might have done, as country, in tax policy or promotion of building … I think we could’ve probably imposed more rigorous standards in terms of lending … but even … and possibly LTVs, LTIs along the lines we have. The … we were working within a European framework that set out limits for large exposures, etc., to individuals and we were endeavouring not to be super equivalent to that. I haven’t sat down and thought through, Deputy – in terms of my recollections and ifs, buts and maybes on what might have happened over my time there … I haven’t sat down to think through, in detail, what I might have done. I can only deal with the reality of what was there.

1369

Chairman

Thank you. And maybe just a final question on this before I bring in the leads … maybe if you could offer us your view on the different business models being adopted by the banks in the run-up to the crisis and also the products … some of the products I mentioned earlier. So, both the business model and the products that were available.

1370

Ms Mary Burke

I’m not sure I can deal with the products,per se. I can’t say that I focused particularly on the products in terms of prudential regulation. Looking at the business models of the banks, a number of them were particularly aggressive in terms of commercial property lending. In some cases it certainly was outside of their original reason for being, I suppose, I will put it that way. Sorry, I’ve lost my train of thought, Deputy, can you say the question again?

1371

Chairman

On business models and your view on them … on the type of models that were being developed and pursued by the banks in the lead-up to the crisis period.

1372

Ms Mary Burke

Yes. I think some of the main retail banks aggressively pursued business looking at what competitors were doing and, by their own admission in terms of evidence here, I think they accepted that some of that lending was not entirely appropriate. I think that some institutions should have stuck to plain, vanilla, residential lending and certainly not dabbled to the extent they did in commercial property. But one bank in particular was seen as a property bank and that authorisation … when it was authorised, it was recognised that it would have problems with the sectoral limits. The fact that that was also in what other banks saw as a competitive space with them caused problems. I think now we would intervene more assertively in terms of the business models, in terms of whether or not we think they are viable and appropriate, but at the time we didn’t do that.

1373

Chairman

Thank you very much. Senator O’Keeffe, so, question and supplementary?

1374

Senator Susan O’Keeffe

Thanks Chair. The inspection of commercial property lending exposure that we talked about before in Vol. 2, can you just confirm whether the results of that would have been passed upwards? Wwould the Central Bank have known about that inspection and the level of, you know, would that have been passed through automatically?

1375

Ms Mary Burke

It would have been passed up to some degree. I would have orally briefed on my reporting line. My recollection is it was also mentioned in the CEO report, which was a report the CEO made to the authority. In the context of those reports, the executives on the regulatory side were always given detailed briefings so that they could deal with any issues. My understanding of the procedure for the circulation of documents from authority meetings is, and I think you’d have to refer to the authority members’ handbook in that regard, is that all authority papers were circulated to two senior executives in the Central Bank. So, assuming that procedure was followed, they would have had those papers.

1376

Senator Susan O’Keeffe

When you talked earlier about the now-famous seventh floor, can we just be clear, those meetings that took place between those executives and bank executives, were they minuted and were those minutes passed back to you?

1377

Ms Mary Burke

Not in general. I can’t speak to … I don’t know what I don’t know, if you follow me, Deputy, so if meetings were happening that I didn’t know about, I obviously can’t speak to them. On various … on a few occasions when people would have asked for briefing, they might give us some feedback. I don’t believe … I rarely if ever saw what one would call a minute. You might get feedback, particularly if there was an issue they wanted you to look at again, so you would get a feel for what the discussion was but, and certainly as the crisis moved on, and I know the bank, in terms of the bespoke pieces it prepared for the committee, has done an analysis of all the various meetings. The sheer number of those meetings I certainly wouldn’t have been aware of what was discussed at most of them.

1378

Senator Susan O’Keeffe

Finally, the report we spoke about earlier, that you completed on 10 September, the outlook for liquidity.

1379

Ms Mary Burke

I didn’t personally complete it.

1380

Senator Susan O’Keeffe

I’m sorry – your department. That was obviously, roughly two weeks or three weeks before the night of the guarantee. Would your department have had any further involvement as the crisis escalated into that period of time, would you have been asked for any more information, would you have been supplying information to the Central Bank, to the regulator, to the Department of Finance, in that period leading up?

1381

Ms Mary Burke

We were supplying information to all of the above for a long period of time. I couldn’t tell you in those particular few weeks what particular pieces of information I was providing—–

1382

Senator Susan O’Keeffe

Sure. But you were part of—–

1383

Ms Mary Burke

But there was constant information being provided. In the context of liquidity particularly, there was regular meetings of, I’ve already mentioned, an internal committee headed up by the Central Bank, where we discussed liquidity on a regular basis.

1384

Senator Susan O’Keeffe

Would you have been at those meetings yourself—–

1385

Chairman

Last question now, Senator.

1386

Ms Mary Burke

I was at some of those meetings, yes.

1387

Senator Susan O’Keeffe

And so, finally, would you have taken the view that on the night of the guarantee, that the financial institutions were solvent, all of them, or not? Given what you knew.

1388

Ms Mary Burke

Given what I knew, our focus was, at BSD, was particularly on liquidity at that point. I was not involved in any substantive discussions on the guarantee. At that point we were not questioning solvency, and I would say, I suppose, as a regulator you have to work based on the information that you have, regulatory returns, accounts, etc. You can’t, based on some sort of feeling, decide that – or, you know, an instinct or whatever – that somebody or some bank may or may not be solvent, that’s not how it operates. That being said, I amn’t conscious that I had that particular feeling on that evening.

1389

Chairman

Thank you very much. Senator Barrett.

1390

Senator Sean D. Barrett

Thank you, Chairman. Is a regulatory system with no sanctions, is it moral hazard and bound to fail?

1391

Ms Mary Burke

In my view, yes, using your reference earlier of the guards. I think they have to have the power to enforce and be seen, by the market that they supervise, to be in that position.

1392

Senator Sean D. Barrett

Looking ahead … and, you know, how do we prevent the next crisis, should we aim for a two-tier system, one regulated by you which carries your protections, and the other sort of, free-range, like, we don’t reimburse losing lotto tickets or slow greyhounds, or whatever? Would that be a way to proceed, that we have a very tightly regulated sector which protects people’s savings, and gambling separated?

1393

Ms Mary Burke

I wouldn’t have characterised any of it necessarily as gambling, Deputy. I certainly would not favour that sort of a system. I think we … because you’d never know the contagion effects by the free range, as you’ve described them yourself, and where the connections may come with industry. I think that was probably part of the problem with securitisations etc., in the lead-up to the crisis. I do think, however, we do, to some degree, have various levels of oversight now in terms of banks. I wouldn’t describe it as two tiers, but you do have the SSM in Frankfurt supervising the systemically important banks in each jurisdiction, and what are called the LSIs … the less significant banks, actually, sorry, is the terminology, are supervised at a more local level, with oversight by the ECB. And so long as Ireland is within the EU, and more particularly with the euro, that regime will continue to apply.

1394

Senator Sean D. Barrett

Finally, May 2008, when you sought the extra staff, was that a normal shortage of staff or did you have premonitions of doom—–

1395

Ms Mary Burke

No, I—–

1396

Senator Sean D. Barrett

—–a few months afterwards?

1397

Ms Mary Burke

I didn’t have premonitions of doom. That would be probably overstating it. I did, however, have the collapse of Sachsen, the collapse of Northern Rock and the financial crisis ringing in my ears, so it was more in an effort to try and deal with the sheer workload that we were being given, rather than any foresight of doom and gloom on my part.

1398

Senator Sean D. Barrett

Thank you, thank you.

1399

Chairman

I just need to establish one question, and this might even prepare us for tomorrow. Was there a boss of bosses on the seventh floor?

1400

Ms Mary Burke

There was a reporting line.

1401

Chairman

Okay. Who was the boss?

1402

Ms Mary Burke

My reporting line was up through the prudential director and to the CEO. The authority had a chairman, and I assume the CEO would report to him. And on the Central Bank side, the Governor would have been the top. At an instinctive level rather than a legal level—–

1403

Chairman

Right?

1404

Ms Mary Burke

—–and I’m not in a position to—–

1405

Chairman

Sure.

1406

Ms Mary Burke

—–start parsing it, I think staff in the Central … or in Dame Street, let’s use that term so as I don’t have to start doing sides, would have felt that the Governor was the senior executive in the building. But, that being said, you know, I have come up through a long … a long time in a central bank where we still call the Governor “Governor”, so that would have been my feeling, as opposed to wondering whether or not, in law, he had powers over me, if you follow me.

1407

Chairman

Okay, thank you very much for that. Is there anything else? Sorry?

1408

Deputy Pearse Doherty

Just, sorry, because it may come up later on, just to clarify with the witness here. It was just on the question of stress testing and devising stress tests. I just looked through the core documents. You did have responsibility in relation to domestic mortgages and stress tests, isn’t that correct?

1409

Ms Mary Burke

Yes, but that was a different form of stress testing. That was the stress testing … I can’t remember who asked me the question earlier?

1410

Deputy Pearse Doherty

I asked you the question.

1411

Ms Mary Burke

Sorry, I beg your pardon. Yes, there was a guidance we had imposed on mortgage lenders that in the case of individual applications for mortgages they should stress test them for a 2% increase in interest rate and assess whether or not the applicant was in a position to afford that. That was implemented by the prudential department. It is now actually housed on the consumer side, in the context of affordability, and it is built into our consumer protection code.

1412

Chairman

Thank you very much. Is there anything you would like to add before we bring matters to a conclusion, Ms Burke?

1413

Ms Mary Burke

No, I’m fine, thank you, Deputy.

1414

Chairman

Okay. With that said, I’d now like to thank you for your participation with the inquiry today, Ms Burke, and for your engagement with the inquiry, and to now formally excuse you and in doing so, propose that we would break until 5 p.m. Is that agreed? Oh sorry, I need five … we need a bit of extra time for the switch-over. Okay, what time do you need? 5.15 p.m. Well, I’m saying 5.10 p.m. for 5.15 p.m., okay, is that agreed? Agreed. Okay, thank you.

1415

Sitting suspended at 4.50 p.m. and resumed at 5.23 p.m.

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Reference Texts

1. Terms of Reference for the Banking Inquiry
2. Houses of the Oireachtas (Inquiries, Privileges and Procedures) Act 2013
3. Relevant Proposal to the Committees on Procedure and Privileges for Dáil Éireann and Seanad Éireann for the conduct of an inquiry
4. Orders of Reference of the Joint Committee