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

JULY 2007

The Formation of the Domestic Standing Group

The establishment of the Domestic Standing Group (DSG) in July 2007 by a Memorandum of Understanding between the Central Bank, the Financial Regulator and the Department of Finance was an EU requirement. Following a recommendation of the Economic and Financial Committee¹ , the EU Financial Services Committee had required that all member states establish an emergency planning and management group in the form of a Domestic Standing Group.² Membership of the DSG was also effectively prescribed by the EU. The 2005 EU Memorandum of Understanding brought the principals from the Central Banks, Bank Supervisors and the Ministries for Finance together as a tripartite group to formulate an EU wide policy on crisis management.³ This was followed by a domestic Memorandum of Understanding in 2007 which formed the Domestic Standing Group (DSG). The signatories to this Memorandum of Understanding were Kevin Cardiff, Second Secretary of the Department of Finance, Liam Barron, Director General (CBFSAI) and Patrick Neary (Financial Regulator).⁴

The primary representatives of each party comprising the DSG were Tom O’Connell (CBFSAI), Con Horan (Financial Regulator), and William Beausang (Department of Finance).⁵

The DSG met on a monthly basis from July 2007 – July 2008 and supplied much of the financial market information from the Central Bank and the Regulator to the Minister and Government during the period covered in this chapter.

AUGUST 2007

NTMA stops Placing Deposits with the Irish Banks

For some time the National Treasury Management Agency (NTMA) had been sceptical of the business models of INBS and Anglo. Michael Somers, who was CEO of the NTMA said:“I always had a concern about Anglo…”⁶ Somers subsequently added in his clarification statement to the Joint Committee⁷ that the Minister for Finance’s guidelines prohibited the NTMA from placing deposits in counterparties with S&P⁸ rating of less that A1, which included INBS.”⁹

The NTMA’s former Director of Finance and Risk, Brendan McDonagh, explained to the Inquiry how the agency was now growing increasingly concerned about the global financial markets:

“By August 2007, the NTMA had made the decision… to stop placing deposits with any bank. The NTMA policy was to move maturing deposits back to the Central Bank of Ireland – we referred to it internally as safe-harbouring deposits.”¹⁰

He also said:

“we had concerns from August 2007 about banks globally, Deputy, because things … strange things were beginning to happen. There was rumour after rumour in the market even about big banks like Wachovia, Wells Fargo, Washington Mutual, Citibank, BNP Paribas, Goldman Sachs … Merrill Lynch … so like, it wasn’t just confined to Ireland.”¹¹

John Corrigan, Chief Executive Officer NTMA, put this in the context of the NTMA’s role:

“the NTMA’s role is … in that space is to fund the Exchequer and to make sure that the Exchequer has sufficient cash to meet its day-to-day requirements. We had a very conservative approach to risk. I don’t think anybody would thank us if the money which had been garnered through borrowing or through tax receipts had been lost through some sort of placement with, with, dodgy counterparts.”¹²

When asked by the Joint Committee“Was it the first time that the NTMA had made that kind of decision in relation to putting deposit in the Irish banks?”¹³ , John Corrigan responded:“To the best of my knowledge, yes.”¹⁴

Brendan McDonagh stated:

“There could have been no ambiguity at any time during this period on the part of senior Department of Finance officials or the Minister for Finance as to the NTMA’s position on global bank risk from August 2007 and our reluctance, given the increasing dislocation of financial markets, to put at risk any State money under our management by placing it on deposit with domestic or international financial institutions unless we were directed to do so by the Minister for Finance.”¹⁵

31 August 2007 – DSG Update

Despite the fact that the NTMA,“who had a strong market-facing role, had very fundamental concerns about the stability of the financial system”¹⁶ the Central Bank and Financial Regulator reported to the DSG that the“domestic economy and banking system remained sound and there is no cause for alarm.”¹⁷ They told the group that they were not aware of any liquidity difficulties for Irish banks.¹⁸ “However if there is a long term credit crunch globally this could impact on economic developments.”¹⁹ For now,“This is not an Irish problem, but a global one. The Regulator has put a lot of effort into minimising any reputational damage for Ireland, but there are risks there also.”

SEPTEMBER 2007

The September IMF Article IV Staff Report was largely positive about the fundamentals of the Irish economy, though it noted weaknesses both in the construction sector and the exposure to the banks. It said:

“Economic performance remains impressive but noted that in recent years economic growth had become increasingly reliant on house building. It also noted that banks have large exposures to the property market, but stress tests suggest that cushions are adequate to cover a range of shocks.”²⁰

7 September 2007

The Irish Times carried an article on 7 September 2007 entitled ‘Banking on Very Shaky Foundations’ written by Professor Morgan Kelly.²¹

12 September 2007 – Northern Rock

Northern Rock, a UK bank, sought and received liquidity support from the Bank of England due to a problem in the credit market. This led to panic among depositors“in the first run on a British bank in more than a century.”²² In Ireland“there were queues on the street outside Northern Rock when it got into difficulty.”²³

21 September 2007 – DSG Update

Less than a fortnight later, the Central Bank was reporting to the DSG that the Northern Rock crisis was still generating a significant negative effect on the market, but that there were tentative improvements.²⁴ However, some“significant Irish financial institutions” needed to renew substantial funding in early 2008. Access to ECB funding was regarded as a very important safeguard for Irish banks.²⁵

OCTOBER 2007

On 2 October 2007 a preparatory note for the DSG meeting raised several issues that needed attention.²⁶ According to the note, the Department was starting to consider what legal powers might be needed by the Minister for Finance to provide assistance to a financial institution in distress. Included in these options was nationalisation.²⁷ The legal position regarding“the scope for the NTMA to place a deposit with a bank” was also highlighted for examination. So too was the Deposit Guarantee Scheme, which protects depositors, following the UK government’s decision to provide a temporary 100% guarantee of deposits with Northern Rock.

It is worth pointing out that three months after the DSG was formed and a month after Northern Rock, there was still a sense that the“roles and responsibilities of the Department, the Central Bank, and the Financial Regulator” needed clarification.²⁸

9 October 2007 – DSG Update

In its October update to the DSG the CBFSAI reported that Irish banks had a“good name” although it noted that there was also a perception internationally that Irish banks were exposed to the property sector.²⁹ They reported a“…return to more normal financial markets conditions…”³⁰ But even with improved liquidity conditions, a tightening of lending behaviour was prevalent and the retail lending rates would remain under upward pressure“for as long as disturbed credit market conditions persist.”³¹ The report also noted that while market funding was available, it was increasingly over a shorter term. Irish bank shares continued to fall, having lost between 30% and 40% of their value since the start of 2007. This update also marked the first time in the period that the issue of Contracts for Difference (CFDs) was brought to the attention of the Department. Significant losses to high‘net worth’ individuals in relation to CFDs were highlighted.³²

NOVEMBER 2007

13 November 2007

The pressures were building, as evidenced by an email from IL&P to the Regulator on the 13 November confirming the raising of €2 billion from the ECB but noting:“The level of pressure on Irish Institutions continues at a pace in both the Credit and Equity Markets.” The email also passed on some feedback IL&P had received from their major shareholders:“…One of our Canadian Holders said that she had been informed out of London that we in IL&P are the next Northern Rock, so once again, we are on red alert.”³³

DSG Update

An information note, known as an ‘Aide Memoire’ for Government, was sent to Brian Cowen, former Minister for Finance, on 13 November 2007. The subject of this information note was ‘Financial Market Developments’. It summarised the information given by the DSG to the Central Bank and Regulator and it also provided a look ahead to the Central Bank’s Financial Stability Report.³⁴

The DSG update repeated concerns on the Irish economy and the exposure of banks to the property sector with bank share prices reported as being“depressed.”³⁵ It also claimed that despite improvements in credit market conditions, the financial markets remained volatile. However it noted that:“To date, these developments have not had any serious effects on the Irish domestic financial system…And stressed that the “Irish institutions are financially sound with good quality assets and are well regulated.”³⁶

The update also included an overall assessment of the 2007 Financial Stability Report. It said that financial stability risks had increased on previous years, but that the upward momentum of residential property prices had slowed and house prices had lowered by 3.5% on a year to date basis. The assessment concluded that:“The underlying fundamentals of the residential market continue to appear strong. The central scenario is, therefore, for a soft, rather than a hard, landing.”³⁷

16 November 2007 – DSG Update

The Central Bank produced a paper for another DSG meeting in November. In the month that had passed since the last update, Irish bank share prices had continued to fall and had now lost between 30% and 50% of their value. According to the report the quality of assets secured on speculative development land was a particular focus of attention for financial institutions.

The update also provided more detail on negative sentiment on the interbank market toward Irish banks’ exposure to the property markets:

“There are some indications that lrish banks are being subject to more refusals in the unsecured interbank market on account of negative international sentiment regarding the lrish banking sector and the Irish property market generally… there is a general discount in the value of lrish banks as there is a perception internationally that they are exposed to the property markets…”³⁸

Two items were highlighted in the update. One was that“If the present market conditions persist, as expected, into 2008 there is an increased risk of liquidity issues arising for Irish banks”. The other was the importance of“highlighting the inherent strengths of the Irish financial system and economy.”³⁹

The Central Bank and Financial Regulator reported to the DSG that they were continuing to monitor the position closely:

“The Central Bank and Financial Regulator continue to liaise with the Irish banks closely at CEO level and are monitoring the position very closely. The banks in turn are working intensively to implement contingency arrangements to meet their liquidity requirements.”⁴⁰

Legislation

Meanwhile, work was continuing to prepare legislation to provide the Minister for Finance with the necessary legal options to support a distressed financial institution, including nationalisation. This was confirmed by former Attorney General Paul Gallagher in his evidence:

“Between 30 November 2007 and 29 September 2008, the Department was in constant contact with my office, looking at possibilities, identifying different options.”⁴¹

However bank resolution legislation, which would allow for the winding up of a financial institution and which would have given another legislative option on the night of the Guarantee, had not been requested from the Attorney General or the Office of the Attorney General.

Chapter 1: The Banks

Introduction

Irish banks had been national businesses for decades, set up to serve local and national enterprises. However, by the mid to late 1990s, the bigger banks were establishing an international presence; AIB bought into Bank Zachodni in Poland and Bank of Ireland bought Bristol and West in the UK. As Ireland’s economy began to grow, National Australia Bank entered into the retail market. The International Financial Services Centre (IFSC) opened in Dublin which also provided a location for the emerging global non-retail financial business.

Klaus Regling & Max Watson said in ‘A1 Preliminary Report on The Sources of Ireland’s Banking Crisis’:

“From the late 1990s onwards, the world economy was characterised by relatively high growth, low headline inflation, strong liquidity creation, and low interest rates. The literature has named this period ‘The Great Moderation,‘ which can be explained by the positive effects of globalisation, technological progress and productivity increases, and the stronger credibility of most central banks around the world, which had become independent from political interference, facilitating a stabilisation of inflation expectations.”¹

Ireland’s profile in world banking and world financial services expanded rapidly and, by the early 2000s, was well established.

Cheap Money, the Euro and China

Throughout the early 2000s, trade between the US and China grew, resulting in a surplus in favour of China. The Chinese Government recycled much of the new and surplus money back into the US by investing in US treasuries (Government bonds). In turn, the US Federal Reserve (Central Bank) invested the bond monies in US banks and insurance companies for a higher return. A high-risk loop of mutual inter-dependencies stretching from Chinese investors to US householders had formed, with every party in the loop hoping to profit.

David Duffy, Chief Executive Officer, AIB, said:

“… It’s a once in a generation circumstance where the availability of a huge amount of liquidity including retail bank liquidity which wasn’t available before in the sense that it was made available as well as geopolitical events where China, in order to grow, was very much a supporter of a cheap cost of capital through its purchasing of US debt despite the overall levels of debt. …the US consumer became very heavily indebted and that was a contributor to the property boom.”²

The creation of the Euro and the growth of the Chinese economy both affected the world economy. Professor Philip Lane, Professor of International Macroeconomics and Director of the Institute of International Integration Studies in Trinity College Dublin, explained some of the international background:

“China was growing so quickly that it was important in the late 1990s, but by the mid-2000s it was very important. That had trading effects, although maybe less so here. For example, the economies of Portugal, Greece, Italy and so on were quite affected by the rise of cheap imports from China. Financially, the surpluses coming out of China were essentially flowing into the US financial system. Low interest rates in the US prompted, for example, the rise of securitisation in US financial markets and European banks were active in the US system. Therefore, there was a deep connection between what was going on in the US in the mid-2000s and what was going on in Europe. A lot of that was being intermediated through banks. European banks were important in linking the US financial system to the European financial system.”³

David Duffy also said in his evidence to the Joint Committee:

“That cheap money was allowing every market to chase property and when it collapsed in the sub-prime and then was further influenced by allowing banks to go bankrupt in the US, there were many more banks were very close to going bankrupt. So the extraordinary measures of the US Government at the time, both negative and positive, if you put all of those together, it is an exceptional period of time. Ireland’s problem was that we were very badly positioned to react to that given our concentration.”⁴

From around 2003, the Irish started to invest a very high proportion of national income and personal income in property.⁵ This was enabled by the ready availability of cheap money on the wholesale money markets.

Brendan McDonagh, CEO of NAMA said:

“I think, when you look at the … again, at the growth in the balance sheets of the banks between 2003 and 2008 … the banks were lending, but they were effectively lending to a longer-term asset class, which was property, but they were funded by short-term cheap, wholesale money market deposits. So, they were borrowing at, you know, one month, three month, six months at around 2% … a lot of it, you know, German money coming into Ireland, looking for a home. And, you know, once the crisis happened, all those depositors withdrew, took their money back and the banks were left long on assets but short on cash.”⁶

Global Driver: Europe and the Euro

A number of factors within the single currency context contributed to the liquidity crunch preceding the economic crash of 2008, principally:

1. EU monetary union and control of monetary policy
2. Design faults of the Euro
3. Foreign exchange risk eliminated
4. Interest rate harmonisation

1. EU monetary union and control of monetary policy

The free movement of capital and its attendant benefits provided a critical rationale for the introduction of the euro. The EU’s developed and expanding status bolstered available liquidity. European investors began to look favourably on Ireland, given its impressive economic performance throughout much of the 1990s and into the mid-2000s.⁷ A major expansion in liquidity in Ireland was the result.

“…Prior to monetary union, Ireland and Spain had probably under-invested in housing as we had a higher cost of capital than in countries like Germany or France. Given the demographic profile, we needed to invest in housing. In permitting a more rapid adjustment to the housing stock, the lower cost of capital was beneficial. However, it was the failure to appropriately control this surge in investment which eventually proved fatal…”⁸

2. Design faults of the Euro

The Eurozone was an economic and monetary union that lacked a banking union. The Stability and Growth Pact continued only certain aspects of the convergence criteria, considering that others would be successfully addressed by the European System of Central Banks (ESCB) and European Central Bank (ECB). In the absence of the exchange rate and the domestic interest rate, the behaviour of the Irish economy was allowed to change in ways that would not have been previously possible due to external pressures placed on the punt as the real effective exchange rate deteriorated.

Professor John FitzGerald, Research Professor at the Economic and Social Research Institute (ESRI), told us:

“You do not have the interest rate tool to manage an economy or to manage inflation and, in particular, asset market bubbles. You have to use other instruments, that is, fiscal policy. It was something which we did not anticipate or talk about. It is clear from the literature before monetary union, people were barking up the wrong tree about the problems of monetary union, not just in Ireland but elsewhere that one needs to use fiscal policy to manage housing market bubbles.”⁹

In the absence of a banking union, where free capital flows were facilitated by the new currency system, Ireland needed to modify its approach to policy formation in the fiscal and monetary spaces. The gaps between the convergence criteria and entry into the Eurozone on 1 January 1999 were sizeable refer to following table. The reference criteria were:

• Inflation no more than 1.5 percentage points above the average of the three countries with the lowest rates.
• Long term interest rates no more than 2 percentage points above the average of the three countries with the lowest rates.
• Exchange rate – within normal band of the Exchange Rate Mechanism for previous two years.
• National budget deficit less than 3% GDP.
• National debt less than 60% of GDP – or heading in the right direction.

The criteria of an optimal currency area highlights the importance of consolidated fiscal policy across members of the currency zone and the importance of fiscal transfers, as well as labour mobility. These facts were present but considered of the utmost importance in the Irish context. The Irish approach to fiscal policy was coloured by the experience of the 1980s and the fiscal consolidation that took place as part of the protracted recession, and Ireland’s labour market was nearing full employment at the time. According to John FitzGerald:

“…there was a need to use fiscal policy in a different way. In terms of the economics literature, the use of fiscal policy to manage the cycle had gone out of fashion, as the Senator is probably aware, saying fine tuning is not possible. This is not fine tuning, this is stopping disaster by using fiscal policy differently. Hopefully we have learned our lesson.”¹⁰

Historical compliance with the Maastricht criteria

Source: Centre for Economic Policy Research.¹¹

3. Foreign exchange risk eliminated

The introduction of the Euro eliminated foreign exchange currency risk across the majority of EU Member States. That provided a platform for access to cheap liquidity by financial institutions from large client deposit bases in different countries. It also helped foster a perception outside the EU that the risks of euro Member States were pegged to that of the best performers, notably Germany with its AAA status. Thus, for certain types of investors, a 10 year Irish bond paying annual interest of 2% was more attractive than a 10 year German bond paying annual interest of 1%. In such a scenario, the short-term gain and risk would trump the longer-term gain and risk, even though the scale, structure, markets and risks of the Irish and German economies were vastly different.

As was stated in the Nyberg Report:

“…The Irish economy and Irish financial institutions were, furthermore, exposed to the expansionary financial incentives associated with membership of the Euro area. The disappearance of exchange risk and the absence of euro-wide inflationary pressures caused a significant reduction in interest rates, compared to the Irish Punt historic rates, while there was virtually unfettered access to funding from European and other capital markets (Figure 1.2). At the same time competition increased via new non-Irish entrants into domestic financial markets…”¹²

The EU financial institutions used the new Euro denominated liquidity to invest in bond offerings from the Irish financial institutions for an incremental return. The Irish institutions lent to developers who in turn invested in property and construction, seeking to obtain an even higher return. Some investors formed syndicates (group of borrowers pooling monies together) to invest in tax designated and non-tax designated property-related ventures. Householders, along with investors, also borrowed monies to purchase housing and second properties.

Brendan McDonagh said:

“…While some of the lending was to professional, well-managed entities, much of it was to individuals or syndicates whose primary business was not property developments, or who became involved in property developments relatively late in the cycle”¹³ and went on to say “They were new arrivals, a lot of the professional class. A lot of the professional class got into syndicates, particularly to buy land, and particularly to buy land mainly in … a lot of it in regional Ireland…”¹⁴

4. Interest rate harmonisation

Under European Monetary Union (EMU), the ECB sets interest rates to meet the needs of the Eurozone economy as a whole. This resulted in an interest rate which, for many years in the run-up to the crisis, was set at a level which was too low for Ireland. That resulted in a low or, at times, negative real interest rate for Ireland, further aggravating the boom. For countries experiencing low growth or recession, the opposite effect occurred.¹⁵

David Doyle, former Secretary General, Department of Finance, said:

“…Prior to the establishment of the ECB the Irish Central Bank was fully responsible for monetary policy and financial stability and regulation. It set interest rates at a level that were appropriate to the specific conditions of the Irish Economy. It lost this authority following the entry into the Euro. The ECB did not appear to regard the question of curbing asset prices or excessive credit growth through the interest rate mechanism as appropriate, viewing this as a matter for the domestic central banks and regulators…”¹⁶

Bertie Ahern, former Taoiseach, said:

“…We were … able gradually to remove incentives from the property market but membership of the euro meant that we were unable to raise interest rates. Accordingly… according to the IMF report in the summer of 2009, the housing boom was caused mainly by cheap credit due to low interest rates, along with rising incomes and a strong demand for housing…”¹⁷

An IMF Staff Report contained the following:

“The boom years stored up immense problems. Following a decade of export- and FDI (foreign direct investment) led growth supported by broad-based productivity gains, from about 2003 on the Irish economy embarked on a domestic boom underpinned by lax lending. Stiff competition for market share from foreign-owned as well as domestic banks pushed underwriting standards lower, and the feedback effect of rising collateral values fuelled the leveraging process. Rapidly rising property prices also drove high fixed investment in commercial and residential property, and a positive wealth effect fed private consumption, raising incomes and employment. Wages and prices rose, eroding competitiveness and compressing real interest rates. The integration of the Irish financial system into the broader euro area financial landscape, as well as the apparently strong fiscal position of the sovereign, gave Irish banks unfettered access to wholesale funding that turbocharged their asset expansion.”¹⁸

Irish Financial Institutions

During the Context Phase of the public hearings, the Joint Committee heard evidence from Peter Nyberg, Rob Wright, Patrick Honohan and Klaus Regling, all of whom had completed reviews of the crisis. The key findings of these reports as they related to the banks were as follows:

• The Banking Crisis occurred because there was a malfunctioning of risk mitigating controls (Nyberg).¹⁹
• Domestic factors were decisive in causing the Crisis, facilitated by international factors (Nyberg).
• Banks engaged in overly risk –taking behaviour in which the authorities behaved passively (Nyberg).
• The enhanced wholesale funding available from the single currency “turbo charged” growth prospects for the Irish banks (Nyberg).
• There was a property bubble and unsustainable growth between 2002 and 2007 (Wright).²⁰
• Ineffective micro-prudential regulation due to reliance on light touch regulation that trusted the banks (Honohan).²¹
• Even though the banks might have accepted subliminally that there were risks, they brushed those aside (Honohan).
• The stress tests in 2006 were not severe enough (Honohan).
• Commercial property lending was the biggest problem (Regling).²²
• The huge concentration of some banks in commercial real estate should have sounded the alarm bells in advance of the crisis (Regling).
• Aggressive lending policy pervaded the banks at various grades, junior and senior (Regling).

The Joint Committee wanted to establish, through evidence given by bank executives and board members, the extent to which the findings outlined above were the reasons for the collapse of the banking industry in Ireland. In particular the Committee examined the following key areas:

• The scale of Wholesale Funding Growth
• Competition
• Commercial Property/Real Estate
• Residential Property
• Large Exposures/Cross-Bank Lending
• Interest Roll-Up
• Regulation of the Banks (covered in Chapter 4).

The Joint Committee then examined how these key issues were dealt with within the banks and focused on lending practices.

Chapter 8: Post-Guarantee Developments

Introduction

Following the issuance of the Guarantee, the Financial Regulator issued a letter to all Covered Institutions, advising them that the existence of the Guarantee should not be used as a marketing or advertisement tool to attract funding which could potentially create liquidity distortions in the banking markets.¹

In the short-term, the Guarantee had stabilised and improved the liquidity position of the Covered Institutions.² However, by January 2009 the Guarantee was “just about” working with regard to providing non-ECB liquidity to the banks.³

In testimony to the Inquiry, former Group Chief Executive of Ulster Bank, Cormac McCarthy, in response to questioning on the impact of the Guarantee on Ulster Bank, said that it was:

“Very significant. Within a period of weeks there were billions of wholesale customer deposits and a degree of retail deposits flowed out of the institution.”⁴

This was reiterated in the RBS Group Annual Report and Accounts 2008, which stated:

“The governments of some of the countries in which the Group operates have taken steps to guarantee the liabilities of the banks and branches operating in their respective jurisdiction. Whilst in some instances the operations of the Group are covered by government guarantees alongside other local banks, in other countries this may not necessarily always be the case. This may place subsidiaries operating in those countries, such as Ulster Bank Ireland Ltd, which did not participate in such government guarantee schemes, at a competitive disadvantage to the other local banks and therefore may require the Group to provide additional funding and liquidity support to these operations.”⁵

In October 2008, the British Government announced that they would recapitalise Ulster Bank’s parent company, RBS.⁶ By December of that year Great Britain owned 58% of the shares.⁷ Therefore, according to Richie Boucher, Group Chief Executive in BOI, Ulster Bank “…had been, effectively, nationalised by the British Government, so the depositors had an implicit guarantee.”⁸

The Joint Committee considered whether or not the Guarantee could have been rolled back in part or rescinded for one or more of the Covered Institutions as the scale of the potential liabilities in the Covered Institutions were discovered during Project Atlas.⁹ This is also discussed in Chapter 7.

Notwithstanding the moral obligation, there was an opportunity between the announcement of the Guarantee and the formal designation by the Minister for Finance of the Covered Institutions under the Credit Institutions (Financial Support) Scheme 2008 (CIFS)¹⁰ on 24 October 2008, to change the terms and scope of the Guarantee. For example, one of the banks could have potentially been excluded. When questioned about this option, Kevin Cardiff said:

“…remember, a lot of new money came in on foot of the guarantee but it didn’t come in four weeks later. It started coming in immediately. So, that you would pull out of the guarantee with hundreds of millions, billions and millions of deposits, based explicitly on it, would’ve created a … would’ve created … I don’t know. It would’ve been extraordinarily risky. But, no, … I don’t recall a discussion about pulling out at that stage. I think we’d gone beyond that point. In practical terms, we were beyond the no return point.”¹¹

On the question of what might have had happened had a bank such as Anglo been kept outside of the Guarantee in the first instance, Paul Gallagher, former Attorney General, said:

“…you could have let Anglo go on its own, you didn’t have to do anything, but the judgment was made that leaving a bank that, I think Governor Honohan in his report says was ‘of systemic importance‘, systemic not that we needed this bank but systemic importance in terms of the consequences. And one of the things that was apparent from the information given to the Government by the other banks was the other banks were distinguishing between Anglo and INBS and themselves and understandably so. But the report that they gave us of the reactions from the money markets was Ireland was untouchable. And if you have one bank go, given what was known as the overexposure to property, the ready consequence I assume … was they’d say, ‘These other banks have huge exposure to property. There may be distinctions but we’re not convinced and the whole lot goes.‘ … and that was the calculation made with regard to Lehman Brothers and it went so badly wrong and I think there was a huge fear that if that gamble is taken, that things would just be out of control. And those are the judgments that have to be made and were made.”¹²

There was a power in the CIFS to revoke the Guarantee under certain conditions. Section 8 of the CIFS provided:

“The Minister may review and vary the terms and conditions of this Scheme from time to time, at no later than six-month intervals, to ensure that it is achieving the purposes of the Act of 2008. At such a review, the Minister shall consider, inter alia, the continued requirement for the provision of financial support under this Scheme with regard to the objectives of this Scheme and section 2(1) of the Act of 2008. The results of any such review shall be provided to the European Commission.”¹³

When questioned about this, Paul Gallagher said:

“There’s a power to revoke it in the guarantee scheme if, for example, the conditions of the guarantee weren’t being complied with, otherwise it was intended to last for two years, subject to a review. And it was conditional on the basis which … or, sorry, it was conditional on the circumstances which required the giving of the guarantee continued, and if they didn’t continue, then the Minister was entitled to bring it to an end and would be required to do so by the EU.”¹⁴

However, rather than being shortened, the Guarantee was actually extended beyond the original end-date of 2010 through the Eligible Liquidity Guarantee Scheme.¹⁵

Impact of the Guarantee on Restructuring

Separate, but related to the need to recapitalise and restructure the Covered Institutions, was the question of whether or not the Guarantee delayed vital bank restructuring. Governor of the Central Bank, Patrick Honohan stated the following in oral testimony:

“We were in suspended animation for two years. One of the things the guarantee did, and we were talking about the subordinated debt, but guaranteeing the senior debt had a double effect. It is not just a question of not paying those guys, but any restructuring of the banking system, like liquidating or closing, would have triggered immediate payment under the guarantee from the Government. That meant that doing something with Anglo Irish Bank or with INBS, all these things, could be considered at leisure, because there was nothing one could viably do until the end of September 2010 and by that stage the damage was done.”¹⁶

This was supported by Marco Buti, Director General for Economic & Financial Affairs, European Commission, in his evidence to the Joint Committee, where he said: “…the banks had to be restructured and, from that viewpoint, the blanket guarantee clearly did not help.”¹⁷

Michael Noonan, the Minister for Finance, said that the Guarantee should have been “…accompanied by a restructuring and a recapitalisation of the banks…” thereby possibly guarding against Ireland’s need to enter into a Bailout Programme two years later.¹⁸

Capital Position of the Covered Institutions

In October 2008, Patrick Neary, former Chief Executive, IFSRA, appeared on RTE’s ‘Prime Time’ Programme. He said that Irish financial institutions were well capitalised in comparison to European banks. He was confident they would be able to deal with loan losses incurred during the ordinary course of business into the foreseeable future.¹⁹

That assessment had been supported only a few days previously by Merrill Lynch. In their advice to the Minister for Finance, relating to the liquidity and strategic options available to the Government on 28 September 2008 Merrill Lynch stated: “It is important to stress that at present, liquidity concerns aside; all of the Irish banks are profitable and well capitalised…”²⁰

The then Taoiseach, Brian Cowen had also advised the Dáil on 30 September 2008 that: “while Ireland along with all developed economies has experienced a sharp decline in its property market, there is very significant capacity within the institutions to absorb any losses…”²¹

The then Minister for Finance, Brian Lenihan, met with the Governor of the Central Bank and the Financial Regulator to discuss the PwC reports generated for Project Atlas, which confirmed that the capital position of each of the institutions reviewed was in excess of regulatory requirements as at 30 September 2008.²²

However, notwithstanding these positive assertions, over time, the Project Atlas reviews started to uncover evidence of a markedly different and less positive situation. In addition, the Minister for Finance was aware that international capital market expectations relating to capital levels in the banking sector had altered and that an injection of capital, by the State, would be required.²³

PwC ‘Project Atlas’ Reports

Having completed their Project Atlas 1 review in September 2008, PwC²⁴ were engaged once again on 9 October 2008 to review the financial and capital positions of the six²⁵ financial institutions covered by the Guarantee (the Covered Institutions). This examination was known as ‘Project Atlas 2’ .26 PwC concentrated on reviewing a sample of loan books and losses, focusing initially on the top 20 borrowers in each Covered Institution, but this was subsequently extended to the top 50 borrowers, when evidence was found that a large number of borrowers had loans with two or more lenders.²⁷

Part of the Project Atlas 2 review consisted of examining scenarios showing the impacts which various asset write-downs would have on Tier 1 Capital.²⁸ However, these scenarios were based on unrealistically low impairment levels with the fall in asset values accelerating.²⁹

The scope of Project Atlas 2 was further broadened in November 2008 to include a review, known as Project Atlas 3, of land and development loans and related loan security. On this occasion, PwC were tasked with assessing the top 75 land and development loans within the Covered Institutions as at 30 September 2008. As part of the process, Jones Lang LaSalle (JLL) were engaged to carry out a review of valuations on the underlying assets supporting the top 20 land and development exposures in each Covered Institution.³⁰

The results of Project Atlas 3 showed significant differences on land and development loans between the Covered Institutions’ own valuations of €27.405 billion and the JLL valuations of €19.568 billion – a difference of €7.837 billion across the five of the Covered Institutions reviewed.³¹

JLL’s and Banks’ valuations of land and development loans, Q4 2008

Source: Project Atlas, Draft Property Values Review³²

The material differences between JLL’s and the five Covered Institutions’ valuations in respect of their land and property loan portfolios highlighted falling asset values and served as a forecast of impending material losses on the Covered Institutions’ property-related loans. In this regard, John Corrigan, former CEO of the NTMA said:

“…clearly the property values continued to fall and the whole funding regime continued to come under more strain, so while they [i.e. the six Covered Institutions – the five in the above table plus IL&P] probably were solvent at that point in time [i.e. when Project Atlas was undertaken], clearly the situation deteriorated rapidly.”³³

As set out in the table below, overall, PwC reviewed loans totalling €253 billion, of which €159.2 billion related to property backed lending. €62.6 billion of that latter amount related to land and development loans, with €30.3 billion connected to land-bank developments. This represented almost one fifth of total property-backed lending of €159.2 billion, over half of which were either unzoned or, if zoned, had no planning permission.

Total Loans reviewed by PwC

Source: Merrill Lynch and PwC summary³⁴

Debtor concentrations revealed by the ‘Project Atlas’ Reports

Michael Somers, former Chief Executive, NTMA, said the following in his evidence:

“When the Pricewaterhouse report came in, I must say I was flabbergasted when I saw the size of the loans … which were advanced by the Irish banking system to individuals. I mean, they ran to billions. And I think I wrote to the Minister for Finance, he’d asked me to write a letter to him about what I thought of the overall economic and financial scene, and I wrote to him and one of the things I mentioned was that some individual had loans from the banking system equivalent to 3% of our GNP, which I thought was absolutely staggering.”³⁵

It also transpired that large sums had been lent to a small number of developers, many with exposures to numerous banks. In this regard, Denis O’Connor, Partner with PwC said:

“…top ten borrowers had loans of €17.7bn with the six guaranteed banks and that was before any additional borrowings they had in Ulster Bank or Bank of Scotland Ireland.”³⁶

John Corrigan, former CEO, NTMA, suggested in his evidence that this was “…information the regulator didn’t seem to have up until that.”³⁷

David Doyle, former Secretary General in Department of Finance, noted that PwC “…in the course … of a couple of days were able to feed us [Department of Finance] information about the liquidity exposures, information that we [Department of Finance] didn’t have otherwise.”³⁸

However, in his evidence, Patrick Neary, former Chief Executive, IFSRA, said that PwC were engaged because they had the resources to promptly carry out the work required and that PwC’s findings simply confirmed information the Financial Regulator already had.³⁹

Asked to respond to the figures obtained from the Project Atlas reviews, representatives of the banks gave varying testimony. Brian Goggin, former Group Chief Executive of BOI stated:

“I don’t believe that Bank of Ireland was disproportionately exposed or active in the property and construction sector. I think the issue that affected the Bank of Ireland was the absolute amount in money terms of that exposure. Bank of Ireland had quite a broadly diversified loan book in its totality.”⁴⁰

Brian Goggin noted that 65% of the BOI’s lending in property and construction was in investment property “generating a contracted rental flow.” He did not accept that the bank had an over-concentration of risk in the property and construction sector.⁴¹

By contrast, responding to similar a similar question regarding Project Atlas, Richie Boucher accepted that BOI had an over-concentration of risk in the property and construction sector, though he suggested that the bank believed at the time that this risk was manageable and lacked “sufficient recognition” of the connection between property markets in Ireland, the United Kingdom and the rest of the world.⁴²

Richard Burrows, former Governor of the BOI Group, when asked by the Joint Committee to comment on how Project Atlas had highlighted problems in the BOI’s property portfolio, said:

“I think they did a forensic job at the time. It was a matter of opinion, of course, as to what value you could attribute to any particular security, because the market was effectively closed. I think they made a reasonable attempt at it.”43

Michael Fingleton, former Chief Executive, INBS noted that PwC had carried out a detailed analysis of INBS’s loan book which was positive.⁴⁴

The Joint Committee was prevented by the potential of causing prejudice to the criminal proceedings from hearing evidence from several other proposed witnesses on this and other issues.

Adequacy of the ‘Project Atlas’ Reports

Though Project Atlas revealed a need to restructure and recapitalise the Covered Institutions, in assessing the adequacy of the Project Atlas Reports, the then Taoiseach, Brian Cowen, said the following:

“PwC was engaged to review the loan books and the capital position of the six Irish banks covered by the guarantee. The PwC report stated under a number of stress test situations that all of the Irish financial institutions which they reviewed would have sufficient capital to meet the regulatory requirements up to 2011. This analysis was hopelessly optimistic and certainly did not envisage the crisis to develop the way that it subsequently did.”⁴⁵

When referred to Brian Cowen’s above assessment, Denis O’ Connor, a Partner with PwC, said that the scenario analyses were conducted “before NAMA [and] before Tier 1 Capital Ratios increased from 4% to 10%.” He also drew attention to two other factors impacting on the estimates, namely:

• paper equity whereby PwC had assumed that the loans were backed by equity but it “wasn’t really equity”.
• reliance by lenders on personal guarantees given by borrowers which “proved not to have any value.” ⁴⁶

Aidan Walsh, Partner, PwC added that the scenarios had been examined in October 2008, which was around the time of Budget 2009. That Budget, he said, “was framed against assumptions that GDP would decline by 1% in 2009 and unemployment might rise to 7%.” However the actual values turned out to be a GDP decline of “something [like] 7%” and an unemployment rate rise of 15%. Thus, “the economic outlook in official documentation at the time was far more benign than the recession that evolved in Ireland over the subsequent two years.”⁴⁷

However, insofar as the PwC analyses are concerned, two important points arise:

1. Time: With the crisis deepening, time was of the essence. Taking the time necessary to adequately interrogate each loan appears not to have been an option for PwC, as the financial institutions could have collapsed during the period, leaving the economy without a proper banking system. In this regard, Ann Nolan of the Department of Finance said:

“…we couldn’t give ourselves the luxury of taking six months to look at every single loan because the banks might have collapsed in that time, which would have left every small business in Ireland without a proper banking system.” ⁴⁸

2. Management information: PwC’s work on Project Atlas was based on the management accounts of the relevant banks. Such accounts are limited in their nature as they are:

• draft accounts.
• prepared internally, usually by the finance division or equivalent.
• not audited accounts and not subject to external audit scrutiny and assessment.
• typically unapproved by the board of the relevant bank.
• can differ from bank to bank.

However, reliance on management information by PwC in carrying out its work seemed unavoidable.

According to the evidence of Denis O’Connor, Partner with PwC, the reports prepared by PwC did not undergo any independent verification procedures.⁴⁹ The initial work was focussed on liquidity and a high level review of major lending positions and loan provisions booked by the banks.⁵⁰

According to Patrick Neary: “…the professional approach taken by Pricewaterhouse … while it did rely on the banks … questioned and interrogated the information.”⁵¹

However the situation was one where a worsening and accelerating crisis could scarcely be described, let alone quantified with certainty. A status report was urgently needed, even if it was considered inadequate.

Ann Nolan, Second Secretary, Department of Finance, described the PwC reports as the “…initial due diligence.”⁵² She asked whether PwC could have “known better” and indicated that she was not sure, even though the exposures eventually turned out to have been significantly understated.⁵³ This view was reiterated by John Hurley, former Governor of the Central Bank, who said in his evidence that:

“…falling market and values were going to be determined very much in the context of the falling market, so it wouldn’t have been known at a particular moment in time how far property prices were going to go…”⁵⁴

John Corrigan said that the PwC work:

“…certainly was a worthwhile exercise in that it exposed the extent to which … various developers were multi-banked, and it exposed the concentration of the system in various developers…”⁵⁵

Under PwC’s scenario 2 the total impairment charges were estimated at approximately €32 billion.⁵⁶ However, ultimately the State was required to invest €64.2 billion in the Irish financial institutions.⁵⁷

Budget Brought Forward to October 2008

By June, the Exchequer had estimated a tax shortfall of €3 billion for the year, while a further shortfall of €1.3 billion was evident by the end of August. As the Project Atlas loan book reviews were being conducted, the economy entered in to recession in September. The 2009 Budget, due to be announced in December 2008, was brought forward by 2 months to October 2008.⁵⁸

As a result, planned pay increases for the public sector were cancelled and additional taxation measures were required to reduce the gap. Among the corrective measures announced, was the introduction of the Income Levy.

The budget was framed on the basis that tax revenues would increase by 1% in 2009, even though revenue was expected to fall by 13.7% in 2008. This growth was assumed despite GDP contracting in 2008 and the expectation that it would do so again in 2009. Increases in current expenditure were agreed, while capital expenditure was cut back.⁵⁹

Recapitalisation programme announced

The Department of Finance became the driving force for discussing recapitalisation requirements with the financial institutions.⁶⁰

Ann Nolan told the Inquiry:

“The PwC analysis showed clearly that there was a serious problem with land and development loans, both because of the total volume of such loans across the system and because of the small number of developers who had huge debts across the system.”⁶¹

When John Corrigan, former CEO of NTMA was questioned about AIB and BOI, he said:

“…there was extreme pushback from the two banks at the outset of these discussions…certainly they resisted the notion of recapitalisation.”⁶²

In her evidence, Ann Nolan said that BOI was: “…most realistic…AIB told us…they didn’t need any capital…they were, you know, well able to cope.”⁶³

In their Court⁶⁴ minutes of 13 October 2008, BOI indicated that they would require a capital injection, but it was decided that it was not an opportune time to approach the Government, given the recent Guarantee decision and the Budget due to be announced the following day.⁶⁵ BOI’s Court continued to discuss how they could approach the Government for taxpayer investment as a source of equity, given the tightening of liquidity and the high cost of capital they were experiencing over the period.⁶⁶

In October 2008 BOI had internal discussions about the bank’s possible need for a capital injection by the State as one of a number of options reviewed by the bank at that time.

It was also noted that Brian Goggin would explore the idea of a “capital injection by the taxpayers,” but that this would not be done until after the Budget which took place around that time, mid-October. The bank’s public position at that time was that the bank did not require taxpayer funding.⁶⁷

Richard Burrows said:

“In any public statement, if you’re in a situation looking for capital, the last thing you want to do is to start talking about that publicly because that just engenders a great deal of uncertainty and loss of confidence in an institution. It’s like a central banker or Minister for Finance not talking about a devaluation before he does it; he can’t because you almost make the situation worse-“He confirmed to the Joint Committee that the topic of the bank’s recapitalisation had been raised at a meeting with the Minister for Finance before the end of the year – “late autumn of 2008.”⁶⁸

When asked about the board minutes, Brian Goggin said:

“the discussions around capital, as evidenced in these papers, had all to do with new capital rules arising out of the decision by the UK Government to increase the core tier 1 ratio of the UK banking system, up to 7.5%. That immediately put pressure back on the Irish banks. The capital discussions here have nothing whatsoever to do with solvency; it’s all to do with new regulatory impositions.”⁶⁹

Kevin Cardiff was asked if BOI had raised the matter of requiring capital on the night of the Guarantee, given that the bank was raising it internally just two weeks after the guarantee meeting. He said, clarifying an earlier answer, that:

“the minutes you’ve sent to me talk a bit more about precautionary capital. Capital is … in a sense, they’re consistent with what I was saying last time, that at this point, there was a need for capital mostly based on changing market expectation, that they’re already saying, even on 18 October, “Look, let’s look at that.” And also, …… we and the official system started to focus on capital also almost immediately, probably around the 15th (October 2008) or so, I think, I sent an e-mail to people saying we have to now do an exercise about capital, and about whether nationalisations may be required, and so forth.”70

“having said that, I think even now they may have been a little bit coy, at the very least, because it was some months later we were still discussing with them how much capital they needed. I don’t think they were entirely upfront, let’s say, about their own desires……. if they had been more upfront about that, we might have moved along a little bit quicker.”⁷¹

When asked to comment on the position of AIB in October 2008, Eugene Sheehy, former Group Chief Executive of AIB, said:

“There’s also lots of documents you will have seen that we were adequately capitalised at the time. If a board had decided to raise funds in a share placement with customers, you would have to immediately announce that. At the time we were looking at capital, and we had a whole range of mitigants that we thought we could apply. We were a long, long way from ever having to, at that stage, ask shareholders to pay up.”⁷²

It is clear from the board minutes of 11 December 2008, that AIB still believed that they were “…adequately capitalised…”⁷³ and did not require any capital from the State. Dermot Gleeson told the Inquiry that he did not know when AIB became insolvent. However he referred to the fall in house prices and said: “The real trouble was 2009, and I don’t know when in 2009-10 AIB became insolvent.”⁷⁴

Anglo also believed that they would raise sufficient capital. According to Gary McGann, former Non-executive Director, Anglo “…there was a belief that a recapitalised Anglo could have a future but it would need (a) stronger funding sources and (b) probably a broader funding footprint.”⁷⁵

Questioned by the Joint Committee on when Gary McCann would have realised that Anglo’s future as an independent financial institution without any intervention or State support was no longer tenable, he said: “I don’t think there was a point in time…at all points in time the board saw this as a funding liquidity challenge.”⁷⁶ At a meeting on 12 December 2008, the board of Anglo discussed a potential mechanism for raising capital through a rights issue or a preference share issue and suggested that existing investors were prepared to participate in an equity offering.⁷⁷

Recalling her first meeting with representatives from AIB and Anglo, Ann Nolan spoke of being “… stunned at the amount of capital the private sector was going to put into them.”⁷⁸ However, the anticipated capital injections from private sources did not materialise for either of the two banks, as investors had lost confidence in the Irish banks.⁷⁹

Throughout the month of December 2008, meetings continued between the Department of Finance, the NTMA, the Central Bank, Merrill Lynch and Arthur Cox Solicitors to discuss the recapitalisation programmes for AIB, BOI and Anglo. In his evidence, John Corrigan spoke of one particular meeting on 13 December 2008, where the NTMA, amongst others, pressed strongly for Anglo to be nationalised.⁸⁰

According to Pádraig Ó Ríordáin, former Managing Partner of Arthur Cox:

“…once the State guaranteed each of the banks, then the State was, obviously, vulnerable to any default by any of the banks.”⁸¹

Accordingly, the Government made an announcement on the 14 December 2008 that the State would support the Covered Institutions through a recapitalisation programme of up to €10 billion, so as to meet with their regulatory capital requirements.⁸²

Ultimately, the Government announced on 21 December 2008 that the State would inject €1.5 billion into Anglo and €2 billion each into AIB and BOI by way of preference shares. It was anticipated that a further €1 billion for AIB and BOI would be required⁸³ but, according to Kevin Cardiff, the Government wanted the relevant banks to sell assets, increase profits and reduce costs to support their own levels of capital.⁸⁴ Kevin Cardiff said that providing the needed capital upfront would reduce the incentive for these banks to raise additional capital on their own and that “…people didn’t want to give them that luxury.”⁸⁵

Nationalising Anglo, 15 January 2009

Once the decision to recapitalise AIB, BOI and Anglo was made, Arthur Cox were tasked with carrying out a due diligence exercise.⁸⁶

According to Ann Nolan, there were “…deep concerns about recapitalising Anglo without nationalising it, simply because of the issues that had led to the chairman’s resigning.” As a result, Arthur Cox prioritised their due diligence on that bank.⁸⁷

Over the period from the end of 2008 into early 2009, two parallel work-streams continued on Anglo – one examining recapitalisation and the other nationalisation. According to Ann Nolan, the Department of Finance needed to be ready for either option once the due diligence exercise was completed. Arthur Cox, the Office of the Attorney General and the Department of Finance continued their work on the Anglo Irish Bank Corporation Bill 2009 – the legislation to nationalise Anglo. Meanwhile, the Department continued work on the recapitalisation aspect, formally notifying the European Commission on 8 January 2009.⁸⁸

Arthur Cox reverted to the Department a week later on 15 January 2009, reporting on issues of legal concern within the bank.⁸⁹ In addition to these issues, Anglo’s business model was considered “fatefully flawed” ⁹⁰ and according to Ann Nolan, “…there was no capacity to regenerate profits, which the other banks had.” ⁹¹ As a result, a number of options in respect of Anglo had to be considered, as follows:

• to continue with the original recapitalisation of €1.5 billion, either by preference shares or ordinary shares
• to nationalise
• to disengage⁹²

Due to a number of factors, including the provision of the State Guarantee, Europe’s expectation that no bank should fail⁹³ and the likely contagion effect across the financial system, the option of the State to try to disengage from Anglo was not considered “realistic”, according to Ann Nolan.94 Having formally consulted with the Central Bank, Financial Regulator, NTMA and officials in the Department of Finance, the Minister for Finance, Brian Lenihan, sought a decision from the Government to take full control of Anglo by way of nationalisation and to replace the management board.⁹⁵

On 15 January 2009, the Minister for Finance, on behalf of the Government, announced that Anglo would be nationalised with immediate effect. This did not increase the exposure of the State, as the State was already liable since the issue of the Guarantee in the previous September.⁹⁶ However, it would appear to the Joint Committee that nationalising Anglo was carried out without the full knowledge of how much additional capital Anglo would ultimately require.

Recapitalisation of the Covered Institutions, continued.

In his evidence to the Joint Committee, former Taoiseach, Brian Cowen stated that:

“…the success of the guarantee on the night was to restore liquidity that was badly needed at that critical time. It was a success for a short time and … sentiment against Irish banks continued.”⁹⁷

The Guarantee did not address the on-going liquidity problems being faced by the Covered Institutions. They were still facing an extremely unstable outlook, with major withdrawals of deposits and established credit lines leading to substantial recourse to the Central Bank for short-term liquidity support.⁹⁸

Consultations continued between AIB, BOI and the Department of Finance on the recapitalisations through to the end of 2008 and into early 2009. The focus was on the capital amounts required and the associated terms and conditions.⁹⁹

In February 2009, the Government agreed a Core Tier 1 capital injection of €3.5 billion for both AIB and BOI through a proposed purchase of preference shares by the National Pension Reserve Fund (NPRF).¹⁰⁰ BOI advised members of their Court on 18 March 2009 that they needed additional capital and the only available source was the Government.¹⁰¹ According to Michael Somers, former CEO of the NTMA, the NTMA became involved because it had the cash from the National Pension Reserve Fund (NPRF) and the Government wanted the agency to invest it in the banks.¹⁰²

Certain conditions were attached to the recapitalisations, such as:

• a fixed dividend of 8% was payable annually on the preference shares.¹⁰³
• the Government could appoint 25% of the banks’ directors.¹⁰⁴
• both AIB and BOI were required to increase their lending to SMEs¹⁰⁵ by 10% and to provide additional lending of 30% to first time buyers in 2009.¹⁰⁶
• senior executives were required to take a reduction of at least 25% in total remuneration and would receive no bonuses or salary increases for 2008 and 2009.¹⁰⁷

However in March 2009, while carrying out a legal and financial due diligence exercise on both institutions¹⁰⁸ the NPRF wrote to the Minister for Finance advising him that “…it is likely that the proposed €3.5bn preference share investment in AIB will fall short of what is required.”¹⁰⁹

It appeared to the NTMA that AIB felt its position was no worse than that of BOI and that AIB would only recommend to their shareholders an amount of additional capital that was equal to the amount to be provided to BOI.¹¹⁰ It was agreed, ultimately, that AIB would sell their US and Polish subsidiaries to cover the shortfall and a capital injection of €3.5 billion was reaffirmed.¹¹¹ The sale of the Polish subsidiary did not occur until early 2010, after the Central Bank had completed the PCAR (Prudential Capital Assessment Review) and “…insisted that the assets be sold…”¹¹²

Meanwhile, Anglo continued to struggle post-nationalisation. The market had lost confidence in the bank and the new management board could not curtail its deteriorating capital position.¹¹³ As Ann Nolan commented: “… Anglo surprised on the downside every time you looked at it for the entire period … and that’s just looking at the losses.”¹¹⁴

In its December 2008 monthly accounts, Anglo’s Core Tier 1 Capital Ratio stood at 5.7%. By February 2009, this had fallen to 4.9%. In effect, Anglo had only €790 million of capital to absorb any further losses on their loan book before they would be in breach of their 4% regulatory capital requirement.¹¹⁵ The business model was broken and did not facilitate a source of income to make up the additional capital that the bank urgently required.¹¹⁶

According to Kevin Cardiff, Anglo “…was never going to get all of the capital it might want upfront.”¹¹⁷ Consequently, capital injections were phased: in June 2009 the Minister for Finance invested €3 billion and a further €1 billion was invested in August 2009.¹¹⁸

While the NTMA was reluctant to use the NPRF to recapitalise AIB and BOI, this went ahead on the Minister for Finance’s instruction.¹¹⁹ John Corrigan said that it was considered that “…there was a strong probability that the State would get its money back…” from BOI and AIB, but it was believed to be unlikely that the money would be recouped from Anglo. For this reason, the recapitalisation of Anglo was made using cash drawn from the Exchequer rather than the NPRF.¹²⁰

Why did the authorities not see the scale of the recapitalisation problem upfront?

Problems arose for the State authorities such as the Department of Finance and the NTMA when seeking to estimate the projected scale and timing of bank recapitalisations. On the basis of evidence presented to the Inquiry, these problems arose from the following factors:

1. Declining asset values: Officials did not foresee the extent of the future drop in asset values. The drop in values reached up to 50% for housing¹²¹ and around 90% for non-developed land.¹²²

2. Reliance on management information: PwC were engaged to review the loan books and capital positions of the Covered institutions. However, as previously discussed, though PwC’s work expanded over time, it was based predominantly on the management accounts of the Covered Institutions and did not involve any independent verification. The Joint Committee is of the view, such work should have been commissioned.¹²³

3. Non-performing loans: The extent of non-performing large commercial loans, especially land and property related, was not known prior to their transfer to NAMA in 2010. It transpired ultimately that only 23% of the property-related loans transferred to NAMA were in actual fact performing, which was close to only half of the NAMA Participating Institutions’ own estimates. Furthermore, there were significant variances between those institutions. ¹²⁴ That exerted a major influence on the scale and timing of the recapitalisations of individual institutions.

The unknown scale of the above together with other poor lending practices, interest roll-up and reliance on paper equity made projections on bank recapitalisations difficult to estimate in a volatile market. This eventually necessitated the engagement of Blackrock Solutions to assess and model bank portfolios in 2010 and 2011, through the PCAR and PLAR exercises.¹²⁵

Mini Budget April 2009

In tandem with the capital injections into AIB and BOI, the economic situation continued to deteriorate. The Government felt it necessary to introduce further fiscal adjustments, in the form of a “mini-budget”, in April 2009. A review of Exchequer revenue and expenditure revealed that the expected General Government Deficit as a percentage of GDP had only reduced to 10.75%.¹²⁶ In October 2008, the Government planned to reduce this to a 6.5% deficit.1

When the “mini-budget” was introduced, the Exchequer borrowing requirement was forecast to be €20.3 billion.1 In reality, the borrowing requirement exceeded the forecast considerably, rising to €24.6 billion by the end of 2009.¹²⁷ Overall, expenditure cuts of €1.5 billion and tax increases of €1.8 billion were introduced.¹²⁸

This 2009 “mini-budget” also included significant institutional changes, most notably the creation of NAMA¹²⁹ and the reform of the Central Bank.¹³⁰

Three-year Business Plans from Covered Institutions

In October 2009, a Memorandum for Government indicated that the Government was considering a number of options for restructuring the banks. These included a possible merger of EBS and INBS and a possible sale of the combined entity to IL&P; the possibility of either Ulster Bank or Bank of Scotland Ireland taking over the combined EBS/INBS entity and the acquisition by a foreign institution of EBS/INBS.¹³³

Each of the Covered Institutions was required to prepare and submit a 3-year business and recovery plan to the Central Bank setting out how management intended to return the relevant Covered Institution to a stable, properly capitalised and profitable position. The plans would also have to be approved by the European Commission and monitored on a quarterly basis.¹³⁴

Ultimately, the merger of EBS and INBS did not proceed. The Government decided to merge EBS with AIB as it failed to get sufficiently attractive bids to sell EBS.¹³⁵ Anglo and INBS were deemed to be non-viable and, therefore, a specific plan was put in place for these two institutions.¹³⁶ They ultimately became Irish Bank Resolution Corporation (IBRC).¹³⁷

The preparation, approval and re-approval of these plans took from 2009 to 2013, with BOI’s plan approved quickly under State aid rules and AIB’s plan taking longer, due the merger of AIB and EBS. However, PTSB’s plan was not approved until April 2015, as their restructuring proved slower than the other banks. Each of the banks produced several iterations of their plan over the period, as the economic environment continued to deteriorate and their capital requirements grew due to their increasing loan provisions.¹³⁸

Changes in the Covered Institutions and Central Bank Throughout 2009

Between the announcement of the Government’s Guarantee in September 2008 and completion of the first bank recapitalisation programme by the end of 2009, a number of significant changes unfolded as the financial institutions and official bodies adjusted to the new banking environment.

One of the first changes insisted upon by the Government as a condition of the Bank Guarantee was the appointment of Government nominated Non-Executive Directors to the boards of the Covered Institutions. Often referred to as Public Interest Directors, the reasons for their appointment were explained to the Inquiry by the former Taoiseach, Brian Cowen:

“Well public interest directors were … the idea there was that whilst we didn’t have ownership of these banks, we believed this was in the interest … to try and help restore some public confidence in the governance of these organisations to have people who are in there…. they would be au fait with Government policy or public policy and would be bringing that perspective to the table while others from the private sector expertise might be bringing a commercial experience to it. It was a balance if you like, to try and … to demonstrate (a) that it was important that there be public interest directors and (b) that they would be capable of ensuring that at board level people understood what the public policy priorities of Government would be in respect of how they were conducting their business.”¹³⁹

Alan Dukes, when asked about his role as a Public Interest Director for Anglo, stated:

“…you had a duty to the company and … you had a duty to the shareholder and … you had a duty of care to the employees of the company and you still had to bear the public interest in mind. But where all these things met was never clear.”¹⁴⁰

He went on to say:

“I rationalised it to myself on the basis that I was there to look after the public interest, the shareholder in the bank was the Minister for Finance. The Minister for Finance has a duty to the public interest and in a sense kind of embodies the public interest, so the objectives of the Minister for Finance satisfied the requirements that I look after the public interest.”¹⁴¹

The Minister for Finance nominated 12 Public Interest Directors, two directors to the board of each of the Covered Institutions.¹⁴² These appointments, made in January 2009, were the first of many leadership changes across the six Covered Institutions. During 2009, AIB’s Chief Executive, Chair and Group Finance Director retired,¹⁴³ while BOI’s Governor chose not to stand for re-election and the BOI Group CEO stepped down.¹⁴⁴ IL&P accepted resignations from their CEO and CFO.¹⁴⁵ INBS also lost its Chairman and Chief Executive,¹⁴⁶ while EBS saw its Chief Financial Officer depart alongside the Managing Director of its Haven Mortgages subsidiary.¹⁴⁷ Numerous other non-executives and other members of senior management teams departed posts across the Irish banks during the year.

On the regulatory side, publication of the Central Bank’s 2008 Financial Stability Report, was delayed due to market uncertainty. Initially scheduled for publication in November 2008, it was eventually decided in February 2009 that the report would never be published.¹⁴⁸

There were also changes of key personnel within the Central Bank. Although it was announced in January 2009 that John Hurley would be reappointed for a second seven year term as Central Bank Governor, he had indicated to the Minister for Finance that he would not serve for more than one year and subsequently retired in September 2009, when he was succeeded by Patrick Honohan.¹⁴⁹

At the Financial Regulator, its Chief Executive, Patrick Neary, retired in January 2009¹⁵⁰ and his role was taken over on an interim basis by the Financial Regulator’s Consumer Director, Mary O’Dea.¹⁵¹ This interim appointment was eventually extended until January 2010, when Matthew Elderfield arrived from his post as Chief Executive of the Bermuda Monetary Authority,¹⁵² following an extensive international search.

By the time of Matthew Elderfield’s appointment, the Central Bank and Financial Regulator had already begun to implement an extensive programme of reforms, driven by both national and international responses to the financial crisis. The report considers these reforms in more detail at Appendices 10 and 11.

Eligible Liability Guarantee Scheme (ELG Scheme)

The ELG Scheme¹⁵³ was introduced in December 2009 and ran in tandem with the Credit Institutions (Financial Support) Act 2008 (CIFS Act 2008) until September 2010. The CIFS Act 2008 guaranteed the liabilities of the Covered Institutions until end September 2010.¹⁵⁴ The ELG Scheme provided for an unconditional and irrevocable State Guarantee for certain eligible liabilities (including deposits) of up to five years in maturity incurred by the financial institutions from the date they joined the Scheme until the closure of the Scheme, subject to certain terms and conditions. The NTMA was appointed by the Minister for Finance as the ELG Scheme Operator.

On 26 February 2013 the Minister for Finance announced the closure of the ELG Scheme to all new liabilities from 28 March 2013. After this date, no new liabilities would be guaranteed under the Scheme. This did not affect any liabilities already guaranteed as of 28 March 2013.¹⁵⁵

Prudential Capital Adequacy Review (PCAR) 2010

In early 2010, the Central Bank carried out a review of the Covered Institutions’ capital positions. This Prudential Capital Adequacy Review (PCAR)¹⁵⁶ exercise identified a need for approximately a further €10.9 billion¹⁵⁷ of capital to be provided for AIB, Bank of Ireland and EBS combined.¹⁵⁸

In giving evidence to the Inquiry, former Group Chief Executive of the EBS, Fergus Murphy said:

“EBS actually grew its retail deposits by circa €2 billion through the crisis, a notable feat when compared with the exodus of retail deposits from other institutions during this period. This particular action helped to stabilise the society and along with the actions on exiting commercial property and land and development finance and other actions, lessened the ultimate amount of capital that the organisation eventually required.”¹⁵⁹

BOI met their requirement for €2.66 billion additional capital by raising new capital in the market and by converting €1.7 billion of their existing €3.5 billion preference shares into ordinary shares. AIB sold its Polish operations and its investment in M&T Bank in the US, which contributed €3.4 billion of its capital requirement. The Government provided the balance of €4 billion.¹⁶⁰

In September 2010, due to the increasing scale of discounts being applied to loans on being transferred to NAMA, the Central Bank determined that AIB would require a further €3 billion of capital over and above the €7.4 billion capital injection which had occurred in March 2010.¹⁶¹ This figure was rolled-up into the revised capital requirements arising from the PCAR/PLAR 2011 exercise.¹⁶²

Anglo and INBS were not formally part of the initial PCAR exercise in 2010, due to the fact that a final decision had not been taken on the restructuring of either institution. However the Central Bank did give an indication in its PCAR announcement in March 2010 that, as an interim measure, Anglo would require €8.3 billion of additional capital and that INBS would need €2.6 billion.¹⁶³ These requirements were satisfied by the issuance of a Promissory Note at the end of March 2010.¹⁶⁴ The quantum of this Promissory Note was increased on several occasions during 2010 as the extent of the final haircuts applied by NAMA to loans transferred from both Anglo and INBS became clearer.¹⁶⁵ Ultimately, the value of the Promissory Notes issued by the Government in support of Anglo and INBS reached €30.6 billion by the end of 2010.¹⁶⁶

Merger of Anglo and INBS into IBRC

The Government’s initial intention regarding the restructure of Anglo was to remould it into a new business bank. However, in 2009, Anglo made a loss of €12.7 billion. In 2010 it made a loss of almost €17.7 billion. The 2010 figures were partly driven by haircuts applied to NAMA loans, which amounted to €11.5 billion.¹⁶⁷ This, together with the severity of the Irish sovereign debt crisis and the additional capital required by Anglo, meant that the funding of any future business was likely to be challenging.¹⁶⁸ Hence, this plan was quickly abandoned in favour of splitting Anglo into an asset recovery vehicle and a funding bank.¹⁶⁹ A Restructuring Plan based on this approach was submitted to the European Commission on 22 October 2010.¹⁷⁰

The Government had initially provided INBS with €2.7 billion to cover losses arising on its commercial property loan portfolio.¹⁷¹ In September 2010, the NTMA recommended that a further €2.7 billion be provided to cover expected losses on the residual (post-NAMA transfer) loan book.¹⁷² In evidence to the Inquiry, Michael Fingleton, Michael Walsh and John Stanley Purcell all indicated that they believed that the discounts applied by NAMA for their loans were excessive and that this led to INBS requiring more additional capital than they felt was required.¹⁷³ INBS had ceased to function as a lending institution and the Government was formulating proposals as to the future of the business. The Restructuring Plan for INBS had been submitted to the European Commission in June 2010 and it proposed “the continued management of the society as a going concern in anticipation of a sale to a trade buyer.”¹⁷⁴

The entry into the Bailout Programme and the subsequent negotiations with the Troika on the restructuring and future of the Irish banking system had a significant impact on the future of Anglo and INBS. See Chapter 10 – The Troika Programme.

A revised Joint Restructuring Plan was submitted to the EU in January 2011.¹⁷⁵ This plan provided for the sale of the deposit franchises of both Anglo and INBS, the management of the residential mortgage portfolio (ex-INBS) for eventual sale and the orderly wind-down of the combined commercial loan book over a 10 year period.¹⁷⁶ The combined entity would not require any further capital injections from the State. The Joint Restructuring Plan was approved by the European Commission in June 2011.¹⁷⁷ Anglo and INBS were merged into one entity in July 2011, to form IBRC and IBRC’s executive management team focused on delivery of the agreed strategy.¹⁷⁸

The Promissory Notes and Subsequent IBRC Dissolution

In his evidence, Pádraig Ó Ríordáin explained the use of Promissory Notes during the relevant period:

“Promissory notes constituted promises to pay an amount over time to the bank but were accounted for as capital as if they had been paid in cash. However, accounting rules required that they carry a high coupon or interest rate to be paid by the State. The banks then pledged the promissory notes as collateral with the Central Bank, which in return provided the banks with cash in the form of emergency liquidity assistance (ELA).”¹⁷⁹

By the end of 2010, the State had provided capital of €34.7 billion in support of Anglo and INBS (IBRC), of which €30.6 billion was made up of Promissory Notes.¹⁸⁰ In his evidence to the Joint Committee, Pádraig Ó Ríordáin said:

“It became a central objective of both the Government and the Central Bank to unwind this arrangement as the cost of the promissory notes to the Government was very high and the ECB/Central Bank wished to wean the Irish banks off ELA.”¹⁸¹

These Promissory Notes required a payment to be made to the Central Bank of €3.1 billion in March each year.¹⁸² At the time, IBRC was reliant on Emergency Liquidity Assistance (ELA) from the Central Bank of circa €41 billion and, in the absence of an alternative funding solution from the ECB, it was imperative that IBRC retained its banking licence and access to ELA.¹⁸³ According to Michael Noonan:

“…maintaining Central Bank funding to support the wind-down of IBRC was the most prudent approach to protect the taxpayer. Various alternative sources of long term funding were explored but did not prove possible. It was only when a long-term viable solution for the promissory notes was found and the system more generally had stabilised, that we decided to liquidate the bank.”¹⁸⁴

In early February 2013, pursuant to section 3(3) of the Anglo Irish Bank Corporation Act 2009, Kieran Wallace and Eamonn Richardson of KPMG were appointed by the Minister for Finance as Special Liquidators to IBRC.¹⁸⁵ By doing so, this “…triggered events of default under a range of agreements between IBRC, the CBI and third parties.”¹⁸⁶ According to Michael Noonan, this involved:

“…the winding down of its business operations, discharging the liability of IBRC to the Central Bank in a way that ensured no capital loss for the Central Bank, while the remaining loans of IBRC would be sold on the market or, if necessary, transferred to NAMA and, finally, converting the IBRC promissory note to a portfolio of fully marketable long-term Irish Government bonds. Through these actions the promissory notes and IBRC were to be eliminated from the Irish financial landscape with consequent reputational benefits.”¹⁸⁷

The Joint Special Liquidators now controlled the operations of the IBRC pursuant to the IBRC Act 2013.¹⁸⁸

Financial Measures Programme (FMP), 2011

Ireland’s entry into the Troika Bailout Programme in November 2010 (see Chapter 10 The Troika Programme) had two core elements: one relating to fiscal policy and structural reform and the other relating to bank restructuring and reorganisation.¹⁸⁹ Regarding the latter, a plan called the Financial Measures Programme (FMP) was developed. This provided for a fundamental downsizing and reorganisation of the banking sector and the recapitalisation of the Covered Institutions to the highest international standards.¹⁹⁰

The FMP was announced on 31 March 2011 and its main elements were:¹⁹¹

• Sale of the Anglo deposit book to AIB and of the INBS deposit book to IL&P.
• Merger and wind down of Anglo and INBS.
• Merger of AIB and EBS.
• Recapitalisation of the two pillar banks, AIB/EBS and BOI.
• Recapitalisation of IL&P.
• Deleveraging of the banks.

In the view of Kevin Cardiff, former Secretary General at the Department of Finance, this programme marked “a key turning point in the rescue of the Irish banking system.”¹⁹²

Prudential Capital Adequacy Review (PCAR), 2011

As part of the FMP, the Central Bank undertook a further PCAR exercise in March 2011.¹⁹³ This exercise identified a need for the banks to raise a further €24 billion of capital. The exercise also included a Prudential Liquidity Assessment Review (PLAR) which was used to identify the amounts of assets required to be disposed of by the banks to aid their return to stable funding levels.¹⁹⁴

The aggregate target for disposals agreed with the Central Bank was some €72 billion over the 3 year period 2011 to 2013.¹⁹⁵

PCAR identified the need for additional capital of €24 billion, over and above the €46.3 billion that had already been invested by the State up to the end of 2010.

As part of this capital raising exercise, AIB,¹⁹⁶ BOI and PTSB¹⁹⁷ were required to undertake Liability Management Exercises (LME) which, in practice, meant buying back their subordinated debt from investors at a discount to the original face value. This “burden sharing”
exercise in 2011 generated €5.198 billion of the additional capital required and reduced the State’s funding requirement by that amount.¹⁹⁸ See Chapter 11 – Burden Sharing. Nonetheless, the State was still required to inject a further €16.6 billion¹⁹⁹ into Irish banks, including €3 billion of contingent capital,²⁰⁰ as set out below:

Capital requirement resulting from PCAR 2011 and how it has been met (€bn)

Source: PCAR 2011 Review²⁰¹

As part of the PCAR 2011 exercise, PTSB were required to sell off its Irish Life business, which it eventually did in February 2013. The sale raised €1.3 billion, resulting in a reduction the State’s ultimate contribution.²⁰²

Overall, on completion of the 2011 capital raising exercise, the State had provided the Irish banks with a total of €64.2 billion in the 3 years since a decision was first made to provide capital in December 2008. A summary of the total investment by the State in the Irish banks is set out in the table below.

Source: Department of Finance report for Banking Inquiry, 13 April 2015²⁰³

The deleveraging plan was successfully completed by the target date. The banks sold €45 billion worth of assets over the period of the plan through amortisation and the disposal of bank assets.²⁰⁴

Cessation of new lending

One consequence of the crisis and the ensuing bank restructuring efforts was the almost total cessation of new lending for businesses of all sizes over the period 2009 to 2013.²⁰⁵

Despite specific provisions in the restructuring plans of both BOI and AIB for boosting credit availability to the business sector, both supply and demand for credit remained depressed, partly due to the recession and also due to the structural constraints under which the banks were operating.²⁰⁶ These constraints included the need to restore the banks’ capital ratios, a focus on asset recovery and disposal, liquidity constraints and a reduced appetite to take risk.²⁰⁷

The following graph depicts the percentage change in new lending to Irish private sector businesses over the period from 2001 to 2013.

Source: Central Bank of Ireland: Trends in Business Credit and Deposits²⁰⁸

What Remains in the Covered Institutions?

NAMA acquired loans from the Participating Institutions valued at €74.4 billion.²⁰⁹ Taking account of discounts applied, the Participating Institutions ultimately reduced their balance sheets by around €70 billion (which was equivalent to 45% of GDP)²¹⁰ in line with the deleveraging targets set out as part of the Troika monitoring programme. The objective, as described by Brian Cowen, was to get “…a situation going as quickly as possible where banks could show repaired balance sheets and get on with lending…”²¹¹

When the large property-related loans were transferred from the Participating Institutions to NAMA in 2010, residential property prices were still plunging. House prices reached their peak in September 2007 and their lowest point in March 2013.²¹² The difference amounts to a fall of 51%.²¹³

The decline in asset values, combined with high loan-to-value ratios in lending during the later stages of the boom years, resulted in many of the remaining loans in the financial institutions also being highly leveraged.

Dirk Schoenmaker, Professor of Banking and Finance at the Rotterdam School of Management, Erasmus University Rotterdam, commented as follows in an academic paper:

“…While in 2005, only half of first time buyers had LTV rates above 90 per cent, with very few above 100 per cent, these numbers went up in 2005 and 2006. By then, two-thirds of mortgages to first time buyers had LTV rates over 90 per cent and one third over 100 per cent …”²¹⁴

The table below illustrates the volume of property loans which still remained on the Covered Institutions’ balance sheets at the end of December 2013.

Outstanding loans and impairments of Irish banks, end-2013 (in € bn)

Source: Schoenmaker²¹⁵

At the end of 2013, two-thirds of all property-related loans remained on the balance sheets of the Covered Institutions and €42.3 billion worth of these were impaired loans (i.e. 17.7% of mortgages and 56.9% of CRE). That debt still existed even though, as already noted, €74 billion of property-related loans (referred to as CRE in the table above) had already been transferred from banks and into NAMA.

Whilst the Irish banks have taken large provisions for non-performing loans (53% as at June 2014), the level of actual loan write offs at 5.2% could be considered quite low.²¹⁶

In his paper, Dirk Schoenmaker captures the lack of execution of the strategy. He states:

“Taking sufficient provisions for NPLs [non-performing loans] is a first step to heal banks. A necessary second step is to write off bad loans, to clean up bank balance sheets. On the first step, Ireland has been pro-active. On the second, progress is very slow…”²¹⁷

Economist, Peter Bacon commented in his evidence:

“If there were a [further] Bacon report, what would it be focusing on at the moment? It would be saying, “Why in heaven’s name, seven or eight years after the collapse, are we still dealing with a mortgage arrears problem?”²¹⁸

Returning to the markets

During 2010 – 2012, Covered Institutions could only go to the markets with government-guaranteed CIF or ELG bonds. It was not until November 2012 that the Pillar Banks were in a position to return to the markets on a standalone basis.

BOI moved first with an unguaranteed 3 year, €1 billion, Asset Covered Security (ACS) bond²¹⁹ (also known as a Covered Bond) on 13 November 2012. AIB followed suit with an ACS issuance of €500 million the following month. In December 2012, BOI managed to raise €250 million in the first subordinated bond issue deal with a 10% coupon²²⁰ and a maturity of 10 years in a targeted deal for their equity investors.²²¹

Over the next year, the two Pillar Banks were set to issue more ACS Bonds and subordinated bonds but it took until 29 May 2013 before BOI went to the market with a senior unsecured and fully unguaranteed bond. BOI launched an unsecured bond for €500 million, which was oversubscribed.²²²

AIB were able to carry out a similar transaction in November 2013, which was also oversubscribed.²²³

Source: Recent bond issuance by the Irish “Pillar Banks”²²⁴

This AIB transaction took the total bond issuance by the two Pillar Banks in 12 months to just over €5.7 billion with public transactions going out as far as 10 years.

AIB and BOI were now back in the international debt markets without the need for a support line from the State for the first time since the introduction of the Guarantee.

The possibility of retroactive recapitalisation

In June 2012, the European Heads of State decided to “…break the vicious circle between banks and sovereigns, and that when a Single Supervisory Mechanism is in place involving the ECB, the European Stability Mechanism (ESM) could recapitalise banks directly.”²²⁵

The possibility of retroactive recapitalisation will also be available to Irish financial institutions, through a specific provision in the ESM.²²⁶ According to Michael Noonan: “…ESM may directly recapitalise banks or retroactively recapitalise banks. But it needs unanimity of the governors and it has to be done on a case-by-case basis…”²²⁷ (See Appendix 10 for further detail on SSM and ESM)

Findings of the Joint Committee

1. One consequence of the crisis and the ensuing bank restructuring efforts was the almost total cessation of new lending for businesses over the period 2009 to 2013.

2. The reasons that PwC’s Project Atlas Report (September/October 2008) did not reveal the true extent of the capital requirements of the banks were:

   • the wider assumptions for the economy, taken from official forecasts and on which the work was based, did not materialise.
   • there was insufficient time for loan reviews given the fragility of the banking system.
   • the analysis was based on the management accounts of the relevant banks and not an independent verification of the loan books.
3. In October 2008 BOI had internal discussions about the bank’s possible need for a capital injection by the State as one of a number of options reviewed by the bank at that time.

Chapter 8 Footnotes

1. Letter from the Financial Regulator to all Covered Institutions, Q4 2008, INQ00166-001, (Subject to S33AK, Central Bank Act 1942).

2. Ann Nolan, Second Secretary General, Department of Finance, statement, ANO00002-001.

3. Brian Cowen, former Taoiseach and Minister for Finance, transcript, INQ00089-114.

4. Cormac McCarthy, former CEO, UB, transcript, INQ00086-048.

5. RBS Group Annual Report and Accounts 2008, page 29: http://www.investors.rbs.com/~/media/Files/R/RBS-IR/annual-reports/rbs-group-accounts-2008.pdf

6. RBS Group Annual Report and Accounts 2008, page 104: http://www.investors.rbs.com/~/media/Files/R/RBS-IR/annual-reports/rbs-group-accounts-2008.pdf

7. RBS Group Annual Report and Accounts 2008, page 148: http://www.investors.rbs.com/~/media/Files/R/RBS-IR/annual-reports/rbs-group-accounts-2008.pdf

8. Richie Boucher, Group CEO, BOI, transcript, INQ00085-038.

9. Project Atlas was a PwC report on the health of the Irish banking system, commissioned by the Financial Regulator in 2008.

10. http://www.irishstatutebook.ie/eli/2008/si/411/made/en/print

11. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-079.

12. Paul Gallagher, former Attorney General, transcript, INQ00110-028.

13. http://www.irishstatutebook.ie/eli/2008/act/18/section/8/enacted/en/html#sec8

14. Paul Gallagher, former Attorney General, transcript, INQ00110-041.

15. Paul Gallagher, former Attorney General, transcript, INQ00110-041; The Credit Institutions (Eligible Liabilities Guarantee Scheme) 2009 in made pursuant section 6 (4) of the Credit Institutions (Financial Support) Act 2008 and came into effect on the 9 September 2009.

16. Patrick Honohan, Governor, Central Bank, transcript, PUB00273-009.

17. Marco Buti, Director General for Economic & Financial Affairs, European Commission, transcript, INQ00100-019.

18. Michael Noonan, Minister for Finance, transcript, INQ00102-020.

19. Patrick Neary, former CEO and former Prudential Director, IFSRA, transcript, INQ00132-080.

20. Merrill Lynch Wealth Management memo, NTMA00399-002.

21. Statement by An Taoiseach, Brian Cowen, 30 September 2008, DOT00164-005.

22. Government announcement on maintaining capital levels in the Covered Institutions, 30 November 2008, PUB00288-001.

23. Government announcement on maintaining capital levels in the Covered Institutions, 30 November 2008, PUB00288-001.

24. As PwC had completed a lot of the necessary background work, the firm was engaged to carry out further reviews, as required.

25. Allied Irish Banks plc, Anglo Irish Bank Corporation plc, Bank of Ireland Group, Educational Building Society, Irish Life & Permanent plc, Irish Nationwide Building Society.

26. Denis O’Connor, Partner, PwC, statement, DOC00001-006.

27. Denis O’Connor, Partner, PwC, statement, DOC00001-006.

28. See Glossary of Terms.

29. See impairment levels in terms of basis points contained within Project Atlas II Volume 1 Overview Working Draft, 17 November 2008, DOF02573-090, (e.g. Commercial/Corporate impairment of 150bps in scenario 1 and 125 bps in scenario 2 – equates to 4.5%/3.75% impairment over 3 years when asset values had already fallen in excess of this since the beginning of 2008).

30. Jones Lang LaSalle valuations were completed over the period November/December 2008.

31. Irish Life & Permanent plc was not included in the Jones Lang LaSalle valuations of land and development loans, as they did not lend to this part of the property sector; Project Atlas, Draft Property Values Review, 4 February 2009, DOF05792-013.

32. Project Atlas, Draft Property Values Review, 4 February 2009, DOF05792-013.

33. John Corrigan, former CEO, NTMA, transcript, INQ00106-028.

34. Merrill Lynch and PwC summary, DOF03984-002.

35. Michael Somers, former CEO, NTMA, transcript, INQ00093-021.

36. Denis O’Connor, Partner, PwC, transcript, INQ00097-003.

37. John Corrigan, former CEO, NTMA, transcript, INQ00106-028.

38. David Doyle, former Secretary General, Department of Finance, transcript, INQ00113-036.

39. Patrick Neary, former CEO and former Prudential Director, IFSRA, transcript, INQ00132-074.

40. Brian Goggin, former Group CEO, BOI, transcript, INQ00139-005.

41. Brian Goggin, former Group CEO, BOI, transcript, INQ00139-006.

42. Richie Boucher, Group CEO, BOI, transcript, INQ00085-015.

43. Richard Burrows, former Governor, BOI, transcript, INQ00104-045.

44. Michael Fingleton, former CEO, INBS, statement, MFI00001-013.

45. Brian Cowen, former Taoiseach and Minister for Finance, statement, BCO00002-005.

46. Denis O’Connor, Partner, PwC, transcript, INQ00097-008.

47. Aidan Walsh, Partner, PwC, transcript, INQ00097-008.

48. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-016/017.

49. Denis O’Connor, Partner, PwC, transcript, INQ00097-034.

50. Also referred to as an Impairment provision, this is an amount set aside from profits to cover the expected loss on a loan that is impaired.

51. Patrick Neary, former CEO and former Prudential Director, IFSRA, transcript, INQ00132-110.

52. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-016.

53. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-021.

54. John Hurley, former Governor, Central Bank, transcript, INQ00047-118.

55. John Corrigan, former CEO, NTMA, transcript, INQ00106-028.

56. Jones Lang LaSalle summary, DOF04897-004.

57. Department of Finance report for Banking Inquiry, 13 April 2015, DOF07852-003.

58. Oral PQ, 25 September 2008, DOF07613-003/004.

59. Budget 2009: An Assessment for CBFSAI, Q4 2008, CB-Narrative INQ00167-001.

60. Ann Nolan, Second Secretary General, Department of Finance, statement, ANO00002-002; John Corrigan, former CEO, NTMA, also advised the Joint Committee that in the case of the first round of recapitalisations “the Central Bank really wasn’t involved”, transcript, INQ00106-014.

61. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-002.

62. John Corrigan, former CEO, NTMA, transcript, INQ00106-033.

63. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-034. This is also supported by Eugene Sheehy, former Group Chief Executive, AIB, where he confirms saying AIB would rather die than take equity in October 2008, transcript, INQ00133-012.

64. Bank of Ireland’s board is known as the “Court.”

65. BOI Court minute 13 October 2008, BOI03889-002.

66. BOI Court minute 17 October 2008, BOI04042-004.

67. BOI Court Minute Extract 17 October 2008, BOI04042-004.

68. Richard Burrows, former Governor, BOI, transcript, INQ00104-060.

69. Brian Goggin, former Group CEO, BOI, transcript, INQ00139-063.

70. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00351-030.

71. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00351-030/031.

72. Eugene Sheehy, former Group CEO, AIB, transcript, INQ00133-012.

73. AIB Board minute 11 December 2008, AIB02517-002.

74. Dermot Gleeson, former Chairman, AIB, transcript, INQ00123-010.

75. Gary McGann, former Independent Non-executive Director, Anglo, transcript, INQ00082-024.

76. Gary McGann, former Independent Non-executive Director, Anglo, transcript, INQ00082-024.

77. Anglo Board Minute, 12 December 2008, IBRC00626-001.

78. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-034.

79. David Doyle, former Secretary General, Department of Finance, statement, DDO00001-011.

80. John Corrigan, former CEO, NTMA, transcript INQ00106-003; Minutes of sub-group meetings, 13 December 2008, DOF04995-001.

81. Pádraig Ó Ríordáin, Partner, Arthur Cox, transcript, INQ00111-014.

82. Government announcement on €10bn recapitalisation of Covered Institutions, 14 December 2008, DOF00752-001.

83. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-019.

84. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00351-035.

85. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00351-035.

86. Pádraig Ó Ríordáin, Partner, Arthur Cox, statement, POR00001-006; Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-003. Due to legal privilege, little detail is held on the scope of this exercise.

87. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-013.

88. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-013.

89. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-038.

90. John Corrigan, former CEO, NTMA, transcript, INQ00106-010. This is reiterated by Pádraig Ó Ríordáin, Partner, Arthur Cox, transcript, INQ00111-018/019.

91. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-038.

92. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-003.

93. John Hurley, former Governor, Central Bank, transcript, INQ00047-077 to 079.

94. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-003.

95. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-003. Memo for Government decision on Nationalisation, 15 January 2009, DOF02259-001.

96. Pádraig Ó Ríordáin, Partner, Arthur Cox, transcript, INQ00111-020.

97. Brian Cowen, former Taoiseach and Minister, transcript, INQ00089-114.

98. Memo to Government on a proposal for a NAMA, March 2009, DOF03553-001.

99. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-003.

100. Memo for Government – Recapitalisation of the Banking System, 11 February 2009, DOF07683-001.

101. Memo to BOI Court, 18 March 2009, BOI04068-003.

102. Michael Somers, former CEO, NTMA, transcript, INQ00093-022.

103. Memo for Government, 11 February 2009, DOF07683-002.

104. Memo for Government, 11 February 2009, DOF07683-002.

105. See Glossary of Terms.

106. Memo for Government, 11 February 2009, DOF07683-006.

107. Memo for Government, 11 February 2009, DOF07683-005/006.

108. This was due diligence exercise undertaken by PwC and Arthur Cox.

109. Letter to Minister for Finance from NPRF 20 March 2009 re proposed purchase of preference shares in AIB and BOI, NTMA00001-002. See also Memo to Government, 22 April 2009, DOF03558-003.

110. John Corrigan, former CEO, NTMA, transcript, INQ00106-033.

111. Memo to Government, 22 April 2009, DOF03558-003 to -005.

112. Ann Nolan, Second Secretary General, Department of Finance, statement, ANO00002-007.

113. Memo to Government, 22 April 2009, DOF03558-002/003.

114. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-021.

115. Memo for Government on Recapitalisation of Anglo and AIB, DOF03558-002.

116. Ann Nolan, Second Secretary General, Department of Finance, transcript, INQ00076-021.

117. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00351-025.

118. Note to Minister for Finance, Capital Injection into Anglo Irish Bank, July 2009, DOF05979-001.

119. Michael Somers, former CEO, NTMA, transcript, INQ00093-009.

120. John Corrigan, former CEO, NTMA, transcript, INQ00106-015.

121. Gerard Gannon, Executive Director, Gannon Homes, statement, GGA00001-002.

122. Patrick Davitt, CEO, IPAV, transcript, INQ00066-016.

123. Denis O’Connor, Partner, PwC, transcript, INQ00097-034.

124. Brendan McDonagh, CEO, NAMA, transcript, PUB00331-046.

125. Prudential Capital Adequacy Review (PCAR) was a review of the Covered Institutions’ capital positions; Prudential Liquidity Assessment Review (PLAR) was used to identify the amounts of assets required to be disposed of by the banks to aid their return to stable funding levels.

126. ESRI Quarterly Economic Commentary Spring 2009, DOF07521-029.

127. Budget Statement 2009, announced 14 October 2008. Source: http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2008101400006?opendocument

128. Macroeconomic and Fiscal Framework 2009-2013, PUB00388-010.

129. Exchequer Statement December 2009, PUB00382-001.

130. Financial Statement of the Minister for Finance, Brian Lenihan, 7 April 2009, PUB00386-006.

131. Financial Statement of the Minister for Finance, Brian Lenihan, 7 April 2009, PUB00386-012.

132. Financial Statement of the Minister for Finance, Brian Lenihan, 7 April 2009, PUB00386-011.

133. Memorandum for Government, October 2009, DOF03573-001.

134. EC Ex post evaluation of Economic adjustment Program, PUB00356-047.

135. EC Ex post evaluation of Economic adjustment program, PUB00356-048.

136. EC Ex post evaluation of Economic adjustment Program, PUB00356-047.

137. See below for an examination of the merger of Anglo and INBS and the formation of IBRC.

138. EC Ex post evaluation of Economic adjustment Program, PUB00356-057.

139. Brian Cowen, former Taoiseach and Minister for Finance, transcript, INQ00089-101/102.

140. Alan Dukes, former Public Interest Director, Anglo Irish Bank, transcript, INQ00141-052.

141. Alan Dukes, former Public Interest Director, Anglo Irish Bank, transcript, INQ00141-052.

142. Alan Dukes, former Public Interest Director, Anglo Irish Bank, transcript, INQ00141-012/013.

143. As noted in AIB Annual Report for the year ended 31 December 2009, Dermot Gleeson retired as Chairman on 1 July 2009, John O’Donnell retired as Group Finance Director on 31 August 2009 and Eugene Sheehy retired as Group Chief Executive on 30 November 2009.

144. As noted in Bank of Ireland Annual Report for the year ended 31 March 2009, Brian Goggin stepped down as Group Chief Executive from 25 February 2009, while Richard Burrows chose not to stand for re-election as Governor.

145. As noted in Irish Life and Permanent Report for the year ended 31 December 2008, Denis Casey resigned as CEO and Peter Fitzpatrick resigned as CFO.

146. As noted in INBS Financial Statements for the year ended 31 December 2008, Michael Walsh resigned as Chairman on 17 February 2009, while Michael Fingleton would retire as Chief Executive on 30 April 2009.

147. As noted in EBS Financial Statements for 2009, Alan Merriman ceased to be a Director on 10 March 2009, while Tony Moroney retired from the main board on 29 May 2009 and departed his post at Haven Mortgages on 9 September 2009.

148. Central Bank Board Meeting Minutes, Q1 2009, INQ00157-001 (Subject to S33AK, Central Bank Act, 1942).

149. John Hurley, former Governor, Central Bank, statement, JHU00006-001.

150. The Annual Report of Financial Regulator 2008 confirms Neary’s retirement on January 2009.

151. Mary O’Dea, former Consumer Director and Chief Executive, statement, MOD00001-001.

152. Details of Matthew Elderfield’s appointment is confirmed in a Regulatory and Operational Risk Report of AIB in October 2009, AIB02942-028.

153. Eligible Liabilities Guarantee Scheme. Source: http://www.ntma.ie/business-areas/funding-and-debt-management/eligible-liabilities-guarantee-scheme/

154. The Government extended this Guarantee on a number of occasions.

155. Eligible Liabilities Guarantee Scheme. Source: http://www.ntma.ie/business-areas/funding-and-debt-management/eligible-liabilities-guarantee-scheme/

156. Central Bank and Financial Regulator PCAR 2010, 30 March 2010, PUB00377.

157. AIB €7.4billion; BOI €2.66billion; EBS €0.875billion.

158. EBS was still a stand-alone entity at this point. IL&P was not included in this first PCAR exercise.

159. Fergus Murphy, former Group Chief Executive, EBS, transcript, INQ00120-004.

160. Department of Finance report for Banking Inquiry, 13 April 2015, DOF07852-004.

161. Memo for Government, Changes in NAMA, 29 September 2010, DOF03594-002.

162. PCAR 2011 Review, PUB00167-039.

163. Prudential Capital Assessment Review, PUB00377-005.

164. Memo for Government, Changes in NAMA, 29 September 2010, DOF03594-004.

165. Memo for Government, Changes in NAMA, 29 September 2010, DOF03594-002.

166. Department of Finance report for Banking Inquiry, 13 April 2015, DOF07852-004.

167. Anglo Annual Report & Accounts 2010, page 34

168. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-133.

169. Government Statement, 30 September 2010: “On the 8th September last I announced the Governments decisions on the restructuring and resolution of Anglo Irish Bank…..This envisages the splitting of the bank into two licensed and regulated credit institutions: an Asset Recover Bank….and a Funding Bank..” contained within Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, DOT: Core Book 35, KCA00001-328.

170. Joint EC Restructuring and Work Out Plan for Anglo & INBS, 31 January 2011, DOF00808-004.

171. The Economic Adjustment Programme for Ireland, February 2011, DOF05089-016.

172. The Economic Adjustment Programme for Ireland, February 2011, DOF05089-016.

173. Michael Fingleton, former CEO, INBS, transcript, INQ00077-019; Michael Walsh, former Chairman, INBS, transcript, INQ00079-044; John Stanley Purcell, former Director & Secretary, INBS, transcript, INQ00078-018.

174. EC Decision on State Aids, 29 June 2011, DOF00817-004.

175. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, DOT: Core Book 35, KCA00001-328.

176. Joint EC Restructuring and Work Out Plan for Anglo & INBS, January 2011, DOF00808-005.

177. EC Decision on State Aids, 29 June 2011, DOF00817-039.

178. Mike Aynsley, former Group CEO, Anglo-IBRC, transcript, INQ00141-008.

179. Pádraig Ó Ríordáin, Partner, Arthur Cox, statement, POR00001-010.

180. Department of Finance submission to the Banking Inquiry, 13 April 2015, DOF07852-004.

181. Pádraig Ó Ríordáin, Partner, Arthur Cox, statement, POR00001-010.

182. Michael Noonan, Minister for Finance, transcript, INQ00102-006.

183. Michael Noonan, Minister for Finance, transcript, INQ00102-005.

184. Michael Noonan, Minister for Finance, transcript, INQ00102-005/006.

185. Special Resolution & Direction relating to IBRC, 6 February 2013, DOF05532-004.

186. IBRC Liquidation – Background Information, 6 November 2013, DOF05670-001.

187. Michael Noonan, Minister for Finance, transcript, INQ00102-006.

188. Source: http://www.irishstatutebook.ie/eli/2013/act/2/enacted/en/html.

189. Department of Finance, Briefing Pack Bank Implementation Group August 2011, DOF07670-005.

190. Department of Finance, Briefing Pack Bank Implementation Group August 2011, DOF07670-005.

191. Department of Finance, Briefing Pack Bank Implementation Group August 2011, DOF07670.

192. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-235.

193. EC Ex-post evaluation of Economic Adjustment Program, PUB00356-048.

194. Central Bank PCAR 2011 Review, PUB00167-033.

195. Central Bank PCAR 2011 Review, PUB00167-034.

196. Now including EBS.

197. PTSB was part of the PCAR/PLAR 2011 exercise, unlike the previous year.

198. Department of Finance report for Banking Inquiry, 13 April 2015, DOF07852-011.

199. Difference between initial requirement for €24billion and final amount of €16.6billion is accounted for by private sector investment in BOI.

200. Referred to as CoCo in the table below.

201. PCAR 2011 Review, PUB00167-005.

202. Department of Finance report for Banking Inquiry, 13 April 2015, DOF07852-004.

203. Department of Finance report for Banking Inquiry, 13 April 2015, DOF07852-004.

204. EC, Ex-post Evaluation of the Economic Adjustment Programme Ireland, 2010-13, PUB00356-055.

205. Central Bank of Ireland: Trends in Business Credit and Deposits Q4 2013: https://www.centralbank.ie/polstats/stats/cmab/Documents/2013q4_ie_trends_in_business_credit_and_deposits.pdf

206. Ajai Chopra, former Deputy Director, IMF, statement, ACH00001-015/016.

207. David Duffy, former CEO, AIB, transcript, INQ00134-007.

208. Central Bank of Ireland: Trends in Business Credit and Deposits Q4 2013: https://www.centralbank.ie/polstats/stats/cmab/Documents/2013q4_ie_trends_in_business_credit_and_deposits.pdf

209. C&AG Report, Progress Report 2010-2012, NAMA00010-019.

210. EC, Ex post Evaluation of the Economic Adjustment Programme Ireland, 2010-2013, PUB00356-015.

211. Brian Cowen, former Taoiseach and Minister for Finance, transcript, INQ00089-118.

212. Residential Property Price Index, Central Statistics Office.

213. Based on CSO data – CSO does not provide absolute numbers but instead produces a price index to measure the change.

214. Dirk Schoenmaker, Stabilising and Healing the Irish Banking System: Policy Lessons, PUB00371.

215. Dirk Schoenmaker, Stabilising and Healing the Irish Banking System: Policy Lessons, PUB00371-015. The witnesses who appeared on behalf of the banks were not questioned in relation to the extent of the debt remaining after loans were transferred to NAMA.

216. Dirk Schoenmaker, Stabilising and Healing the Irish Banking System: Policy Lessons, PUB00371-025.

217. Dirk Schoenmaker, Stabilising and Healing the Irish Banking System: Policy Lessons, PUB00371-027.

218. Peter Bacon, Economist, transcript, PUB00334-020.

219. See Glossary of Terms.

220. See Glossary of Terms.

221. Recent bond issuance by the Irish “Pillar Banks”, 20 November 2013, PUB00413-001.

222. Recent bond issuance by the Irish “Pillar Banks”, 20 November 2013, PUB00413-001.

223. Recent bond issuance by the Irish “Pillar Banks”, 20 November 2013, PUB00413-001.

224. Recent bond issuance by the Irish “Pillar Banks”, 20 November 2013, PUB00413-001.

225. PQ on Bank Recapitalisation, 3 October 2013, DOF00651-001.

226. PQ on Bank Recapitalisation, 3 October 2013, DOF00651-001.

227. Michael Noonan, Minister for Finance, transcript, INQ00102-060.

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

JULY 2007

The Formation of the Domestic Standing Group

The establishment of the Domestic Standing Group (DSG) in July 2007 by a Memorandum of Understanding between the Central Bank, the Financial Regulator and the Department of Finance was an EU requirement. Following a recommendation of the Economic and Financial Committee¹ , the EU Financial Services Committee had required that all member states establish an emergency planning and management group in the form of a Domestic Standing Group.² Membership of the DSG was also effectively prescribed by the EU. The 2005 EU Memorandum of Understanding brought the principals from the Central Banks, Bank Supervisors and the Ministries for Finance together as a tripartite group to formulate an EU wide policy on crisis management.³ This was followed by a domestic Memorandum of Understanding in 2007 which formed the Domestic Standing Group (DSG). The signatories to this Memorandum of Understanding were Kevin Cardiff, Second Secretary of the Department of Finance, Liam Barron, Director General (CBFSAI) and Patrick Neary (Financial Regulator).⁴

The primary representatives of each party comprising the DSG were Tom O’Connell (CBFSAI), Con Horan (Financial Regulator), and William Beausang (Department of Finance).⁵

The DSG met on a monthly basis from July 2007 – July 2008 and supplied much of the financial market information from the Central Bank and the Regulator to the Minister and Government during the period covered in this chapter.

AUGUST 2007

NTMA stops Placing Deposits with the Irish Banks

For some time the National Treasury Management Agency (NTMA) had been sceptical of the business models of INBS and Anglo. Michael Somers, who was CEO of the NTMA said:“I always had a concern about Anglo…”⁶ Somers subsequently added in his clarification statement to the Joint Committee⁷ that the Minister for Finance’s guidelines prohibited the NTMA from placing deposits in counterparties with S&P⁸ rating of less that A1, which included INBS.”⁹

The NTMA’s former Director of Finance and Risk, Brendan McDonagh, explained to the Inquiry how the agency was now growing increasingly concerned about the global financial markets:

“By August 2007, the NTMA had made the decision… to stop placing deposits with any bank. The NTMA policy was to move maturing deposits back to the Central Bank of Ireland – we referred to it internally as safe-harbouring deposits.”¹⁰

He also said:

“we had concerns from August 2007 about banks globally, Deputy, because things … strange things were beginning to happen. There was rumour after rumour in the market even about big banks like Wachovia, Wells Fargo, Washington Mutual, Citibank, BNP Paribas, Goldman Sachs … Merrill Lynch … so like, it wasn’t just confined to Ireland.”¹¹

John Corrigan, Chief Executive Officer NTMA, put this in the context of the NTMA’s role:

“the NTMA’s role is … in that space is to fund the Exchequer and to make sure that the Exchequer has sufficient cash to meet its day-to-day requirements. We had a very conservative approach to risk. I don’t think anybody would thank us if the money which had been garnered through borrowing or through tax receipts had been lost through some sort of placement with, with, dodgy counterparts.”¹²

When asked by the Joint Committee“Was it the first time that the NTMA had made that kind of decision in relation to putting deposit in the Irish banks?”¹³ , John Corrigan responded:“To the best of my knowledge, yes.”¹⁴

Brendan McDonagh stated:

“There could have been no ambiguity at any time during this period on the part of senior Department of Finance officials or the Minister for Finance as to the NTMA’s position on global bank risk from August 2007 and our reluctance, given the increasing dislocation of financial markets, to put at risk any State money under our management by placing it on deposit with domestic or international financial institutions unless we were directed to do so by the Minister for Finance.”¹⁵

31 August 2007 – DSG Update

Despite the fact that the NTMA,“who had a strong market-facing role, had very fundamental concerns about the stability of the financial system”¹⁶ the Central Bank and Financial Regulator reported to the DSG that the“domestic economy and banking system remained sound and there is no cause for alarm.”¹⁷ They told the group that they were not aware of any liquidity difficulties for Irish banks.¹⁸ “However if there is a long term credit crunch globally this could impact on economic developments.”¹⁹ For now,“This is not an Irish problem, but a global one. The Regulator has put a lot of effort into minimising any reputational damage for Ireland, but there are risks there also.”

SEPTEMBER 2007

The September IMF Article IV Staff Report was largely positive about the fundamentals of the Irish economy, though it noted weaknesses both in the construction sector and the exposure to the banks. It said:

“Economic performance remains impressive but noted that in recent years economic growth had become increasingly reliant on house building. It also noted that banks have large exposures to the property market, but stress tests suggest that cushions are adequate to cover a range of shocks.”²⁰

7 September 2007

The Irish Times carried an article on 7 September 2007 entitled ‘Banking on Very Shaky Foundations’ written by Professor Morgan Kelly.²¹

12 September 2007 – Northern Rock

Northern Rock, a UK bank, sought and received liquidity support from the Bank of England due to a problem in the credit market. This led to panic among depositors“in the first run on a British bank in more than a century.”²² In Ireland“there were queues on the street outside Northern Rock when it got into difficulty.”²³

21 September 2007 – DSG Update

Less than a fortnight later, the Central Bank was reporting to the DSG that the Northern Rock crisis was still generating a significant negative effect on the market, but that there were tentative improvements.²⁴ However, some“significant Irish financial institutions” needed to renew substantial funding in early 2008. Access to ECB funding was regarded as a very important safeguard for Irish banks.²⁵

OCTOBER 2007

On 2 October 2007 a preparatory note for the DSG meeting raised several issues that needed attention.²⁶ According to the note, the Department was starting to consider what legal powers might be needed by the Minister for Finance to provide assistance to a financial institution in distress. Included in these options was nationalisation.²⁷ The legal position regarding“the scope for the NTMA to place a deposit with a bank” was also highlighted for examination. So too was the Deposit Guarantee Scheme, which protects depositors, following the UK government’s decision to provide a temporary 100% guarantee of deposits with Northern Rock.

It is worth pointing out that three months after the DSG was formed and a month after Northern Rock, there was still a sense that the“roles and responsibilities of the Department, the Central Bank, and the Financial Regulator” needed clarification.²⁸

9 October 2007 – DSG Update

In its October update to the DSG the CBFSAI reported that Irish banks had a“good name” although it noted that there was also a perception internationally that Irish banks were exposed to the property sector.²⁹ They reported a“…return to more normal financial markets conditions…”³⁰ But even with improved liquidity conditions, a tightening of lending behaviour was prevalent and the retail lending rates would remain under upward pressure“for as long as disturbed credit market conditions persist.”³¹ The report also noted that while market funding was available, it was increasingly over a shorter term. Irish bank shares continued to fall, having lost between 30% and 40% of their value since the start of 2007. This update also marked the first time in the period that the issue of Contracts for Difference (CFDs) was brought to the attention of the Department. Significant losses to high‘net worth’ individuals in relation to CFDs were highlighted.³²

NOVEMBER 2007

13 November 2007

The pressures were building, as evidenced by an email from IL&P to the Regulator on the 13 November confirming the raising of €2 billion from the ECB but noting:“The level of pressure on Irish Institutions continues at a pace in both the Credit and Equity Markets.” The email also passed on some feedback IL&P had received from their major shareholders:“…One of our Canadian Holders said that she had been informed out of London that we in IL&P are the next Northern Rock, so once again, we are on red alert.”³³

DSG Update

An information note, known as an ‘Aide Memoire’ for Government, was sent to Brian Cowen, former Minister for Finance, on 13 November 2007. The subject of this information note was ‘Financial Market Developments’. It summarised the information given by the DSG to the Central Bank and Regulator and it also provided a look ahead to the Central Bank’s Financial Stability Report.³⁴

The DSG update repeated concerns on the Irish economy and the exposure of banks to the property sector with bank share prices reported as being“depressed.”³⁵ It also claimed that despite improvements in credit market conditions, the financial markets remained volatile. However it noted that:“To date, these developments have not had any serious effects on the Irish domestic financial system…And stressed that the “Irish institutions are financially sound with good quality assets and are well regulated.”³⁶

The update also included an overall assessment of the 2007 Financial Stability Report. It said that financial stability risks had increased on previous years, but that the upward momentum of residential property prices had slowed and house prices had lowered by 3.5% on a year to date basis. The assessment concluded that:“The underlying fundamentals of the residential market continue to appear strong. The central scenario is, therefore, for a soft, rather than a hard, landing.”³⁷

16 November 2007 – DSG Update

The Central Bank produced a paper for another DSG meeting in November. In the month that had passed since the last update, Irish bank share prices had continued to fall and had now lost between 30% and 50% of their value. According to the report the quality of assets secured on speculative development land was a particular focus of attention for financial institutions.

The update also provided more detail on negative sentiment on the interbank market toward Irish banks’ exposure to the property markets:

“There are some indications that lrish banks are being subject to more refusals in the unsecured interbank market on account of negative international sentiment regarding the lrish banking sector and the Irish property market generally… there is a general discount in the value of lrish banks as there is a perception internationally that they are exposed to the property markets…”³⁸

Two items were highlighted in the update. One was that“If the present market conditions persist, as expected, into 2008 there is an increased risk of liquidity issues arising for Irish banks”. The other was the importance of“highlighting the inherent strengths of the Irish financial system and economy.”³⁹

The Central Bank and Financial Regulator reported to the DSG that they were continuing to monitor the position closely:

“The Central Bank and Financial Regulator continue to liaise with the Irish banks closely at CEO level and are monitoring the position very closely. The banks in turn are working intensively to implement contingency arrangements to meet their liquidity requirements.”⁴⁰

Legislation

Meanwhile, work was continuing to prepare legislation to provide the Minister for Finance with the necessary legal options to support a distressed financial institution, including nationalisation. This was confirmed by former Attorney General Paul Gallagher in his evidence:

“Between 30 November 2007 and 29 September 2008, the Department was in constant contact with my office, looking at possibilities, identifying different options.”⁴¹

However bank resolution legislation, which would allow for the winding up of a financial institution and which would have given another legislative option on the night of the Guarantee, had not been requested from the Attorney General or the Office of the Attorney General.

DECEMBER 2007

The NTMA Under Pressure

Since the NTMA’s decision to move its deposits away from the domestic banks, it had come under pressure to reverse that decision. Michael Somers said:

“the pressure then continued on us at every meeting we went to …we were only asked along because I think we had the money and they wanted us to part with …”

“We had a meeting of the NTMA advisory committee, I think it was about 6 December, when the pressure was extreme. And I went off and I said I’d have to get legal advice on this as to where do I stand. Because, I mean, the Minister for Finance was my boss and I wanted to see, well, what do I do? Because the legal power that we were using was to borrow money for the Exchequer. It wasn’t to borrow money to bail out the banks … We were borrowing money to fund the Exchequer. Here we were being pushed to use that money, which was there to pay the bills at the end of the week, to instead prop up the banks, to provide liquidity for the banks.”⁴²

Michael Somers then sought a legal opinion as to how to proceed and Brendan McDonagh explained that:

“and the senior counsel’s opinion came back, said, ‘Legislation’s very clear under the 1990 Act. If the Minister issues you a direction under section 4(4), you are obliged to comply with the Minister’s direction.’”⁴³

Brendan McDonagh explained in his evidence that the NTMA was invited to attend a DSG meeting on 12 December 2007. He said:

“The NTMA was invited to the latter stages of a domestic standing group meeting with the Department of Finance and the Central Bank to discuss the placing of deposits within existing credit limits with; Bank of Ireland, €200 million; AIB, €200 million; Irish Life and Permanent, €50 million; and EBS, €50 million. An existing deposit of €40 million with Anglo Irish Bank, with a maturity of one year, had been in place before the NTMA made its decision to cease placing the deposits with the banks and to place them instead with the Central Bank. The NTMA’s position at this meeting which took place I believe on 12 December 2007, was that in the absence of a written direction from the Minister, we did not intend reversing this policy of placing bank deposits in financial institutions. We made the point at the meeting that, if anything, the risks attaching to the banking system, internationally as well as domestically, had become even more pronounced since the original August 2007 decision.”⁴⁴

“Following that meeting, the Minister for Finance at the time, Brian Cowen, wrote to the chief executive of the NTMA, Michael Somers, on 19 December 2007, directing the NTMA to place deposits with the four main banks, namely, Bank of Ireland, AIB, Irish Life and Permanent and EBS.”⁴⁵

The position adopted by Brian Cowen was contrary to the position of the NTMA.

This direction was clarified to the NTMA on 21 December 2007.⁴⁶ Brian Cowen said in evidence:

“the NTMA chief executive, who … they’re very strong on their independence, they wanted a written letter that they were to continue providing funds into the Anglo Irish Bank. In terms of deposits, overnight deposits, it was felt that, if it were to emerge that they weren’t doing that, that that might reflect badly on the banking system generally. So that direction was written for by me in January of 2008 for a six-month period.”⁴⁷

He also said:

“There was a letter of instruction, as I understand, because they said they required a direction on that and they were always very mindful of their own independence.”⁴⁸

Crisis Simulation

The EU requirement⁴⁹ to run a crisis simulation exercise was met in December 2007. It was the first of its type to include members of the DSG, and it was run over the course of an afternoon. The simulation focused on a distressed single borrower.⁵⁰ Feedback sought by the Central Bank from the exercise was largely positive; it was well planned organised and effectively executed.⁵¹ Though the procedures in the crisis management manual used by the Central Bank known as the‘Black Book’, were described in the Honohan Report as “…excessively cumbersome…”,⁵² evidence to the Joint Committee from Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, was that the exercise was well formulated:

“…really well constructed in the sense of a lot of thought went into it over a period of weeks or months by the people concerned and there was a real attempt to make this a realistic thing that could happen…”⁵³

As to whether or not this was a“realistic thing that could happen,” Con Horan, former Prudential Director of the Financial Regulator, said:

“Being absolutely frank, I’ve been involved in these at a European level and I’ve been involved in them at a domestic level. And they are largely simulations around a small group of facts that are conducted over an afternoon or a full day with papers prepared and people able to read documents in advance of that. So, the reality is they do … you do learn lessons and you do pick up issues in relation to how it would happen in reality, but, in effect, having experienced crises in Ireland and in Europe in recent years, the reality is always an awful lot more complicated and different.”⁵⁴

JANUARY 2008

At the end of 2007 and into the start of 2008 the “big four”⁵⁵ auditing firms were becoming increasingly concerned about the stability of the banking sector and the consequences for their clients as going concerns. The four firms met with the Financial Regulator in early 2008. The purpose was to ensure a full understanding among the authorities of the risks now evident in the financial system, and to seek reassurance of the actions being taken by the Government, Regulator and Central Bank to address these risks.⁵⁶

Paul Dobey, of KPMG, the auditor for AIB, said:

“We were concerned, generally, as a firm, in relation to the matters … the financial stability matters in 2007, and in early … on 10 January 2008 we met with the Financial Regulator… to have a discussion about the issues that the … the issues that were arising in the environment at the time.”⁵⁷

“all the four firms went in and … and talked to the … to the regulator.”⁵⁸

In relation to further meetings held in late 2008 and early 2009, he said:

“and it wasn’t done lightly. We had huge consultations in our firm… It was unprecedented”⁵⁹

“We spoke to the Central Bank because we wanted to understand ELA and… what dialogue was going on between the Central Bank and the euro system… and we also spoke to the Department in relation to capital. Now, when we came along … and we, therefore, concluded that those banks were going concerns.”⁶⁰

“…we also had a responsibility to assess whether the going concern based on preparation of financial statements was appropriate. It was in the context of the going concern based on the financial statements which was a future looking thing and maybe that’s not keeping the score, right? That’s assessing what the score might be at the end of the game, right? And we’re only at half-time. We had to go and make an assessment and get assurances from the system, if I put it that way, the Department, the Regulator, the Central Bank, around the going concern basis of preparation.”⁶¹

John McDonnell, Partner of PwC described the meeting in the following terms:

“the meeting that the accounting firms had with the regulator in the context of accounting for financial instruments as a result of the liquidity crisis. And what happened at the time was that we had the subprime crisis in late 2007 and, as a result of that, there was a number of issues around how one would value securitisation vehicles, but, in particular, the credit aspect of financial … of financial instruments.”⁶²

16 January 2008 – DSG Update

A further ‘Memorandum for the Information of Government’ was submitted to Brian Cowen.⁶³ As with the previous updates for Government, the memorandum was based on an assessment by the Central Bank and Financial Regulator presented to the DSG on 11 January 2008. It noted that a massive coordinated intervention by major central banks had provided liquidity for banks to meet their year-end financial needs. However markets were expected to remain disrupted for some time with reports of financial institutions estimating eventual losses ranging from €100 billion to €275 billion and major international banks seeking balance sheet investment from Middle Eastern and Asian investors. The memorandum also noted that the macroeconomic climate was a concern due to poor economic growth globally and the risk of a US recession.

The Memorandum also noted that some improvements in the market had allowed Irish banks to access their required liquidity but the maturity of funding continued to shorten, thereby increasing the pressure over time. There was an improvement in Ireland’s rating by Fitch, however negative sentiment remained, given concerns regarding the property market, and the share prices of Irish banks continued to fall.⁶⁴

Meanwhile, the DSG was reviewing its financial stability planning. Apart from the crisis simulation exercise, a review of the existing Deposit Guarantee Scheme was still being considered in light of the Northern Rock event. The memorandum also noted that the DSG was continuing to examine the powers available to the CBFSAI and the Minister to respond to a Northern Rock style event in Ireland.⁶⁵

The assessment in the Memorandum for the Information of the Government concluded:

“It is important to emphasis that the Irish banking system is strong, liquid and well capitalised. Notwithstanding the current turbulence, the Irish banks are accessing their required liquidity…”⁶⁶

There was also a note that the next two big hurdles were the rollover of long-term funding arrangements early in the year and the publication of audited accounts. Highlighted for particular attention were“fears in the market that a recession in the US could have a significant impact on financial markets globally.” The memorandum concluded that the Financial Regulator and the DSG were monitoring the situation closely.

Scoping Paper

In January the Department of Finance drafted a confidential 22 page document titled“Financial Stability Issues – Scoping paper”⁶⁷ . The Scoping Paper sought to identify:

“…the options available to the Irish Authorities in the case of a systemic threat to financial stability, as well as consider any issues regarding the structures currently in place to oversee financial stability planning arrangements and also to manage a financial crisis”⁶⁸

William Beausang, former Assistant Secretary Department of Finance, was the originator of the project and he described it as an attempt to:“try to develop an approach where there would be more up-to-date or more relevant information available to the authorities at the point that intervention might need to be taken.”⁶⁹

The paper was drafted as a manual for the management of a financial crisis and detailed the roles of the Central Bank and the Minister for Finance in such a situation. It also effectively summarised the DSG discussions from the previous four months on the legal options available to the Minister, the Central Bank and the Regulator in managing a financial crisis.

Contained within the paper are brief discussions on several key aspects of Financial Regulation. Ideas such as:

• Constructive Ambiguity: “A policy of constructive ambiguity towards financial stability planning involves not sharing full information about public authorities’ likely actions in a financial crisis, in order to minimise moral hazard;” ⁷⁰
• Emergency Liquidity Assistance (ELA): “The view of the CBFSAI is that the requirement for the ELA provision to an Irish bank would signify the existence of a serious threat to the long-term sustainability of the financial institution in question because of the ‘stigma’ that would attach to it. It is important to highlight, therefore, that ELA provision would be an interim measure while urgent consideration was given by all parties to the available options for rescuing the bank;” ⁷¹ and
• Illiquidity and Insolvency: “If a period of illiquidity continues it is likely that an illiquidity institution will move closer to insolvency. In circumstances that liquidity is not freely available, any sustained poorly managed mismatch between the short-term liabilities and the longer-term asset can quickly lead to a situation whereby an institution becomes unable to meet its obligations as they fall due, i.e. it becomes insolvent because of its illiquidity.” ⁷²

Patrick Neary, former Chief Executive IFSRA, said:

“at some stage in 2007, a scoping paper was prepared by the Department of Finance […] and it covered a range of topics, including having a look at a deposit protection scheme, legislation for nationalisation, etc., the tools that might be needed in the event that there was a crisis.”⁷³

Among the tools covered in the Scoping Paper was the use of a government guarantee of a troubled institution’s liabilities to enable it to continue to avail of ELA. The option of nationalisation was also outlined as a temporary measure. Another option was to create a “bad bank”, in other words a State takeover of the part of the bank that it is in difficulty. The paper noted that in a case where a distressed institution is regarded as being systemically important to the economy (i.e. Too Big To Fail) state intervention should be taken on a case by case basis.⁷⁴ It also noted that:“The costs of insolvency should not transfer to the State simply because the institution in question is a bank.”⁷⁵

Under the heading“Scenario 1 – An institution that is illiquid but solvent” the paper said:“Therefore the Minister and Government could quickly find itself in a situation where there was pressure to give assurances that the State was prepared to support the bank in difficulty or provide guarantees to its depositors. Other guarantees which the Minister might consider giving included guarantee to banks regarding interbank lending to pre-empt overall withdrawal of market liquidity….”⁷⁶

In their input into the Scoping Paper the Central Bank and Financial Regulator said that a reference to nationalisation should be included as an additional tool in crisis management. They also said that the issuing of guarantees appeared understated and needed sharper focus, that a letter of comfort (a written assurance as opposed to a full guarantee) from the Minister would not be sufficient to cover the risk to the CBFSAI and that Central Bank could not act on a promise of a guarantee as it was prohibited from lending to insolvent institutions.⁷⁷ This last aspect was confirmed by Tony Grimes who said:“Well, it’s absolutely clear that if the institution is insolvent the Central Bank could not lend without a formal guarantee of the Government.”⁷⁸

John Hurley, former Governor, Central Bank, said:“I think there was an adjustment made which was “Look, a broad guarantee might have to be considered in this systemic situation.”⁷⁹

The input from the Central Bank and Financial Regulator also stated that it was likely to be very difficult to determine the solvency position of an institution. The response paper discussed the scenario in which it was unclear if an institution was insolvent or illiquid. It concluded that the risk involved in refusing to lend to a solvent institution was potentially much more serious than lending to an insolvent one as it may drive a sound bank into liquidation and insolvency.⁸⁰ This input was reflected in the Scoping Paper.

However, despite this level of input, work on the paper did not progress. The paper itself, as seen by the Committee, is an unfinished draft. In his opening statement, William Beausang said work never progressed because of:“…important differences in emphasis with the Central Bank’s assessment, as reflected in the Central Bank’s comments on the Department’s scoping paper, and its own paper on resolution options circulated in June 2008.”⁸¹

The paper was presented to the DSG for observations in January 2008, but saw limited attention outside of that. William Beausang subsequently provided a written statement which stated that:

“Key elements of the Department’s assessment and conclusions set out in the Scoping Paper were not shared by the CBFSAI. Consequently, no agreement was reached at the DSG on the Scoping Paper and it was not submitted to the Minister nor the Secretary-General of the Department of Finance….My recollection is that the work would have been advised to the Head of Banking Division.”

When asked if he had seen a copy of the Scoping Paper, Brian Cowen said:“Mr. Cardiff would have been the guy, my point man, on that.”⁸²

Brian Cowen was asked if he had seen the Paper before. He said he had.⁸³ When then asked when he first saw the Scoping Paper, Brian Cowen said:“When did I see it first? It was only around the time it was done up, I presume.”⁸⁴

Kevin Cardiff was asked why, given the concerns laid out in the Scoping Paper, nobody went in to examine the banks more closely. He replied:

“…this was a failure. There, there ought to have been better information… And, we believed … were led to believe that the regulator had a good picture of the banks under its remit, that reasonable loan loss stress testing had been done, that the banks were regarded as solvent, resilient, capable of withstanding significant shocks and we accepted that.”⁸⁵

FEBRUARY 2008

8 February 2008 – DSG Update

As well as a CBFSAI assessment of financial markets; items for discussion at the February meeting of the Domestic Standing Group included a review of the Deposit Guarantee Scheme, noting that it was coming up in Parliamentary Questions and it was“important that we are in a position to, at a minimum, state that the issues raised are being examined.”⁸⁶

The CBFSAI assessment⁸⁷ started by stating that the Irish banks were still able to access the liquidity they required. However negative sentiment towards Irish banks by international investment banks had resulted in Irish bank share prices remaining low. The assessment noted that there had been some stress testing of residential mortgages in the residential sector but no major issues were highlighted.

When it came to commercial property, the Central Bank was more concerned. The worry was that problems in the sector in the US and the UK were likely to have an impact in Ireland“where difficulties in the commercial property sector are likely to arise during this year.”⁸⁸ Specifically, defaults in the commercial property sector may arise in loans with moratorium⁸⁹ or bullet repayments,⁹⁰ where no payments are made until developments are completed. If the value of the completed development turned out at less than the required repayment, it would lead to defaults. But the report noted that the current position was relatively strong, with low vacancy rates that should help reduce the impact of future problems. The CBFSAI concluded that section of the update by saying:

“The Irish banks are generally happy with the “big players” in property developments. There are some concerns about the next tier of developers e.g. small builders who have completed a development and cannot sell it – and the banks are watching these types of customers early.”⁹¹

In February 2008 the Department of Finance also prepared a presentation entitled“Overview of Financial Stability Resolutions Issues” drawn in part from the Scoping Paper and in the midst of that presentation the following text was highlighted:

“As a matter of public policy to protect the interests of taxpayers any requirement to provide open-ended/legally binding State guarantees which would expose the Exchequer to the risk of very significant costs are not regarded as part of the toolkit for successful crisis management and resolution.”⁹²

When asked how it came about that a legally binding State guarantee could not be part of the tool kit in February and yet one could be introduced September, John Hurley said:

“this situation changed absolutely dramatically within a short space of time and the options for the Government were quite limited and in the circumstances of the change.”⁹³

David Doyle, former Secretary General in the Department of Finance, said:

“In relation to that particular statement that you have there in that presentation – that State guarantees are not part of the toolkit – that was the view, that State guarantees should not be part of the toolkit … Now, by the time September arrived, you had the international financial meltdown taking place; you had Bradford and Bingley being nationalised; you had German banks being nationalised; you had Lehman’s being let go to the wall; so towards the end of that month, the view down in Dame Street was that the financial markets had become so crisis bound that, as a last resort, a guarantee would have to be considered. That was the view that started to emerge the week before this down in Dame Street, because of the huge flows of liquidity and what was going on internationally, that it would have to be considered.”⁹⁴

MARCH 2008

10 March 2008

The Domestic Standing Group received an update on financial market conditions in advance of a Government meeting on 11 March 2008. The four key points of this CBFSAI update were:

• Market conditions had worsened; there was a perception that these difficulties would continue to persist for a significant period of time;
• Market sentiment towards Ireland was negative, based upon the Irish banks’ level of exposure to the property sector and a perceived likelihood of defaults due to the worsening economic situation;
• Irish banks were accessing their required liquidity, but it had become increasingly difficult for them to access any longer term funding which left them more vulnerable to shocks in the market. Long term funding was becoming increasingly difficult to access and was only being made available for banks rated AA or AAA – Irish banks were generally rated A. Some Irish banks were falling back on ECB funding at that time; and
• Property market conditions remained difficult; no new developments were being undertaken and the banks were increasing pressure on developers to raise funds, either by renting property or selling it at a reduced price, to begin to repay outstanding loans. The report says:“If builders begin to default, and the banks are unable to refinance their exposures, this will have significant consequences, for the banks in terms of profits and credit provisions, as well as access to funding, and will have further negative impact on sentiment regarding the Irish market.”⁹⁵

The conclusion to the report was that conditions at that time were returning to those experienced at the end of 2007 – the worst point of the turmoil thus far. The key issue at that point was the“increasing realisation that markets are not going to improve soon and may even deteriorate further.”⁹⁶

St. Patrick’s Day 2008

On St. Patrick’s Day Anglo shares lost 15% of their value from the previous day close, with a maximum fall of 22% at one point that morning. That same day, AIB closed 6.1% down, IL&P closed 4.7% down and BOI closed 4.7% down.⁹⁷ A number of other factors unique to the Anglo share decline were identified by the Financial Regulator in its paper investigating trading in Anglo shares dated October 2008.⁹⁸

Simon Carswell, Irish Times journalist said:

“…after what is known as the St. Patrick’s Day massacre in 2008, when there was short-selling in two of the Irish banks in particular, but mostly in Anglo Irish Bank, a strong statement of confidence issued from the Central Bank and the Financial Regulator’s office to counter that negative market comment.”⁹⁹

Fintan Drury, Non-Executive Director, Anglo Irish Bank, said:

“a few days after St. Patrick’s Day 2008. I received a phone call from Seán Fitzpatrick, the chairman of the bank, asking me if he thought that Brian Cowen would take a call from him.”¹⁰⁰

Seán Fitzpatrick phoned Brian Cowen who was in Vietnam on Ministerial (St. Patrick’s Day) business. Brian Cowen explained:

“The purpose of his phone call was to say to me that they … that this had happened in relation to the share price and that they believed that there was a position being taken by Mr. Quinn in relation to their share and that’s … that the market had this information was out in the markets or whatever. And I said that these are regulatory matters, these are matters he needed to refer down to the Central Bank and to the Financial Regulator and have it dealt with there.”¹⁰¹

Brian Cowen was asked if he had heard of Seán Quinn’s¹⁰² exposure to contracts for difference in Anglo:“I think before I had … before I left for that trip that time around St. Patrick’s Day.”¹⁰³

Shortly after his return to Ireland, Brian Cowen had a meeting with Bertie Ahern at his home. Bertie Ahern said:

“Obviously, market sentiment to Anglo, in particular, internationally was growing. And that was a big concern … I think he was coming back from the airport and came in to me. But we wouldn’t normally … again, I mean, he was concerned about the issue and I was concerned about the issue. We’d all been away for St. Patrick’s Day and he updated me on it.”¹⁰⁴

In March 2008 John Hurley and Pat Neary began approaching individual banks to encourage them to place deposits with each other in what was referred to informally by the Joint Committee in the public hearings as the “Green Jersey” agenda. When asked about it, John Hurley said:

“There would have been a discussion when we met some of the major banks about the potential for their assisting smaller banks that came in to difficulty. That would have happened and you … you would expect in a banking system that if a small bank was in difficulty, that the first port of call would be the main banks because private sector solutions would be the main vehicle at that stage.”¹⁰⁵

According to Patrick Neary:

“we did have a series of meetings essentially with the larger banks to see would they be prepared. And, in principle, yes, they felt there was merit in it but at the end of the day they were saying, ‘Well, look, if we’re going to commit to this we need them to have some form of backing from the Central Bank.’ So it kind of … it, it never really progressed.”¹⁰⁶

Tony Grimes, former Director General, Central Bank, told us:

“it wasn’t really a policy decision, it was more something that you know emerged in the course of the frequent meetings that we would have had with all the individual institutions. And in the context of the exploration by them, and us, of what measures might be put … be put in place to make the liquidity situation somewhat better.”¹⁰⁷

From the evidence presented to the Joint Committee, it is unclear if the DSG or the Government were made aware that the Regulator and Central Bank were pursuing this strategy.

APRIL 2008

OECD Economic Survey of Ireland

In April the OECD published their Economic Survey of Ireland.¹⁰⁸ In the introduction, it said that although productivity growth had slowed in recent years, the economic fundamentals remained strong.

It also said that housing investment had fallen sharply, but that the downswing in activity could soon be over. However, there was also a risk, highlighted in the report, that the slowdown in the housing market could be sharper and more protracted, with greater implications for employment and the wider economy.

On the financial sector it said that the CBFSAI had moved quickly on the global liquidity squeeze. The OECD report stated the Irish banks were highly profitable and well-capitalised, but also that it was important to be prepared to deal with downside risks.

10 April 2008

Brendan McDonagh told us:

“The NTMA had in fact been engaged in discussions with the Department of Finance from April 2008 about the provision of emergency liquidity in circumstances where the Irish banks could not meet their funding requirements from the wholesale markets. This was separate to the engagement we’d been having with the Department of Finance from the summer of 2007 in relation to the NTMA placement of bank deposits …”¹⁰⁹

21 April 2008 – DSG Update

A briefing note outlining financial market developments was prepared for the Tánaiste for a meeting of Government the next day. The note was based on the Central Bank‘s assessment of financial market developments. The key points were:

• There had been a “very negative shift” in US sentiment towards Irish banks. As before this was attributed to perceptions of the Irish economy and exposure to the property sector. This was important as the US was an important source of funding for Irish banks at this time when they were finding it difficult to access funding in Europe. ¹¹⁰
• Confirmation that Irish banks were solvent, well capitalised with strong loan books.
• The Central Bank suggested that the Government continue to focus on the fundamental strengths of the Irish economy.
• An update on the Bank of England’s move to help back access funding.
• A suggestion by the Central Bank that continued access by Irish banks to ECB funding was being seen as a negative signal to the markets: “Relying on the ECB for funding could be seen as a sign of stress in the current climate.” ¹¹¹

Although it described the deteriorating market conditions, the continued access to ECB funding, the difficulty of accessing funds in Europe and the growing prospect of difficulty in the US, the briefing note highlighted that:

“The CBFSAI and industry are continuing to highlight the strength of the Irish banking sector and the quality of the financial regulatory system, Governmental and Ministerial comment on the fundamental strengths of the Irish economy will continue to be important.”¹¹²

Legislation

On the 24 April 2008 an email was also sent between officials in the Department of Finance on the potential for amending the State Guarantee Act 1954 to allow the Minister to provide a guarantee to a financial institution should it be required.¹¹³ It concluded that it may be easier and clearer to draft legislation.

Whilst giving evidence to the Joint Committee, Brian Cowen was asked“when is the first time that you became aware that there was a need to prepare legislation that would allow for the potential State guarantee of the institutions?”¹¹⁴ In response, Cowen answered“April-May.”¹¹⁵

24 April 2008

Fintan Drury described to the Joint Committee how he had helped arrange for Brian Cowen to address a dinner event for the board of Anglo:

“I had undertaken to ask him to do the event and, indeed, the records in the Department should show that he had at least … on at least two previous occasions been diaried to meet with us, but other priorities had got in his way. The event was completely unremarkable. I recollect a general introduction by Seán Fitzpatrick, as chairman, and then a broad discussion about all things other than banking…”¹¹⁶

Brian Cowen was asked about the meeting and whether he had brought a briefing document¹¹⁷ prepared that day on“banking sector issues” with him. He said that he did not bring any briefing with him to the event.¹¹⁸ He was also asked if David Drumm had spoken to him, to request that the NTMA place deposits in the bank:

“I think what he’s referring to there is a conversation he says he had with me, and I was sort of saying “Well is that not done already”, because I was thinking back to this question of the letter that was sent out in January, was that not going ahead or was that not happening. And I obviously misunderstood, because that’s what I thought he was referring to. And that was it, essentially. Sin é.”¹¹⁹

MAY 2008

Three weeks later Brian Cowen was Taoiseach and the new Minister for Finance, Brian Lenihan, received a briefing from his officials. The briefing included a breakdown of the 6 main financial institutions’ most recent Annual Reports:

• AIB had posted profits of €2.5 billion, had a loan book of €128.76 billion (€46.41 billion in property and construction loans), and was noted as being exposed to the property market – especially commercial.
• Bank of Ireland had posted profits of €1.9658 billion, had a loan book of €125 billion (€26.382 in property and construction loans), and was also noted as being exposed to the Irish and UK property market.
• Anglo posted profits of €1.243 billion and had a loan book of €64.949 billion, 63% of its funding base was in deposits (a significant proportion of which were in larger, more mobile accounts), and the bank was exposed to the commercial property market. The report also said there was a
  “Risk of short selling of shares by hedge funds- 12.78% of shares reported to be held on loan” and the
  “Financial Regulator currently investigating short selling of shares in March when shares prices fell 15% in one day.” ¹²⁰
• The key risk for IL&P was that it was currently accessing 20% of its funding from the ECB with no sign of improvement in the near future. It too was exposed to the Irish property market and was having difficulty accessing funding from commercial sources as a result. It had posted profits of €448 million but had a loan book of €39.2 billion.
• INBS had been seeking a buyer to enable it to convert from a building society to a bank, but with little interest from the international market. It had recently been downgraded by Fitch and was having difficulty accessing funding from commercial sources.
• EBS had posted profits of €66.6 million, had a loan book of €15.88 billion, was 52% funded from customer deposits and was also having difficulty accessing funding from commercial sources.

Elsewhere the Department of Finance was warning of a possible issue on the income side of the Exchequer as the“end-April taxes were €736 million below profile – 45% of this shortfall is due to the poor performance of Capital Gains Tax. While it is very early to call an end-year position, we are now factoring in a €2 billion shortfall in taxes but have not publicised this as yet.” It further stated that in overall terms the general government balance was likely to be around -2.2% of GDP and that“This represents a significant worsening of the position for this year with serious consequential impacts for next year.”¹²¹

Around the same time, the Central Bank contact with the banks had moved to daily calls.¹²² When asked, Mary Burke, then Head of Banking Supervision at the Financial Regulator, what she remembered of the period from April to June, she replied:

“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.”¹²³

In May the ESRI published its Mid-Term Review. John FitzGerald said in his written statement:

‘This report came out at the beginning of the “great recession”. It had an upbeat tone which, as subsequent events have shown, was wholly unwarranted. This was based on the assumption, adopted internationally, that the credit squeeze effects would be short lived, with world growth back at trend by 2010. There was a scenario on a credit crunch. However, even this shock was much too mild. The Review completely missed the possibility of a financial collapse’.¹²⁴

JUNE 2008

With financial market conditions continuing to deteriorate throughout 2008, work continued on a draft Bill relating to the proposed powers of intervention. As of 6 June 2008, documentation shows that nationalisation legislation was being prepared.¹²⁵ According to the evidence of Paul Gallagher, the focus shifted in June to nationalisation of the banks and to the provision of a bank guarantee:

“I believe that it was on 16 June 2008 that there was a particular emphasis on producing the necessary legislation that would provide legal options that included… nationalisation legislation and also the provision of a legislative basis for any guarantee that might have to be offered in respect of any institution.”¹²⁶

“what happened on 16 June was they said go ahead and draft. It was still focused on a particular bank because that’s what you would do with nationalisation legislation.”¹²⁷

Kevin Cardiff recalled:

“In the first half of 2008, there was absolutely no serious consideration, which I can now recall, being given in CB/FR, DoF or NTMA to a broad guarantee in respect of a wide range of institutions for a wide range of liabilities, as a discrete policy option, although of course, as I have just noted, there was ongoing work on legislative opt ions which included consideration of how to enable Government to give guarantees in appropriate cases. But at various points in time it seems that a broad Government guarantee did feature in discussions in other quarters. The Governor of the Central Bank, I believe, received approaches in March/April 2008 suggesting that the Government should announce a broad guarantee – though it is possible that what was in mind at this time was a general political undertaking rather than a formal guarantee.”¹²⁸

17 June 2008

“On 17 June 2008, the new Minister for Finance, Mr. Lenihan, in correspondence to Dr. Somers, directed the roll-over of Bank of Ireland and AIB deposits on an unsecured basis and an increase in deposit sizes with Irish Life and Permanent from €50 million to €250 million and EBS from €40 million to €100 million.”¹²⁹

“The NTMA chief executive also advised that the NTMA did not intend to renew a one-year unsecured deposit of €40 million with Anglo Irish Bank which fell due on 8 August 2008, as the deposit was not covered by the Minister’s December 2007 direction… Mr. Cardiff wrote to me on behalf of the Minister directing the NTMA to place a €40 million one-year collateralised deposit with Anglo Irish Bank and to roll over the NTMA’s €200 million deposits with Bank of Ireland and AIB on a six-month collateralised basis.”¹³⁰

NTMA now had a total of €790 million in Irish banks (BOI €200 million, AIB €200 million, IL&P €250 million, EBS €100 million, Anglo €40 million).¹³¹

18 June 2008

Despite providing comprehensive feedback to the Scoping Paper, the Financial Stability Department of the Central Bank and the Banking Supervision Department of the Financial Regulator provided their own Crisis Resolution Options paper in June 2008.¹³²

The Options paper raised a number of concerns regarding nationalisation. It ruled nationalisation out as an option if it would take a long time to enact the legislation or if the announcement of intent to nationalise would be insufficient to stop a run. It also proposed that a bank guarantee would be needed anyway and that the authorities would need to be cognisant of the long term reputational damage to Ireland as a financial centre if an institution were nationalised.¹³³

23 June 2008 – DSG Update

A further briefing note¹³⁴ outlining market developments was prepared for the Government. The key points were:

• Market volatility led to a fall in the share price of Irish banks – on average by 25% since mid-March. This was seen as being due to the further decline in property values.
• Irish banks were seen to be highly exposed to property, with BOI cited as having 70% of its lending tied to“bricks and mortar.”¹³⁵
• Bank of Ireland had successfully issued a €1.2 billion bond, but at a significant premium, reflecting continued negative investor sentiment towards Ireland.
• A number of banks were reported to be on ‘watch’ by rating agencies, the consequence of which would be increased costs in funding, reduced share price and increased outflows of funds. Banks continued to tightly ration lending, the consequences of which are described in the Central Bank’s assessment as follows:“The CBFSAI expects that this continuing tightening in credit availability and cost will likely increase bad debts. The issue of anticipated increase bad debts has already featured in brokers notes/briefing and has received some media comment.” ¹³⁶
• Market knowledge of the exposure of Irish banks to the construction and property sector continued to complicate matters.

The briefing note for the Minister concluded with the following statement:

“Internationally the financial sector is out of favour. While the Irish financial sector should not expect to be immune to this, the widespread perception that Irish banks are very heavily dependent on property lending has exacerbated the position. As property prices continue to fall, the position of Irish banks is vulnerable to further deterioration.”¹³⁷

June 2008

Minutes of the meeting of the Irish Financial Services Regulatory Authority¹³⁸ recorded that senior management of the Financial Regulator reported on the discussions of the DSG on legislative issues and in that regard, on the preparation of a pro forma draft bill on nationalisation. The Authority asked for a further report at the next meeting on legal options for shortening the timetable of mergers.

JULY 2008

In July 2008 Brian Lenihan, then Minister for Finance, wrote to the Attorney General. He marked the letter‘secret.’ He asked the Attorney General to waive the normal requirement of obtaining the Government’s authority prior to referring the drafting of legislation to the Office of Parliamentary Counsel. This waiver was sought on the basis of the exceptional sensitivity and urgent nature of the proposed legislation.¹³⁹

“I write seeking your agreement for the priority drafting of primary legislation proposals relating to the maintenance of financial stability… given the exceptional sensitivity of the matters concerned and the urgent need to ensure an appropriate level of preparedness for a financial stability event, I would ask for your agreement that the normal conventions are set aside on this occasion.”¹⁴⁰

7 July 2008 – Memo for Government

On 7 July 2008, the Office of the Minister for Finance sent a secret Memorandum for Government. The memorandum said that the Live Register had increased from 201,800 at end May to 220,800 at end June. Budget estimates had been based on a figure of 170,000 so this increase would add“some €500 million to expenditure in 2008”¹⁴¹ It was noted that there were also significant spending pressures in the HSE. As a result of these two factors“combined with the tax shortfall of at least €3 billion”¹⁴² there was now“a strong likelihood that we will be in breach in 2008 of our EU commitments arising under the Stability and Growth Pact and our membership of the Euro area.”¹⁴³

8 July 2008 – DSG Update

The Domestic Standing Group met to prepare a report for a meeting of Government. Attendees at this meeting included more senior officials from the Department of Finance and the Central Bank than had previously attended Domestic Standing Group meetings. They included the Deputy Governor of the Central Bank and the Second Secretary of the Department of Finance.

The report confirmed that the Central Bank was“staying in close touch with the Irish banks”¹⁴⁴ and that the sharp decline in Irish bank share prices had not had an impact on the banks’ deposit base.

Two financial institutions (IL&P and Anglo Irish Bank) had recently received a“top up of liquidity.”¹⁴⁵

A strong warning signal was included in the report:

“There were some indications that recent falls in share prices reflected share sales by long-term investor indicating that if the current unfavourable market environment persisted there was an increased risk of a general loss of confidence in the Irish banks. International investors believed that the sharp slow-down in the Irish economy and property market would give riseto significant loan losses for the Irish banks, a collapse in profitability and the need to raise significant capital…”¹⁴⁶

However despite this assessment the Financial Regulator reported that:

“…a detailed line-by-line examination of its loan book by one of the major Irish banks which highlighted that even allowing for ‘worst-case’ loan losses, profitability would remain strong measured against objective market benchmarks.”¹⁴⁷

Con Horan attended this meeting of the DSG in his former role of Prudential Director of the Financial Regulator. He was asked by the Joint Committee how this information was sourced and how had it been verified. His response was:

“…they [banks] would have been doing their own analysis and contingency planning. I don’t think that we went in to check that at that time, in July 2008… It would have been the feedback from the institutions in terms of their observations and their belief, in relation to their [loan] book.”¹⁴⁸

9 July 2008

On 9 July 2008 there was an email exchange¹⁴⁹ between the Department of Finance and the Central Bank on the subject of a Special Resolution Regime. Kevin Cardiff explained this as one in which“you take control of the institution, you manage it out, you share the burden of the losses.”¹⁵⁰

John Hurley was asked about this regime:

“It was discussed in the course of 2008 before I left the bank. It was an option that was being looked at. The matter was … my … the report to me when I came back was the matter had been discussed with the Department of Finance, and the Department of Finance, I think, were in touch with the Attorney General’s office, and my understanding was this ran into legal and constitutional difficulties… I think the United Kingdom had similar problems with a special resolution regime after Northern Rock. This was not … this was a very complicated issue.”¹⁵¹

Kevin Cardiff explained the difficulty in introducing a special resolution mechanism by saying that:

“if you wanted to burn bondholders, then … especially senior bondholders, then you have to talk about major constitutional issues that we didn’t see a way around in sort of June 2008 and even in January 2009, even for subordinated bondholders, there were obstacles, both market and legal.”¹⁵²

John Hurley gave evidence that the regime was not progressed. When asked if it would have made a difference had it been available on the night of the guarantee he said:

“It strikes me that the decision is very likely to have been the same.”¹⁵³

28 July 2008

On 28 July, Brian Cowen met with Alan Gray, an independent economist and Non-Executive Director in the Central Bank, Seán Fitzpatrick of Anglo Irish Bank, Fintan Drury, a former director of Anglo Irish Bank and Gary McGann, Group Chief Executive of Smurfit Kappa Plc and a director of Anglo Irish Bank at Druids Glen. Brian Cowen described how the event was organised:

“I was talking to Fintan Drury one day and I said to him: ‘Look, I’m going away, I’m going to try and get a couple of weeks off. I haven’t had a break in a long time. But before I go away, could we get a few people together? I just want to talk about people about how they see the economy – how they see things going – because we’re seeing here a slowdown.’ …And he suggested that he’d get a few people together.”¹⁵⁴

Fintan Drury said:“We met for about two hours, we went through an agenda that Alan Gray had prepared for the meeting and which did not have banking on it at all.”¹⁵⁵

Alan Gray said:

“I was invited, on behalf of the Taoiseach, to attend the meeting to outline any views I had on unemployment and on the … what was happening in the economy – which is something that many governments have done at different periods – and I put in a lot of effort in advance of the meeting, including talking to some international economists about their perspectives and ideas, and I turned up at the meeting with my detailed notes.”¹⁵⁶

Gary McGann said in his evidence that the meeting took place in Fintan Drury’s house, not in the Druid’s Glen golf club as had been previously understood.¹⁵⁷

Fintan Drury said:

“Seán Fitzpatrick, Brian Cowen and I then went and played … I don’t even remember was it nine or six holes of golf and then we went to the bar and had some drinks… Later, Gary McGann and Alan Gray returned to join us for dinner.”¹⁵⁸

Brian Cowen said:“It was about economic issues – it was nothing to do with Anglo Irish Bank at all.”¹⁵⁹

Alan Gray reflected on his decision to attend the meeting:“I certainly believe, from where we are now and what I know now, that it was a mistake … but I have been so concerned about the issue of unemployment in the Irish economy that I have never not accepted any invitation by any Government Minister or Taoiseach when I have been invited to talk on this issue.”¹⁶⁰

August 2008

The Joint Committee observes that there was very little documentation provided for the month of August 2008. Kevin Cardiff was asked why there appeared to be a gap. He replied:

“I don’t think there was. I mean, August is a time when some people take holidays and so forth but actually there was a lot going on in August. From what I recall, for example, the … the budget that would normally be in December was … was going to be in October and … was brought forward to October. And that decision was made, as I recall, at the very end of August so there were clearly people working on the figures and so forth during August. On the financial side, as I understand it, the … around about the end of July there was a new iteration of legislation which would have been worked on through August. So it may have been that in the natural course of things that people weren’t sending notes around as much but there was work going on, you can be sure.”¹⁶¹

SEPTEMBER 2008

3 September 2008 – Update on Emerging Economic and Fiscal Position

A secret Memorandum was prepared by the Department of Finance for the first Government meeting since the July recess. The report it contained made for difficult reading. It reported that:

“it is now certain that the end-year tax shortfall will be substantially higher than previously expected. The Department of Finance is currently factoring in a shortfall of €5 billion in tax receipts for the year as a whole and it could be higher.”¹⁶²

Another note for the meeting on financial market development contained more bad news. The international difficulties and the initiatives in play to help stabilise the situation were outlined. With regard to the Irish Banks the note stated:

• “As a small banking market significantly involved in property lending particularly in the commercial sector, Irish banks have been hit hard by negative investor sentiment.
• A further indicator of investors’ negative sentiment towards Ireland is that the yield spread of Irish Government Bonds…now stands at 47bps…normally at the low end of a 5 to 10 bp range over Germany.
• The share prices of individual financial institutions have been highly volatile…
• Irish banks are under pressure to maintain dividends…
• Domestic Irish banks continue to state they are open for business and are interested in proposals that offer real opportunity for added value. However, there has been a decline in levels of lending…”
• that it should be noted that:“In the context of international concerns of growth in dependence by banks on liquidity from Central Banks, it should be noted that while the overall level of ECB funding availed of by banks in Ireland has increased from €39.5 billion (Dec 2007) to €44 billion (July2008), domestic banks have reduced their dependence from €15 billion to €13 billion. [This figure fluctuates and it may be too strong to suggest that there is a downward trend].” ¹⁶³

In early September 2008, the Financial Regulator circulated a memorandum to members of IFSRA’s financial stability committee on‘short selling¹⁶⁴ ’ noting as follows:

“…The issue of short selling has received a lot of attention over the course of 2008. This is due to the fact that the practice of short selling is considered to exacerbate market turmoil adding to volatility and risk in the market. Short selling has therefore been seen as a contributory factor in the problems experienced by financial institutions in particular, on the back of extreme share price declines in recent months…”¹⁶⁵

5 September – INBS is Downgraded

On Friday, 5 September 2008, Moody’s¹⁶⁶ downgraded Irish Nationwide Building Society’s (INBS) credit rating by 2 notches.¹⁶⁷ Moody’s report stated the downgrade reflected INBS’s increasing exposure to commercial property and development which accounted for 80% of the society’s loan book.¹⁶⁸ It also cited the rapid deteriorations in land and property values in Ireland and the UK, which were exacerbating the already high loan-to-value ratios on the INBS commercial property and development loan book.¹⁶⁹ The agency expected INBS’s asset quality to weaken as the economic environment in both Ireland and the UK worsened.¹⁷⁰

7 September

The situation at INBS was exacerbated later on 5 September 2008 when, at 18:15, a report on the Reuters newswire erroneously claimed that INBS was to be liquidated.¹⁷¹

In evidence, Michael Fingleton, former Chief Executive, INBS said that“[on] the night the Reuters report was issued, on the lines, we contacted the regulator’s office and we informed them that the report was totally erroneous.“¹⁷²

Reuters subsequently edited the story at 20:30 with a denial as to the story’s legitimacy from INBS, before removing the story from its networks at 22:45.

As a result of these two events, the Moody’s downgrade and the Reuters story, a crisis meeting was arranged for 6-7 September between representatives from Department of Finance, the Central Bank and the Financial Regulator, AIB, Bank of Ireland, and INBS. It was to be held in Central Bank Headquarters on Dame Street and was aimed at determining how to deal with the possibility of INBS facing liquidity difficulties on the Monday.¹⁷³

In explaining these developments, John Stanley Purcell, former Finance Director, INBS noted that:

“The Reuters report was utterly unhelpful. I mean, it created a sense of unease and it was going to result in withdrawals so I mean, the regulator was taking precautions and one of the precautions was to see could a standby facility be arranged.”¹⁷⁴

Michael Fingleton explained that:

“…from the regulator’s point of view, they felt and believed that, following the Reuters report, there might be a run on the society or that there would be a run on the society the following Monday […] and that they wished to establish whether a major bank would supply, if the society needed it, some liquidity”.¹⁷⁵

As to whether INBS needed liquidity, this was challenged by Michael Fingleton, when he argued that:“we didn’t need to access wholesale funds at that time. We had €4 billion of cash or near cash on deposit with counterparty banks” .¹⁷⁶

Nonetheless, the meeting proceeded in order to determine whether AIB and Bank of Ireland would provide a“backstop” facility for INBS.¹⁷⁷

When asked whether “AIB and Bank of Ireland indicate[d] a willingness to provide such a backup at that meeting?” John Stanley Purcell answered“No, they didn’t indicate a willingness” , before elaborating“Well, we had a discussion. I can’t remember all the details, but there was three of us there and the meeting just petered out.”¹⁷⁸

A minute note taken at the meeting noted that:

“The banks reiterated it was not a realistic proposition for either institution to provide unsecured funding for an entity that had a hole in its balance sheet which would exceed its reserves,”¹⁷⁹

Dermot Gleeson, Chairman of AIB, commenting on a meeting held on 7 September 2008 which AIB and Bank of Ireland attended at the request of the Regulator with the Senior Management of Irish Nationwide, said that an assessment was done by AIB itself and the report came back:‘“Don’t touch it” in effect.’¹⁸⁰

Richie Boucher, then Chief Executive Retail Financial Services at Bank of Ireland, was also at this meeting and in his evidence to the Joint Committee, he explained that:

“There was no coherent position … of the problem we were being asked to solve at that moment or the extent of the problem going forward. I have to admit at some stage I said to my colleague, “We should leave this meeting.” We said, “We can’t carry on this discussion.”¹⁸¹

He recalled in evidence:“to be honest, I felt we should get out of the building.”¹⁸²

The two banks appeared clear in their views that the problems at INBS were not only hard to fully discern but not ones that they wished to take on. Other witnesses gave differing versions of these events.

The view of the Regulator on the meeting was expressed by Patrick Neary in his evidence to the Inquiry as follows:

“Richie Boucher would not have known what information we had on the… on the liquidity of Nationwide because we wouldn’t have been in a position to share it with him because that would be absolutely subject to section 33AK, so he got no information about liquidity about Nationwide from us. A meeting was arranged, attended by the two large banks and Irish Nationwide. If Irish Nationwide chose to be, how would you say, coy or restrictive about the information they provided, look, I mean, that … that may have happened.”¹⁸³

John Stanley Purcell commented on this same meeting in his evidence to the Joint Committee as follows:

“information was provided to the meeting at short notice on liquidity, funding liabilities and the maturity of funding liabilities. The meeting concluded without any agreement to progress the provision of a standby facility. Had the matter progressed, any additional information required not brought to the “at short notice meeting” would have been provided .”¹⁸⁴

Four Options for INBS

Michael Walsh said:

“On the Sunday evening of 7 September I got a phone call from Con Horan… they had been looking at a contingency plan, as you know, with AIB and Bank of Ireland that hadn’t operated. Apparently, Anglo had contacted the regulator to say that they might represent a solution. I was slightly surprised, but nonetheless the regulator wanted me to meet them. I accordingly organised to meet them the next morning. Having met them, I did a briefing paper for the regulator setting out the options as I saw them at that point in time. I met the regulator, discussed that options paper. I then revised and adjusted that at the regulator’s request and submitted it to the Department of Finance. That paper is in the public domain.”¹⁸⁵

The paper¹⁸⁶ contained four options for INBS as follows:

• do nothing
• ensure an orderly run-off of INBS
• breakup INBS
• merge with another institution

Legislation

In early September 2008, the draft legislation was modified to allow the Minister for Finance to take a Building Society into public ownership if required.¹⁸⁷ William Beausang said:

“In early September 2008, this work was reorientated to taking a building society into public ownership on the basis of a major contribution from the office of the Attorney General, and, at a late stage, the Department’s commercial legal advisers.”¹⁸⁸

Kevin Cardiff said that this modification was sought by the Department of Finance on the basis of a potential run on INBS. He described the publication of the Reuters report as a trigger event:

“…Reuters ran a story and their story was…Irish Nationwide about to be liquidated. This was a trigger point because that could cause a run …this was a Friday, it could cause a run the next Monday… this is what we have been getting ready for, this is what we have legislation for.”¹⁸⁹

The Department of Finance, through its role on the DSG, liaised with staff of the Attorney General in drafting the necessary legislation:

“…On Friday 5th September 2008 I received a telephone call from William Beausang – a colleague who was heading up the secret work we had been doing on banking crisis preparation…”¹⁹⁰

Paul Gallagher said in his evidence:

“originally, it is true to say Deputy, that the focus was on individual institutions… and in August and September, there was a preparation for the possibility that a guarantee might have to extend beyond the individual institution.”¹⁹¹

In his evidence to the Inquiry, Brendan McDonagh, NTMA, recalled this period in September 2008 as follows:“…the whole focus was on having legislation ready to nationalise a building society and a bank, if required. The NTMA provided technical input into that draft legislation.”¹⁹²

He also said that:

“A separate piece of legislation was also being prepared by the Department of Finance and the Attorney General’s office which would enable the NTMA and the Central Bank to provide secured lending to the financial institutions.”¹⁹³

10 September

On 10 September 2008, the Banking Supervision Department produced a paper at the request of the Department of Finance entitled‘Outlook for Liquidity Irish Domestic Institutions’¹⁹⁴ and sent it to Kevin Cardiff. The paper said that there were two groups of banks emerging: AIB, BOI and EBS were having some success in raising funds; IL&P, INBS and Anglo were finding funding conditions very challenging. It gave more detail on the latter three.

IL&P:
Irish Life and Permanent was frozen out of medium and long term funding markets. Short term funding of up to 30 days was available to IL&P but this was unreliable. The paper noted that IL&P had turned to the ECB for liquidity and that it was not anticipated that the bank would be able to move away from this funding for the rest of the year. The paper concluded that a downgrade would cause IL&P significant problems.

INBS:
The traditional INBS model of relying on retail deposits rather than debt was causing it issues, the report noted, because it had little market access. In addition, the upcoming maturity of some debts was likely to cause issues in the coming period. The report also highlighted recent downgrades by Moodys’ and Fitch as having led to outflows. This, as well as their limited access to ECB funding, meant they needed to acquire funding through the securitisation of some loans. The report also noted that procuring advice from Goldman Sachs was welcome.

Anglo:
At this point, the Financial Regulator painted a pessimistic picture of Anglo’s prospects. It reported that Anglo had been frozen out of the term funding markets, that there was no prospect of a Medium Term Note (MTN), that corporate and retail deposits were down significantly over recent months, and that secured borrowing was one of the few remaining options. The Regulator noted that Anglo suffers from an international perception that it is not “too big to fail” and so was frozen out of international markets. At the same time, the report stated that Anglo was reluctant to seek out ECB funding in case of a downgrade.

11 September

On 11 September 2008 there was more negative news for Ireland. Fitch’s agency¹⁹⁵ downgraded its rating for INBS by one level to BBB+ from A.¹⁹⁶ On the same day EBS reported a half year profit drop of 37%.¹⁹⁷

13 September

On 13 September 2008 following the meeting between Anglo and INBS, David Drumm, CEO of Anglo, wrote to the Financial Regulator with a proposal on how Anglo would acquire INBS. This would have required Government support for any deficit in the INBS net assets, a funding and liquidity backstop to cover any loss of funding. Funding and liquidity support“comfort” would also need to be provided to Anglo to cover any secondary contagion effects, which would not be made public.¹⁹⁸ His letter included the following:“I want to stress to you again that any solution not involving Anglo Irish Bank will lead to problems…”

15 September 2008 – Failure of Lehman Brothers

On 15 September 2008, Lehman Brothers¹⁹⁹ filed for bankruptcy.²⁰⁰ With assets of $639 billion and debt of $619 billion, it was the biggest bankruptcy filing in history. Simultaneously contagion fears through exposure to credit default swaps²⁰¹ engulfed AIG²⁰² leading the US Government to give it a loan of $85 billion. Trust in the wholesale market collapsed as investors looked to see who would fail next.

16 September 2008

On 16 September the IFSRA board meeting noted that Anglo, IL&P and AIB were all anticipating breaching regulatory liquidity requirements at various points over the next month.²⁰³

Meanwhile, Anglo management was actively considering and pursuing various merger and acquisition possibilities, including a possible merger with IL&P and a possible takeover of INBS following a request from the Financial Regulator. The Board was advised that the Regulator was aware of the challenges facing the banking sector, but that a solution had not yet been agreed. The Board agreed that contact should be made with the Central Bank and the Taoiseach to ensure that there was Governmental support for a workable solution.²⁰⁴

17 September 2008

A background note provided to the Minister for Finance and dated 17 September 2008 stated:

“The vulnerability to adjustments in the property sector and further tightening in the availability and cost of credit internationally has put Irish banks under increased pressure. This is impacting individual institutions differently, but all are under pressure, especially the smaller ones.”²⁰⁵

18 September 2008

On 18 September Michael Fingleton had a meeting with the David Doyle, Secretary General of the Department of Finance. He explained:

“The purpose was to ask or suggest to the Government that they would increase the guarantee on deposits from €20,000 to €100,000. That was the purpose of that meeting.”²⁰⁶

The proposal to increase the Deposit Guarantee Scheme was raised by the Central Bank on the same day at a meeting with Brian Lenihan and others.²⁰⁷ A one page minute of the meeting also records a report from John Hurley that liquidity was under great strain and there was now a“potentially serious crisis.” John Hurley said that liquidity was tight for all six banks; AIB and BOI were“ok for now” , EBS and IL&P had ECB access, but INBS and Anglo were facing very immediate problems. Anglo was reported as“the bigger problem” and if it didn’t stabilise could create“knock on difficulties” .

The Central Bank proposal to increase the Deposit Guarantee Scheme to cover deposits of €100,000 was agreed to by Brian Lenihan and he asked that a statement be prepared on the Scheme immediately.²⁰⁸

Commissioning External Advisors

There was a growing question at this time over the sufficiency of the Financial Regulator’s knowledge of the banks’ liquidity and balance sheet positions. Kevin Cardiff said:

“we believed … were led to believe that the regulator had a good picture of the banks under its remit, that reasonable loan loss stress testing had been done, that the banks were regarded as solvent, resilient, capable of withstanding significant shocks and we accepted that. And we stopped accepting it at the beginning of September when, when we had the Nationwide issue and it became clear that in fact, this general sense of how the banks were being run wasn’t, wasn’t being backed up by very specific data.”²⁰⁹

He said:“myself, Brendan McDonagh, John Corrigan decided that we needed this kind of advice²¹⁰ ”

John Corrigan said:“… there was a dearth of knowledge, of detailed knowledge around the institutions…”²¹¹ Following their meetings earlier in the month the NTMA encouraged the Central Bank and the Financial Regulator to get consultants into the banks to do a“deep dive”.²¹²

As a result, the Department of Finance and NTMA encouraged the Financial Regulator to commission Goldman Sachs and PwC to get more detailed information on the balance sheets of INBS and Anglo respectively. At the same time, the NTMA commissioned Merrill Lynch and Morgan Stanley as its external advisors.²¹³

When Goldman Sachs was being commissioned (6/7 September²¹⁴²¹⁵ ) Brendan McDonagh recalled sending an email²¹⁶ to Kevin Cardiff listing 33“obvious” questions that “we should know the answers to.”²¹⁷

It was put to Patrick Neary that the State had paid millions of euros to outside consultants in September 2008 to carry out a review in relation to bank loan books and to capital adequacy; information that the Financial Regulator, required the banks to report on a daily/weekly/quarterly basis. He was asked why these consultants were required. He said:

“…the Authority (IFSRA) decided to quality assure the information that we had, that it would be good to have another set of eyes to look at the information and to make sure that we came to the same consensus view…”²¹⁸

He also responded in a witness statement to the concerns regarding the adequacy of the Financial Regulator’s information:

“It is not clear, however, what those inadequacies were… At no stage can I recall any such concerns being escalated to me. In the years preceding the crisis, the Banking Supervision Department of the Financial Regulator had implemented, in full, the prudential data reporting requirements (Finrep) of the EU Basel 2 Directive and had supplemented these quarterly reports with additional quarterly reports on non-performing assets and loan loss provisioning levels.”²¹⁹

He said the findings of the external advisors confirmed information the Financial Regulator already had.²²⁰

The Financial Regulator,“with a little bit of pushing” according to Kevin Cardiff,²²¹ engaged PwC on 18 September specifically to review Anglo’s short term liquidity, credit quality and management assumptions in respect of these. Dennis O’Connor of PwC recollected:

“We commenced our work on Anglo Irish Bank on the following day, 19 September. Over the following number of days, our engagement was extended to include Irish Life and Permanent and Irish Nationwide Building Society.”²²²

19 September – Merging with Anglo

On Friday, 19 September 2008 the INBS board formally met to consider an approach from Anglo to merge. A merger of INBS and Anglo had been suggested after the meeting with the Regulator on the 7 September. They considered that it had no benefit for INBS, because all the“upside” would be on the Anglo side.²²³

Discussions had been held by IL&P and the Financial Regulator and Department of Finance officials during the days prior to 19 September. The IL&P board met on Friday 19 September and was briefed on these discussions.²²⁴ The position adopted at that meeting was:

• to reject an approach which Anglo had made proposing a merger.
• to develop the option of a possible takeover of EBS.

20 September – Increase of Deposit Guarantee Scheme

On 20 September, Ireland’s Deposit Guarantee Scheme²²⁵ was increased to €100,000 from €20,000 to try to reassure depositors that their money was safe. A briefing note for the Taoiseach, stated:

“The Governor of the Central Bank and the Financial Regulator have stressed repeatedly that Irish financial institutions are well capitalised and liquid with good quality assets.”²²⁶

Morgan Stanley review of IL&P

On the same day, the Morgan Stanley report on IL&P²²⁷ was presented to the Department of Finance. This report was based primarily on management accounts and discussions with management.

Morgan Stanley advised that the IL&P loan book was generally low risk, but 2006 mortgage and commercial lending were likely to cause bad debt provisioning to increase significantly in the future.²²⁸ The bank had stopped“buy to let” lending and commercial lending was at an absolute minimum since early 2008.

Regarding liquidity,“both ratings agencies had IL&P on negative outlook” and the bank was relying heavily on ECB funding as the interbank and debt markets were effectively closed.²²⁹

The Morgan Stanley report presented Government with six potential options to lend support should the bank encounter difficulties, ranging from provision of equity capital by the State through to a good bank/bad bank split.²³⁰

The Financial Regulator Meets the Banks

A series of meetings between Patrick Neary and six Irish banks took place on Saturday 20 September to try to ascertain the true liquidity position of each bank. As the minutes of these meetings are covered under Section 33AK the identities of the institutions cannot be disclosed.

Bank A advised the meeting that it had a confidence and liquidity issue. It had experienced €700 million of withdrawals since Q3 2007 and was concerned that it would suffer further withdrawals from deposits accounts above the new €100,000 guarantee limit. A document outlining the options available to the bank was presented at the meeting.²³¹

Bank B advised the Financial Regulator that it was experiencing significant liquidity issues. Money was flowing out of deposits and the bank requested liquidity support in the form of a Central Bank promissory note.²³²

Bank C said that it would be out of cash in a matter of weeks. Irish lines were being cut by large depositors and if the current pace continued, then it would be in difficulty even sooner. It advocated a statement that no creditor of an Irish regulated entity will lose/fail. It said it could not offer funding for Bank A as it would be bad for its own rating.²³³

Bank D advised the Financial Regulator that it had lost access to US$ funding and that it had US$20 billion repayable in 30 days. It also advocated against involvement with Bank A, as it was considered that there would be a serious contamination risk.²³⁴

Bank E told the Financial Regulator that it was“in good shape” and that it was in talks with Bank F regarding a takeover. The Financial Regulator was also informed that Bank E regarded merger of Banks A and B as“not credible” .²³⁵

Bank F advised the Financial Regulator that its asset quality was high and that its capital could absorb all impairments even under most stressed scenarios. Funding was regarded as the big challenge. It was also stated that it regarded an amalgamation with Bank E as having potential, with productive discussions well underway.²³⁶

21-22 September – Goldman Sachs review of INBS

On 21 September 2008, Kevin Cardiff and other Department of Finance officials met with Goldman Sachs prior to receiving its report on INBS which had been commissioned over the weekend of the 6/7.²³⁷

“The assessment was perhaps a bit more upbeat than we had feared at the time, and in retrospect and with all the benefit of hindsight was hopelessly optimistic. On Sunday 21 September 2008, I heard this assessment in a meeting with Basil Geoghegan from Goldman Sachs and various others. While it might be difficult to get 100% back on some of the loans they had issued, there was nothing to suggest any losses could not be absorbed by INBS’ own capital. In other words, they seemed to be in some trouble, would need some help, but were probably solvent.”²³⁸

These reports had been commissioned at the “encouragement” of the Department of Finance and the NTMA.

The Goldman Sachs draft report on INBS²³⁹ was provided to the Department of Finance on 22 September.

Their findings were based on discussions with INBS management, a data gathering exercise and an initial review of the top 60 commercial exposures. Goldman Sachs advised regarding INBS’ assets that“it is not possible at this point to ascertain the extent, depth, quantum and timing of potential losses.”²⁴⁰

On liquidity, net outflows since 5 September were €868 million (approximately 20% of liquid assets) and“INBS is unable to access unsecured debt markets for liquidity.”²⁴¹ In short liquidity was“considerably strained.”

23 September

On Tuesday at an IFSRA board meeting, it was confirmed by Pat Neary that legislation to nationalise a bank or building society was ready.²⁴²

24 September

Pádraig Ó Ríordáin, former Managing Partner of Arthur Cox, provided evidence that:

“Arthur Cox was engaged by the Department of Finance on the morning of Wednesday, 24 September 2008, to advise in respect of the emerging banking crisis.”²⁴³

Eugene McCague, Chairman of Arthur Cox added:

“We were looking clearly at the option of the legislation for the nationalisation of Anglo and Irish Nationwide. This was what my main, if not sole, focus over those days…”²⁴⁴

There was bad news on 24 September, when CSO quarterly figures revealed that Ireland was officially in recession.²⁴⁵

PwC attended a large²⁴⁶ meeting with officials and advisors on 24 September in Government Buildings. Kevin Cardiff described it as“tense.”²⁴⁷ A minute of the meeting records that representatives of PwC reported on the Anglo loan book, based on the work they had done. At the meeting Pat Neary said that there was no evidence that Anglo was insolvent,“it is simply unable to continue from a liquidity point of view” and that INBS was in a similar situation.

Kevin Cardiff underlined the urgency of the situation and it was agreed to prepare legislation on intervention options, including liquidity support, guarantees, nationalisation and a“bad bank approach” . This appears to contradict the information that Patrick Neary gave to the IFSRA board the previous day when he said that legislation to nationalise was ready.

25 September

At a further crisis meeting on Thursday, 25 September, IL&P told the FR that an explicit guarantee was needed.²⁴⁸ Patrick Neary stated that this would cost in the region of €500 billion and went on to say that, if the State stepped in, the taxpayer would expect to get something back i.e. the guarantee was likely to require some surrender of equity. IL&P responded that“the situation had gone beyond protecting equity.”²⁴⁹ IL&P also updated FR on its merger talks with EBS, which it estimated would probably require €7/8 billion to set up on stable footing.

CBFSAI Board meeting

On the same day, John Hurley provided an update to the CBFSAI board on all the banks’ liquidity difficulties and advised that one bank’s situation was most critical. The Government asked for policy options and the resources of the Central Bank and Financial Regulator were committed to work on this as an urgent priority over the coming weekend.²⁵⁰

The meeting was also told that the Central Bank was keeping in close contact with the ECB regarding the difficult situation in Ireland and Europe. John Hurley said he had spoken directly with Jean-Claude Trichet.

It was noted at the meeting that a €20 billion fund from the Central Bank and NTMA would not be sufficient in the event of further liquidity losses by the domestic banks. The key policy item for the weekend would be whether Government should issue a six-bank guarantee.²⁵¹ The Governor mentioned that an explicit guarantee covering €400 billion liabilities was not something he would have favoured previously; however in the evolving situation, he now believed it required serious consideration.²⁵²

That weekend, the CBFSAI produced its own paper on“resolution options” that said a blanket guarantee was the simplest option, and that it would include senior and unsubordinated debt. On the downside, the paper said a guarantee neglected the public interest argument and the potential costs to the taxpayer were unclear. Nationalisation was mentioned in the paper, but with a note of caution regarding the risks of contagion.²⁵³

After the meeting CBFSAI board member, Alan Gray²⁵⁴ “decided that evening to write to the Department of Finance, the regulator and the Governor of the Central Bank.”²⁵⁵ He sent a strategic advice paper, presented under Indecon-headed paper, his consultancy company.²⁵⁶

His short paper briefly assessed a range of options to improve liquidity in the banking sector and potential responses to individual banks with liquidity issues.²⁵⁷ On options for the sector as a whole, he said that a state guarantee of all loans merited serious consideration. He also said that a temporary guarantee had some clear merits over an unlimited guarantee but there was a risk of a market event when such a guarantee would end.²⁵⁸ On individual banks he favoured market solutions and said nationalisation was the worst option and said“negative system wide impacts are clear” and “the scale of the exchequer exposure and level of funding required is likely to be much greater when contagion impacts are taken into account.”²⁵⁹

26 September

A presentation made to the board of EBS on Friday, 26 September 2008, stated:“Government intervention anticipated and unavoidable; potential scale of intervention is likely to be considerable and could change the Irish banking landscape here fundamentally.”

The presentation noted the extreme stress affecting all Irish institutions and the consequent vulnerability of EBS as a smaller entity among financial institutions.²⁶⁰

Department of Finance asks the advice of the NTMA

Around lunchtime, in an email²⁶¹ to Brendan McDonagh, William Beausang said the Secretary General wanted an analysis from the NTMA on problems that might be encountered for the sovereign rating if the State provided a“guarantee for all deposits/credits of the domestic banking system or would have to provide substantial funding … for institutions taken into protection regime.” The Secretary General also noted that a system-wide guarantee would be controversial from a“State aid perspective.”

In his reply²⁶² Brendan McDonagh said“this is very difficult to answer” as the potential exposure to the State“is not yet independently quantified” . He said Ireland could“expect to be put immediately on negative watch and probably soon after be downgraded” . He estimated that combining the taking on of balance sheets of both Anglo and INBS of €110 billion and“guaranteeing the others of over €420 billion” with a deteriorating budget deficit would lead to“an increase in the cost of funding of perhaps at least 1 percent funding costs. If the State is funding a €50 billion national debt and a €110 nationalised bank” then this increase would cost an extra €1.6 billion per annum.

Merrill Lynch review

On the same day Merrill Lynch (who had been formally engaged by the NTMA on 23 September to advise the Government), presented a draft preliminary analysis²⁶³ to a group that included the Minister for Finance along with a number of senior representatives from the Central Bank, Financial Regulator and the Department of Finance.²⁶⁴ Merrill Lynch pointed out that it had been engaged for just 48 hours and had“not spoken to the management of any of the Irish banks” and that its analysis was based on“limited verbal information from the Ministry for Finance and IFSRA.”²⁶⁵ The slides from Merrill Lynch’s presentation gave pros and cons for a number of options including a Guarantee, a Secured Lending Scheme/ELA, Good Bank, Bad Bank, Protective Custody, and Liquidation.

A minute from the meeting²⁶⁶ records that on a blanket guarantee, Merrill Lynch felt that this“could be a mistake and hit national rating and allow poorer banks to continue.” Dangers included“credibility and prolonging of weak institutions.” They said liquidation was the worst solution. The Minister asked for opinions to be articulated clearly over weekend“so as to be ready to present to Govt.”

27 September – Brian Lenihan and Jean-Claude Trichet

In an interview for the RTÉ documentary“Freefall” in September 2010, Brian Lenihan said:

“Mr. Trichet rang me, and hadn’t been able to get through to me. I was a racecourse in County Kilkenny at a Fianna Fáil event on the Saturday [27 September]. So I caught up with Mr. Trichet’s message the following day which was that ‘you must save the banks at all costs’ ” .

Jean-Claude Trichet,²⁶⁷ former President of the ECB was asked to comment on the RTÉ interview and said that there was:

“No message to Brian, no message to the Government of Ireland, but, if you read the papers, at the time, all central bankers of the world were telling all governments “Don’t do again Lehman Brothers” So, put that in your mind. There was no call from me to Brian.”²⁶⁸

John Hurley told the Joint Committee that he had been in contact with Jean-Claude Trichet over the period leading up to the end of September, through various meetings; formal meetings in Frankfurt, informal meetings and teleconferences.²⁶⁹ He confirmed that the liquidity position of the Irish banks was known to the ECB:

“The liquidity positions in relation to the Irish banks would have been pretty obvious as a result of the developments that were taking place on the ECB funding and that was moving in a particular way in the course of 2008.”²⁷⁰

He also said that“…the liquidity position of one bank in particular was known.”²⁷¹

In response to the question“Were you personally aware of the deteriorating liquidity and solvency in Irish banks in Ireland in 2008, in particular September 2008?” Jean-Claude Trichet replied:“I was aware of the liquidity constraint. I have to say all over Europe… And the Irish banks were part of it. But again, at that time, it was a general problem.”²⁷²

When asked:“Did the Governor of the Central Bank of Ireland brief you or your officials in the ECB on the liquidity-solvency situation and the options being considered?” He replied:

“I would say … Ireland was one of all the advanced economies, one of course of the 15 I already mentioned in Europe, and we had the same, I would say, message for all, “We are in the worst crisis since World War II, make no mistake, it is exactly the situation, it is absolutely drastic, you have to take that into account. On our side we are doing all that we can on the liquidity basis, you are responsible, your government, for the solvency basis.”²⁷³

28 September

AIB noted at its board meeting that Sunday, that:

“…the authorities expected that two financial institutions would fail (unless white knights emerged), and would guarantee the obligations of the other financial institutions on a temporary basis.”²⁷⁴

At a separate meeting, PwC presented its initial findings on Anglo, IL&P and INBS to the Central Bank and the Department of Finance since its appointment on the 18 September. This report focused principally on short term liquidity, credit quality and capital assumptions made by management in respect of these issues.

In an email later that day to Brendan McDonagh of NTMA, John Loughlin of PwC gave summary scenarios for the three banks discussed that morning: Anglo, IL&P and INBS. It recommended having contingency plans for all three in the week commencing 29 September. The analysis in the Memorandum of 28 September 2008 on the banks’ loan books was based only on information that had been provided to Merrill Lynch from PwC regarding Anglo, from Goldman Sachs regarding INBS and limited verbal information from the Department of Finance and IFSRA.²⁷⁵

Merrill Lynch review of Anglo, INBS, IL&P²⁷⁶

Following its draft report presented on Friday 26 September, Merrill Lynch provided a more detailed report by way of Memorandum
²⁷⁷ on Sunday 28 September 2008. The analysis in the Memorandum of 28 September 2008 on the banks’ loan books was based only on information that had been provided to Merrill Lynch from PwC regarding Anglo, from Goldman Sachs regarding INBS and limited verbal information from the Department of Finance and IFSRA. This report was presented in NTMA Treasury building on the Sunday morning.
²⁷⁸ In summary, the report noted:

• The asset quality of INBS’ commercial loan book was regarded as being generally good.
• Based on its own management projections, INBS has liquidity sufficient to meet its needs for around one to two months depending on the level of withdrawals.
• Merrill Lynch also had concerns over the influence of the Chief Executive.

Only 3% of the Anglo loan book was regarded as impaired by its management at that time. Merrill Lynch felt that falling property prices are likely to impact their book, particularly where they have lent on speculative development. The main issue for Anglo was a pressing need for liquidity as a result of a sustained outflow of corporate deposits and overnight funding being unavailable to banks of their credit rating. Merrill Lynch noted that Anglo had formally requested a short term liquidity advance of €1.7 billion from the Central Bank on Friday 26 September for the end of the month.

The asset quality of IL&P was reported as good but they were heavily reliant on wholesale funding and approaching the limit of their eligible collateral with the ECB.

Merrill Lynch also outlined strategic options on the reviewed banks, all of which would have required financial resources from the Government.²⁷⁹ Among the six options considered was state protective custody for Anglo and INBS which Merrill Lynch felt would solve immediate liquidity issues, but at a high cost. On the impact on equity/debt holders, the report noted that“there are significant retail interests.”²⁸⁰ Another option was a good bank/bad bank scheme whereby the bad loans of the banks would be transferred to a State bank to allow a controlled orderly wind down. The report noted that it was difficult to predict how long the work out of the assets would take but Bank of Ireland published projections showed a three to five year period is required to recover 80% – 90% of book value. On the options of a state guarantee to all depositors and senior creditors of the six primary regulated financial institutions, the report noted that this could be over €500 billion, and that the wider market would have been aware that Ireland could not afford it if the guarantee was called in. It was commented that it might also be poorly perceived by other European States if liquidity flows were to migrate.

One option was discounted:

“…allowing an Irish bank to fail and go into liquidation without any government intervention. Whilst this option would initially have no financial impact to the government… The ensuing ‘firesale’ of assets could precipitate dramatic asset deflation and hence force other Irish banks to take significant write downs on their own asset portfolios thus depleting their capital positions.”²⁸¹

The report concluded:

“The market environment is highly uncertain with international developments adding to the pressure on Irish financial institutions… In this context, it is important for the Government to be prepared to act quickly and decisively as required, to step in and prevent a systemic problem.”²⁸²

Sunday Cabinet Meeting

A pre-budget Cabinet meeting was held on Sunday, 28 September 2008. A Department of Finance briefing note prepared for the meeting stated that“a tax shortfall of the order of €6.5 billion was likely by 2008.”²⁸³ After the budget discussion²⁸⁴ Brian Lenihan gave an oral presentation on the international financial markets and their impacts on the Irish banks.²⁸⁵ The Minister explained how the volatility of the markets was adversely affecting liquidity positions.

The Joint Committee sought to determine whether the Cabinet had come to any conclusions on the banking crisis at its meeting. Dermot McCarthy responded:“I can say very emphatically that there was no decision in respect of any banking matter taken at that meeting.”²⁸⁶

Former Minister, Mary Harney’s memory of the discussion at the end of the Cabinet meeting was:

“… that banks were running out of money, that they were solvent but that they were running out of money… But I was aware that a serious situation was emerging, it wasn’t a surprise to me.”²⁸⁷

Mary Harney also stated that at the Cabinet meeting of the 28 September 2008:“I don’t think the word “guarantee” or anything like that was mentioned.”²⁸⁸

Dermot McCarthy also said that:“… there was no orientation or mandate in respect of an approach arising from that Government meeting.” However, when asked if Cabinet members might have been aware of unfolding events, Dermot McCarthy said:“… I think it would be fair to say that they wouldn’t have been surprised that something did arise.”²⁸⁹

29 September

Anglo Irish Bank held a board meeting on 29 September. The minutes reported that the Group had experienced another day of outflows from the wholesale Funding Desk. Senior management in Anglo had decided to propose to BOI and AIB a joint approach to Government to discuss their concerns.²⁹⁰

Dermot Gleeson confirmed that Seán Fitzpatrick had sought a meeting with him in his capacity as Chairman of AIB:

“I had a phone call from Sean Fitzpatrick asking for a meeting, which I declined, and he also asked me if I’d go with him to the Central Bank, I think, or go to the Government. I’m not sure. Anyway that meeting did not happen.”²⁹¹

Chairman of Anglo, Seán Fitzpatrick and its Chief Executive, David Drumm met with the Chairman of Bank of Ireland, Richard Burrows and Group Chief Executive, Brian Goggin. The meeting lasted“maybe 30 minutes, 45 minutes.”²⁹²

Richard Burrows said:

“ they asked us if we would consider taking over Anglo, if we would consider buying any part of Anglo, they were looking for any kind of assistance at all that we could offer in a situation which was clearly of the utmost severity in terms of that default which they were likely to have the following morning.”²⁹³

Brian Goggin said:

“we had absolutely no interest in acquiring Anglo Irish Bank and we politely told them that we could not be of assistance.”²⁹⁴

Seán Fitzpatrick and David Drumm called to Alan Gray that same day:

“I did not invite them to come, they came. I believed they understood that the bank would not open the next day because that was the information that was available to the Financial Regulator and I think was widely known in the market. And I think they were very keen to try and find any option or any channel to, you know, have their views aired. They came and they … Mr. Drumm had a presentation with him. I told him I had a very busy day and, you know, was there … I’d prefer he would just tell me what was the purpose of the meeting. And he went through a number of points in his presentation. He didn’t leave it with me. I told him these were issues that they should talk directly to the Central Bank on, and to the Financial Regulator, and that was what happened.”²⁹⁵

The Anglo minutes also record that“Bank of Ireland felt it was worthwhile,”²⁹⁶ but the AIB Chairman had declined an invitation to meet. The minutes also record that the Chairman and CEO reported“on a number of discussions” during the day with John Hurley regarding the urgent need for a solution to the systemic liquidity issues facing the system. They said they were advised that a solution would be forthcoming.²⁹⁷

Richard Burrows also met with John Hurley that day. He had a pre-arranged meeting. He said this was to:“talk about other matters which had to do primarily with wholesale funding and collateral for funding.”²⁹⁸

He also said that he took the opportunity:

“of explaining to Mr Hurley, the visit that I’d had from Anglo and explaining my concern at the very difficult situation which could result from this default the following morning and I asked if there was any plan in place in the Central Bank to deal with the situation.”²⁹⁹

He said he was:

“…somewhat surprised to find out that there was not and it was Mr Hurley’s guidance to me that if I wanted to take matters further, that I should make an approach to Government.”³⁰⁰

According to the Bank of Ireland Board minutes, the Central Bank and Financial Regulator asked Bank of Ireland to consider acquiring IL&P in a situation where Anglo and INBS had already failed.³⁰¹

Richard Burrows’ impression was that John Hurley was:

“…surprised at the information that I gave him that we’d had this call and this visit by the Chairman and Chief Executive of Anglo and the state of desperation which they had reached on that morning.”³⁰²

John Hurley, in his evidence said that he had not been informed of the meeting between BOI and Anglo that day“… I don’t believe he [Burrows] told me about that meeting. I believe what he told me about were the problems of Anglo Irish.”³⁰³ John Hurley also noted in his evidence that confidentiality considerations would have restricted the context of the discussion of these matters outside of the relevant participants.

Brian Goggin said:

“The issue confronting us on 29 September was the fact that I and the Governor of the Bank of Ireland had been put on notice that Anglo Irish Bank was going to default the following day.”³⁰⁴

Richie Boucher said in his evidence to the Joint Committee that:

“Anglo had come to us [BOI] that afternoon to say “we’re going to default” that’s effectively what they said, and my belief is that our chief executive and our chairman felt that they had to tell the Government something was going.”³⁰⁵

Brian Goggin informed BOI Group Liquidity Committee that a meeting had been arranged with the Taoiseach for later that evening at which a group of senior bankers would discuss the possibility of a Government guarantee being provided for all borrowing by Irish institutions.³⁰⁶

During the day also according to William Beausang:

“work was being carried out with the office of the Attorney General on the emergency legislation”.³⁰⁷

Brian Lenihan had a pre-arranged meeting with former General Secretary ICTU and Central Bank board member, David Begg, to discuss the mounting problems facing the economy and the labour market. David Begg confirmed to the Joint Committee that they did not discuss the banking crisis.³⁰⁸

AIB Chairman Dermot Gleeson said:

“In the afternoon of Monday the 29 September I received a phone call from Richard Burrows of Bank of Ireland. At that stage there was extreme turmoil in the markets and there was a clear impression that Anglo was in serious trouble and that the plan of the authorities was to take Anglo and INBS into some sort of State care – Richard indicated that matters were so difficult we should seek to speak with the Taoiseach and Min for Finance.”³⁰⁹

Richard Burrows said:“a phone call was made out of our office in Bank of Ireland to the Taoiseach’s Department and as a result of that, the meeting was set up.”³¹⁰

Richard Burrows said that the purpose of the meeting was:

“…. to make sure that they (Government) were fully aware of the severity of the situation that could unfold the following morning and the impact that they could have on the banking situation of large.”³¹¹

Dermot Gleeson said that the purpose was to:

“….discuss the dramatically deteriorating international solution, the apparently dire straits in which Anglo found itself and the possible repercussion of Anglo’s imminent collapse for Bank of Ireland and Allied Irish Bank.”³¹²

The meeting was arranged for 21:30,“that was the time we were told to come.”³¹³

Findings of the Joint Committee

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

Recommendation of the Joint Committee

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

Chapter 6 Footnotes

1. The Economic and Financial Committee is a committee of the European Union set up to promote policy coordination among the Member State.

2. EU structures for monitoring financial stability and managing financial crises, DOF06167; Crisis Management Exercise: lessons learned and possible follow-up, DOF06159; Next Steps in developing the EU framework for financial stability and crisis management, DOF06139-004; Next Steps in developing the EU arrangements for financial stability, DOF06204-005.

3. Memorandum of understanding on co-operation between the banking supervisors, central banks and finance ministries of the European Union in financial crisis situation, DOF06149.

4. Memorandum of Understanding the Department of Finance, the Central Bank and Financial Regulator, DOF02469-013.

5. See for instance minutes from October 2007, DOF01948; March 2008, DOF01983; July 2008, DOF02005.

6. Michael Somers, former CEO, NTMA, INQ00093, Para 1556.

7. Michael Somers, former CEO, NTMA, clarification statement, MSO00002-002.

8. Standard & Poors, is one of the three recognised major international statistical rating agencies, Moody’s and Fitch’s being the other two.

9. Michael Somers, former CEO, NTMA, statement, MSO00002-003.

10. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-006.

11. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-032.

12. John Corrigan, former Director of Funding and Debt Management, NTMA, transcript, INQ00106-008.

13. Question by the Joint Committee, INQ00106-008.

14. John Corrigan, former Director of Funding and Debt Management, NTMA transcript, INQ00106-008.

15. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-007.

16. John Corrigan, former Director of Funding and Debt Management, NTMA, transcript, INQ00106-007.

17. Central Bank/Financial Regulator views on financial market development as conveyed to Department of Finance at meeting of 3lst August (summary report), DOF02018-004.

18. Central Bank/Financial Regulator views on financial market development as conveyed to Department of Finance at meeting of 3lst August (summary report), DOF02018.

19. Central Bank/Financial Regulator views on financial market development as conveyed to Department of Finance at meeting of 3lst August (summary report), DOF02018-004.

20. IMF Country Report No 07/035 September 2007, PUB00122-001.

21. Special Articles on the likely event of falls in Irish house prices by Morgan Kelly, PUB00258-002.

22. Simon Carswell, Irish Times journalist, statement, CTX00042-001.

23. Brian Goggin, former Group Chief Executive, BOI, transcript, INQ00139-009.

24. Central Bank Report on financial market conditions, DOF01859.

25. Central Bank Report on financial market conditions, DOF01859-001.

26. List of Issues/Questions for DSG meeting, 3 October 2007, DOF01948.

27. List of Issues/Questions for DSG meeting, 3 October 2007, DOF01948-005.

28. List of Issues/Questions for DSG meeting, 3 October 2007, DOF01948-002.

29.Update on Financial Issues – Government Meeting 9 October 2007, DOF01950-003/005.

30. Update on Financial Issues – Government Meeting 9 October 2007, DOF01950-002.

31. Update on Financial Issues – Government Meeting 9 October 2007, DOF01950-003.

32. Update on Financial Issues – Government Meeting 9 October 2007, DOF01950-003.

33. e-mail correspondence from IL&P to the Financial Regulator, PTSB01924-001.

34. Department of Finance – Aide Memoire for the Government on Financial Market Developments, 13 November 2007, DOF04057-001.

35. Department of Finance – Aide Memoire for the Government on Financial Market Developments, DOF04057-004.

36. Department of Finance – Aide Memoire for the Government on Financial Market Developments, DOF04057-003.

37. Department of Finance – Aide Memoire for the Government on Financial Market Developments, DOF04057-004.

38. Central Bank Assessment of Financial Market Developments 16 November 2007, DOF01962-004-005.

39. Central Bank Assessment of Financial Market Developments 16 November 2007, DOF01962-002.

40. Central Bank Assessment of Financial Market Developments 16 November 2007, DOF01962-005.

41. Paul Gallagher, former Attorney General, transcript, INQ00110-005/006.

42. Michael Somers, former CEO, NTMA, transcript, INQ00093-015/016.

43. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-031.

44. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-006.

45. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-007.

46. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-007.

47. Brian Cowen, former Taoiseach and Minister for Finance, transcript, PUB00345-077.

48. Brian Cowen, former Taoiseach and Minister for Finance, transcript, PUB00345-087.

49. Informal meeting of FSC July 2006 – Crisis Management Exercise: lessons learned and possible follow-up, DOF06159.

50. Crisis Simulation feedback form, DOF06079-004.

51. Crisis Simulation feedback form, DOF06079-004.

52. Honohan Report, The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008, May 2010, PUB00075-122.

53. Kevin Cardiff, former Secretary General and Second Secretary General of the Department of Finance, transcript, PUB00350-055.

54. Con Horan, former Head of Banking Supervision and Prudential Director, IFSRA, transcript, INQ00130-015.

55. Deloitte, Ernst & Young (EY), KPMG and Pricewaterhouse Coopers (PwC).

56. Paul Dobey, Partner, KPMG, transcript, INQ00105-041, John McDonnell, Partner, PwC, transcript, INQ00117-012 to 016.

57. Paul Dobey, Partner, KPMG, transcript, INQ00105-041.

58. Paul Dobey, Partner, KPMG, transcript, INQ00105-041.

59. Paul Dobey, Partner, KPMG, transcript, INQ00105-059.

60. Paul Dobey, Partner, KPMG, transcript, INQ00105-023.

61. Paul Dobey, Partner KPMG, transcript, INQ00105-059.

62. John McDonnell, Partner PwC, transcript, INQ00117-012.

63. Memorandum for the Information of Government Financial Markets Developments, 16 January 2008, DOF03709.

64. Memorandum for the Information of Government Financial Markets Developments, 16 January 2008, DOF03709.

65. Memorandum for the Information of Government Financial Markets Developments, 16 January 2008, DOF03709.

66. Memorandum for the Information of Government Financial Markets Developments, 16 January 2008, DOF03709-002.

67. Department of Finance, Financial Stability Issues – Scoping paper, DOF03183.

68. Department of Finance, Financial Stability Issues – Scoping Paper, DOF03183.

69. William Beausang, former Assistant Secretary, Department of Finance, transcript, INQ00127-048.

70. Financial Stability Issues – Scoping Paper, DOF03183-001.

71. Financial Stability Issues – Scoping Paper, DOF03183-002.

72. Financial Stability Issues – Scoping Paper, DOF03183-005.

73. Patrick Neary, former CEO and former Prudential Director, IFSRA, transcript, INQ00132-072.

74. Financial Stability Issues – Scoping Paper, DOF03183-006.

75. Financial Stability Issues – Scoping Paper, DOF03183-006.

76. Financial Stability Issues – Scoping Paper, DOF03183-002.

77. Joint Central Bank/Financial Regulator response to Department of Finance Paper, “Financial Stability Issues – Scoping Paper (2nd Draft), INQ00170.

78. Tony Grimes, former Director General, Central Bank, transcript, INQ00129-005.

79. John Hurley, former Governor, Central Bank, transcript, INQ00047-100.

80. Joint Central Bank/Financial Regulator response to Department of Finance Paper, “Financial Stability Issues – Scoping Paper (2nd Draft), INQ00171.

81. William Beausang, former Assistant Secretary, Department of Finance, transcript, INQ00127-006.

82. Brian Cowen, former Taoiseach and Minister for Finance, transcript, PUB00345-093.

83. Brian Cowen, former Taoiseach and Minister for Finance, transcript, INQ00089-060/058.

84. Brian Cowen, former Taoiseach and Minister for Finance, transcript, INQ00089-060.

85. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-032.

86. Report of the Domestic Standing Group February 2008, DOF02007-001.

87. Report of the Domestic Standing Group February 2008, DOF02007-002.

88. CBFSAI assessment of Financial market developments 8 February 2008, DOF02007-002.

89. A loan with a moratorium is one where agreement is given to either cease repayment of principal or interest, or both, for a certain period of time.

90. This refers to the final repayment of a loan, which consists of the whole sum borrowed at the start. Any interim repayments are interest-only.

91. CBFSAI assessment of Financial market developments 8 February 2008, DOF02007-003.

92. Department of Finance presentation, “Overview of Financial Stability Resolutions Issues”, DOF03185-011.

93. John Hurley, former Governor, Central Bank, transcript, INQ00047-122.

94. David Doyle, former Secretary General, Department of Finance, transcript, INQ00113-021.

95. Central Bank, Update on Financial Market Developments, CB05971-004.

96. Central Bank, Update on Financial Market Developments, INQ00151.

97. Irish Stock Exchange website – www.ise.ie – Official Record of the Irish Share Price Movement.

98. IFSRA report into Trading in Anglo Irish Bank Corporation PLC shares 17-20 March 2008, INQ00151.

99. Simon Carswell, Irish Times, transcript, PUB00179-013.

100. Fintan Drury, Non Executive Director, Anglo Irish Bank, transcript, INQ00142-005.

101. Brian Cowen, former Taoiseach and Minister for Finance, transcript, PUB00345-088.

102. Seán Quinn, former Chairman of the Quinn Group.

103. Brian Cowen, former Taoiseach and Minister for Finance, transcript, PUB00345-089.

104. Bertie Ahern, former Taoiseach and Minister for Finance, transcript, INQ00109-050.

105. John Hurley, former Governor, Central Bank, transcript, INQ00047-101.

106. Patrick Neary, former CEO and former Prudential Director, IFSRA, transcript, INQ00132-117.

107. Tony Grimes, former Director General, Central Bank, transcript, INQ00129-025.

108. OECD Economic Survey Ireland, PUB00162.

109. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-005.

110. Note for the information of the Tánaiste for Government meeting, 22nd April 2008, DOF01978-003.

111. Note for the information of the Tánaiste for Government meeting, 22nd April 2008, DOF01978-003.

112. Note for the information of the Tánaiste for Government meeting, 22nd April 2008, DOF01978-001.

113. Department of Finance email dated 24/04/2001, DOF02849-001.

114. Brian Cowen, former Taoiseach and Minister for Finance, transcript, INQ00089-018.

115. Brian Cowen, former Taoiseach and Minister for Finance, transcript, INQ00089-018.

116. Fintan Drury, former Non Executive Director, Anglo Irish Bank, transcript, INQ00142-005.

117. Briefing on Banking Sector Issues, 24/04/2008, DOF03372-023.

118. Brian Cowen, former Taoiseach and Minister for Finance, transcript, PUB00345-107.

119. Brian Cowen, former Taoiseach and Minister for Finance, transcript, PUB00345-096.

120. Briefing from the Department of Finance to Minister on financial sector, DOF03372.

121. Brief for Minister for Finance, May 2008, Main Policy Issues, DOF03151-001.

122. Mary Burke, former Head of Banking Supervision IFSRA (May 2006 to October 2008), transcript, INQ00131-007.

123. Mary Burke, former Head of Banking Supervision IFSRA (May 2006 to October 2008), transcript, INQ00131-007.

124. John FitzGerald, Research Affiliate and former Research Professor, ESRI, Statement, CTX00022-014.

125. Outline Heads of a Bill to provide for the Irish Authorities (Minister for Finance) to take action in relation to an Irish financial institution, DOF03209.

126. Paul Gallagher, former Attorney General, transcript, INQ00110-006.

127. Paul Gallagher, former Attorney General, transcript, INQ00110-016.

128. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-005/006.

129. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-007.

130. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-007.

131. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-007.

132. Paper from CB on Crisis resolution options, 18th June 2008, INQ00171.

133. Paper from CB on Crisis resolution options, 18th June 2008, INQ00171.

134. Note for the information of the Minister for Government meeting Financial market developments, DOF03287.

135. Note for the information of the Minister for Government meeting Financial market developments, DOF03287-003.

136. Note for the information of the Minister for Government meeting Financial market developments, DOF03287-004.

137. Note for the information of the Minister for Government meeting Financial market developments, DOF03287-004.

138. Central Bank narrative on Minutes of meeting, June 2008, INQ00023-004.

139. Letter from Brian Lenihan, Minister for Finance to the Paul Gallagher, Attorney General dated July 2008, DOF04447-001.

140. Letter from Brian Lenihan, Minister for Finance to the Paul Gallagher, Attorney General dated July 2008, DOF04447-001.

141. Office of the Minister for Finance – Memorandum for the Government, Measures necessary for Budgetary Consolidation 2008, DOF07574-003.

142. Office of the Minister for Finance – Memorandum for the Government, Measures necessary for Budgetary Consolidation 2008, DOF07574-003.

143. Office of the Minister for Finance – Memorandum for the Government, Measures necessary for Budgetary Consolidation 2008, DOF07574-003.

144. Report of Domestic Standing Group Meeting, 8 July 2008, DOF03304-005.

145. Report of Domestic Standing Group Meeting, 8 July 2008, DOF03304-005.

146. Report of Domestic Standing Group Meeting, 8 July 2008, DOF03304-005.

147. Report of Domestic Standing Group Meeting, 8 July 2008, DOF03304-005.

148. Con Horan, former Head of Banking Supervision and Prudential Director, IFSRA, and attendee at the DSG, transcript, INQ00130-018/019.

149. Department of Finance email to Central Bank, DOF03245.

150. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-068.

151. John Hurley, former Governor, Central Bank, transcript, INQ00047-116.

152. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-068.

153. John Hurley, former Governor, Central Bank, transcript, INQ00047-116.

154. Brian Cowen, former Taoiseach and Minister for Finance, transcript, INQ00089-020.

155. Fintan Drury, former Non Executive Director, Anglo Irish Bank, transcript, INQ00142-005.

156. Alan Gray, Economist, former Non Executive Director, Central Bank and Managing Partner of Indecon Economic Consultants, transcript, INQ00096-009.

157. Gary McGann, former Non Executive Director, Anglo Irish Bank, transcript, INQ00082-001.

158. Fintan Drury, former Non Executive Director, Anglo Irish Bank, transcript, INQ00142-006.

159. Brian Cowen, former Taoiseach and Minister for Finance, transcript, INQ00089-021.

160. Alan Gray, Economist, former Non Executive Director, Central Bank and Managing Partner of Indecon Economic Consultants, transcript, INQ00096-008.

161. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-012.

162. Office of the Minister for Finance – Update on the Emerging Economic and Fiscal Position 2008 – 2011, DOF07703-001.

163. Note for the Minister’s information on financial market developments for Government meeting of 3 September 2008, DOF03356-005.

164. See Glossary of Terms.

165. Memo from Financial Stability Dept to Financial Stability Committee on Short Selling INQ00155 (subject to S.33AK Central Bank Act 1942).

166. Moody’s is one of the three recognised major international statistical rating agencies, Fitch’s and Standard & Poor’s being the other two. Moody’s report had indicated the downgrade would probably be greater except they anticipate there is a moderate probability of systemic support to INBS in the event of financial crisis.

167. Moody’s uses a global rating scale, ranging from AAA, being highest quality – lowest credit risk through to C being lowest rated – typically in default with little prospect of recovery. Within each rating classification, there is a 1,2 or 3 indicating higher or lower end of that generic rating. E.g. A3 to BAA2 is a 2 level (notch) drop.

168. Committee of Public Accounts Report on the crisis in the domestic banking sector: A preliminary analysis and a framework for a banking inquiry July 2012 (21 note to minister re Moody’s downgrade of INBS), PUB00072-217.

169. Committee of Public Accounts Report, July 2012, (Document no. 21 note to minister re Moody’s downgrade of INBS), PUB00072-217.

170. Committee of Public Accounts Report, July 2012, (Document no. 21 note to minister re Moody’s downgrade of INBS), PUB00072-217.

171. This Reuters report was subsequently retracted and is no longer available.

172. Michael Fingleton, former CEO, INBS, transcript, INQ00077-016.

173. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-014.

174. John Stanley Purcell, former Finance Director, INBS, transcript, INQ00078-020.

175. Michael Fingleton, former CEO, INBS, transcript, INQ00077-017.

176. Michael Fingleton, former CEO, INBS, transcript, INQ00077-017.

177. John Stanley Purcell, former Finance Director, INBS, transcript, INQ00078-021.

178. John Stanley Purcell, former Finance Director, INBS, transcript, INQ00078-021.

179. Dermot Gleeson, file note of meeting with CB/FR, 7 September 2008, AIB02136.

180. Dermot Gleeson, former Chairman, AIB, transcript, INQ00123-039.

181. Richie Boucher, Group CEO, BOI, transcript, INQ00085-017.

182. Richie Boucher, Group CEO, BOI, transcript, INQ00085-036.

183. Patrick Neary, former CEO and former Prudential Director, IFSRA, transcript, INQ00132-079.

184. John Stanley Purcell, former Finance Director, INBS, transcript, INQ00078-003.

185. Michael Walsh former Non Executive Chairman and Director INBS, transcript, INQ00070-060.

186. Paper re INBS Options, DOF01822.

187. Credit Institutions (Financial Support) Act 2008 (CISA).

188. William Beausang, former Assistant Secretary General, Department of Finance, transcript, INQ00127-006.

189. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-013.

190. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-042.

191. Paul Gallagher, former Attorney General, transcript, INQ00110-006.

192. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript INQ00090-008.

193. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript INQ00090-008.

194. Committee of Public accounts, Report on the crisis in the domestic banking sector: A preliminary analysis and a framework for a banking inquiry July 2012, (Appendix 2 document no. 20 Letter dated 10 September 2008 from Financial Regulator to Department of Finance with enclosed report on liquidity conditions), PUB00072-217.

195. Fitch’s is one of the three recognised major international statistical rating agencies, Moody’s and Standard & Poor’s being the other two. This downgrade mirrored the same sentiments for downgrade by the Moody’s 5 days previously.

196. Honohan Report, The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008, May 2010, PUB00075-169.

197. Honohan Report, The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008, May 2010, PUB00075-169.

198. Letter from David Drumm to Patrick Neary, 13 September 2008, DOF03148.

199. Lehman Brothers was a global financial services firm. It was the fourth-largest investment bank in the US (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch), doing business in investment banking, equity and fixed-income sales and trading (especially U.S. Treasury securities), research, investment management, private equity, and private banking.

200. Honohan Report, The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008, May 2010, PUB00075-169.

201. A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer (usually the creditor of the reference loan) in the event of a loan default (by the debtor) or other credit event.

202. American International Group (AIG) is a US multinational insurance corporation with more than 88 million customers in 130 countries and is one of the world’s largest insurers. It was deemed too big to fail by the US Government.

203. IFSRA minutes of meeting 16 September 2008, INQ00023-006.

204. Anglo Irish Bank board minutes dated 17 September 2008, IBRC00595-002.

205. Committee of Public Accounts, Report on the crisis in the domestic banking sector: A preliminary analysis and a framework for a banking inquiry July 2012 (Appendix 2 document no. 16 Background note for Minister for Finance on Financial Market Developments to 17 September 2008), PUB00072-217.

206. Michael Fingleton, former CEO, INBS, transcript, INQ00077-018.

207. Note of meeting, 18th September 2008. List of attendees: Brian Lenihan, Department of Finance (Kevin Cardiff and David Doyle), NTMA (Michael Somers, John Corrigan, Brendan McDonagh), CBFSAI (John Hurley, Tony Grimes, Brian Halpin) and the Financial Regulator (Jim Farrell, Patrick Neary), DOF03376-001.

208. Note of meeting, 18th September 2008. List of attendees: Brian Lenihan, Department of Finance (Kevin Cardiff and David Doyle), NTMA (Michael Somers, John Corrigan, Brendan McDonagh), CBFSAI (John Hurley, Tony Grimes, Brian Halpin) and the Financial Regulator (Jim Farrell, Patrick Neary), DOF03376-001.

209. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-032.

210. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-071.

211. John Corrigan, former Director of Funding and Debt Management, NTMA, transcript, INQ00106-012.

212. John Corrigan, former Director of Funding and Debt Management, NTMA, transcript, INQ00106-009.

213. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-036.

214. Note of Meeting with Goldman Sachs, dated 21 September, DOT: Core Book 35, KCA00001-261.

215. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-036. Morgan Stanley were initially approached as advisors, this did not proceed beyond a couple of days owing to possible conflicts of interest.

216. Email Brendan McDonagh to Kevin Cardiff, 21 September 2008, NTMA00447.

217. Brendan McDonagh, former Director of Finance, Technology and Risk, NTMA, transcript, INQ00090-026.

218. Patrick Neary, former CEO and former Prudential Director, IFSRA, transcript, INQ00132-075.

219. Patrick Neary, former CEO and former Prudential Director, IFSRA, statement, PNE00002-003.

220. Patrick Neary, former CEO and former Prudential Director, IFSRA, transcript, INQ00132-074 to 109.

221. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, transcript, PUB00350-071.

222. Denis O’Connor, Partner PwC, transcript, INQ00097-003.

223. INBS board minutes dated 19 September 2008, IBRC00796-005.

224. Minutes of IL&P board meeting dated 19 September 2008, PTSB00884.

225. Press release dated 20 September 2008, PUB00291.

226. Briefing for the Taoiseach, 20 September 2008, DOF03159.

227. Committee of Public Accounts, Report on the crisis in the domestic banking sector: A preliminary analysis and a framework for a banking inquiry July 2012, (Appendix 2 document no. 11 Discussion Documents prepared by Morgan Stanley), PUB00072-217.

228. Morgan Stanley, discussion materials on IL&P, INQ00075-003.

229. Morgan Stanley, discussion materials on IL&P, INQ00075-005 to 014.

230. Morgan Stanley, discussion materials on IL&P, INQ00075-015.

231. Central Bank Minutes of Meeting – CB Narrative, INQ00172.

232. Anglo Irish Bank board minutes dated 17 September 2008, IBRC00595-002.

233. IFSRA meeting September 2008, CB Narrative, INQ00163.

234. IFSRA meeting September 2008, CB Narrative, INQ00163.

235. IFSRA meeting September 2008, CB Narrative, INQ00163.

236. IFSRA meeting September 2008, CB Narrative, INQ00163.

237. Note of Meeting with Goldman Sachs, dated 21st September, DOT: Core Book 35, KCA00001-261.

238. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-005.

239. Goldman Sachs presentation on INBS, DOF03206.

240. Goldman Sachs Discussion materials regarding strategic options, DOF03206-008.

241. Goldman Sachs Discussion materials regarding strategic options, DOF03206-007.

242. IFSRA meeting 23-24 September meeting, INQ00158.

243. Pádraig Ó Ríordáin, Partner, Arthur Cox, transcript, INQ00111-003.

244. Eugene McCague, Partner, Arthur Cox, transcript, INQ00111-006.

245. The common definition of a recession is two successive quarter of decline. CSO Quarterly National accounts, quarter 2 2008 stated: GDP decreased by 0.8% compared to same period 2007. This is the second successive quarter in which GDP showed a decrease. [source: CSO.ie ref 180/2008].

246. Attendees Brian Cowen, Brian Lenihan, the Attorney General, Pat Neary & Jim Farrell (FR); John Hurley & Tony Grimes (CB); David Doyle & Kevin Cardiff (DoF); Dermot McCarthy (DoT), Michael Somers & John Corrigan (NTMA) Basil Geoghegan (Goldman Sachs); Henrietta Baldock & Prasath (Merrill Lynch); Denis O’Connor (PwC); Eugene MacCague (Arthur Cox), DOF03377.

247. Kevin Cardiff, former Secretary General and Second Secretary General, Department of Finance, statement, KCA00002-064.

248. File Note of Meeting with Financial Regulator 09.30 September 2008, PTSB02347.

249. File Note of Meeting with Financial Regulator 09.30 25 September 2008, PTSB02347-001.

250. Minutes of CBFSAI board meeting held on 25 September 2008, INQ00023-008/009.

251. Alan Gray, Economist, former Non Executive Director, Central Bank and Managing Partner of Indecon Economic Consultants, statement, AGR00001-068.

252. Minutes of CBFSAI board meeting held on 25 September 2008, INQ00023-009.

253. Crisis Resolutions Options Paper, INQ00168.

254. Alan Gray, Economist, former Non Executive Director, Central Bank and Managing Partner of Indecon Economic Consultants. [Brian Cowen stated to the Inquiry that he was someone whose views he respected], transcript, INQ00089-007.

255. Alan Gray, Economist, former Non Executive Director, Central Bank and Managing Partner of Indecon Economic Consultants, transcript, INQ00096-007.

256. The Inquiry has evidence of a copy of the letter addressed personally to Kevin Cardiff, DOF03290.

257. Letter from Alan Gray to Kevin Cardiff, DOF03290-004/005.

258. Letter from Alan Gray to Kevin Cardiff, DOF03290-004.

259. Letter from Alan Gray to Kevin Cardiff, DOF03290-005.

260. EBS Board presentation, 26 September 2008, EBS00151.

261. Email from William Beausang to Brendan McDonagh, 13.26, 26 September 2008, DOF03309.

262. Email from Brendan McDonagh to William Beausang, 13.26, 26 September 2008, DOF03309.

263. Presentation to NTMA, Merrill Lynch, dated 26 September 2008, DOF02557.

264. Attendees at Merrill Lynch presentation on 26 September 2008: Minister for Finance, MLx3,Bob O’Hara, Con Horan, Kevin Cardiff, David Doyle, DOF03375.

265. Presentation to NTMA, Merrill Lynch, dated 26 September 2008, DOF02557.

266. Minutes of Meeting with Merrill Lynch, 26 September 2008, DOF02809.

267. Jean Claude Trichet, former President of the ECB, presented a paper and responded to questions by members of the Joint Committee of which he had prior notification, at a meeting of the Institute of International and European Affairs at the Royal Hospital Kilmainham on 30 of April 2015. He did not appear as a witness before the Joint Committee, nor could he be directed to appear because he is not an Irish citizen, nor is he resident in the State. He was subsequently requested by the Joint Committee to assist the inquiry on issues where material clarifications were required. He chose not to assist.

268. Jean-Claude Trichet, former President of the ECB, transcript, INQ00140-025.

269. John Hurley, former Governor, Central Bank, transcript, INQ00047-063.

270. John Hurley, former Governor, Central Bank, transcript, INQ00047-065.

271. John Hurley, former Governor, Central Bank, transcript, INQ00047-064.

272. Jean-Claude Trichet, former President of the ECB, transcript, INQ00140-024.

273. Jean-Claude Trichet, former President of the ECB, transcript, INQ00140-024.

274. AIB board meeting minutes, AIB02247-001.

275. Email John Loughlin PwC to Brendan McDonagh NTMA, 28 September 2008, DOF07880.

276. Memorandum from Merrill Lynch, NTMA00399-002/003.

277. Memorandum from Merrill Lynch, NTMA00399.

278. Brendan McDonagh, former Director of Finance, Technology & Risk, NTMA, transcript, INQ00090-017.

279. Memorandum from Merrill Lynch, NTMA00399-003 to 007.

280. Memorandum from Merrill Lynch, NTMA00399-004.

281. Memorandum from Merrill Lynch, NTMA00399-003.

282. Memorandum from Merrill Lynch, NTMA00399-007.

283. Briefing for Cabinet Meeting, Sunday 28 September, DOF03154.

284. Dermot McCarthy, former Secretary General, Department of the Taoiseach and Secretary General to the Government, transcript, INQ00108-012.

285. Bullet Points for cabinet 28 September 2008, DOT00161.

286. Dermot McCarthy, former Secretary General, Department of the Taoiseach and Secretary General to the Government, transcript, INQ00108-012.

287. Mary Harney, former Tánaiste & Leader of the Progressive Democrats, transcript, INQ00136-036.

288. Mary Harney, former Tánaiste & Leader of the Progressive Democrats, transcript, INQ00136-040.

289. Dermot McCarthy, former Secretary General, Department of the Taoiseach and Secretary General to the Government, transcript, INQ00108-012.

290. Anglo Board meeting minute, 29 September 2008, IBRC00605-001.

291. Dermot Gleeson, former Chairman, AIB, INQ00123-049.

292. Richard Burrows, former Governor, BOI, transcript, INQ00104-016.

293. Richard Burrows, former Governor, BOI, transcript, INQ00104-016.

294. Brian Goggin, former Group Chief Executive, BOI, transcript, INQ00139-009.

295. Alan Gray, Economist, former Non Executive Director, Central Bank and Managing Partner of Indecon Economic Consultants, transcript, INQ00096-012.

296. Anglo Irish Bank, Minutes of the Board of Directors, 29 September, IBRC00605.

297. Anglo Irish Bank, Minutes of the Board of Directors, 29 September, IBRC00605.

298. Richard Burrows, former Governor, BOI, transcript, INQ00104-016.

299. Richard Burrows, former Governor, BOI, transcript, INQ00104-017.

300. Richard Burrows, former Governor, BOI, transcript, INQ00104-017.

301. BOI Court Minute extract, 3 October 2008, BOI03886.

302. Richard Burrows, former Governor, BOI, transcript, INQ00104-043.

303. John Hurley, former Governor, Central Bank, transcript, INQ00047-097.

304. Brian Goggin, former Group Chief Executive, BOI, transcript, INQ00139.

305. Richie Boucher, Group CEO, BOI, transcript paragraph 606. BOI Court minute extract dated 3 October refers to a visit by Fitzpatrick and Drumm to BOI to consider a takeover of Anglo. They also advised that they would be approaching AIB with the same request, BOI03886-002.

306. Bank of Ireland Group Liquidity Committee Minutes, 29 September, BOI00394-010.

307. William Beausang, former Assistant Secretary, Department of Finance, statement, WBE00051-014.

308. David Begg, former General Secretary ICTU and Central Bank board member, transcript, INQ00118-012.

309. Notes of events occurring on Monday & Tuesday (29 & 30 September), Dermot Gleeson, AIB02291.

310. Richard Burrows, former Governor, BOI, transcript, INQ00104-017.

311. Richard Burrows, former Governor, BOI, transcript, INQ00104-017.

312. Dermot Gleeson, former Chairman, AIB, transcript, INQ00123-009.

313. Dermot Gleeson, former Chairman, AIB, transcript, INQ00123-049.

Chapter 1: The Banks

Introduction

Irish banks had been national businesses for decades, set up to serve local and national enterprises. However, by the mid to late 1990s, the bigger banks were establishing an international presence; AIB bought into Bank Zachodni in Poland and Bank of Ireland bought Bristol and West in the UK. As Ireland’s economy began to grow, National Australia Bank entered into the retail market. The International Financial Services Centre (IFSC) opened in Dublin which also provided a location for the emerging global non-retail financial business.

Klaus Regling & Max Watson said in ‘A1 Preliminary Report on The Sources of Ireland’s Banking Crisis’:

“From the late 1990s onwards, the world economy was characterised by relatively high growth, low headline inflation, strong liquidity creation, and low interest rates. The literature has named this period ‘The Great Moderation,‘ which can be explained by the positive effects of globalisation, technological progress and productivity increases, and the stronger credibility of most central banks around the world, which had become independent from political interference, facilitating a stabilisation of inflation expectations.”¹

Ireland’s profile in world banking and world financial services expanded rapidly and, by the early 2000s, was well established.

Cheap Money, the Euro and China

Throughout the early 2000s, trade between the US and China grew, resulting in a surplus in favour of China. The Chinese Government recycled much of the new and surplus money back into the US by investing in US treasuries (Government bonds). In turn, the US Federal Reserve (Central Bank) invested the bond monies in US banks and insurance companies for a higher return. A high-risk loop of mutual inter-dependencies stretching from Chinese investors to US householders had formed, with every party in the loop hoping to profit.

David Duffy, Chief Executive Officer, AIB, said:

“… It’s a once in a generation circumstance where the availability of a huge amount of liquidity including retail bank liquidity which wasn’t available before in the sense that it was made available as well as geopolitical events where China, in order to grow, was very much a supporter of a cheap cost of capital through its purchasing of US debt despite the overall levels of debt. …the US consumer became very heavily indebted and that was a contributor to the property boom.”²

The creation of the Euro and the growth of the Chinese economy both affected the world economy. Professor Philip Lane, Professor of International Macroeconomics and Director of the Institute of International Integration Studies in Trinity College Dublin, explained some of the international background:

“China was growing so quickly that it was important in the late 1990s, but by the mid-2000s it was very important. That had trading effects, although maybe less so here. For example, the economies of Portugal, Greece, Italy and so on were quite affected by the rise of cheap imports from China. Financially, the surpluses coming out of China were essentially flowing into the US financial system. Low interest rates in the US prompted, for example, the rise of securitisation in US financial markets and European banks were active in the US system. Therefore, there was a deep connection between what was going on in the US in the mid-2000s and what was going on in Europe. A lot of that was being intermediated through banks. European banks were important in linking the US financial system to the European financial system.”³

David Duffy also said in his evidence to the Joint Committee:

“That cheap money was allowing every market to chase property and when it collapsed in the sub-prime and then was further influenced by allowing banks to go bankrupt in the US, there were many more banks were very close to going bankrupt. So the extraordinary measures of the US Government at the time, both negative and positive, if you put all of those together, it is an exceptional period of time. Ireland’s problem was that we were very badly positioned to react to that given our concentration.”⁴

From around 2003, the Irish started to invest a very high proportion of national income and personal income in property.⁵ This was enabled by the ready availability of cheap money on the wholesale money markets.

Brendan McDonagh, CEO of NAMA said:

“I think, when you look at the … again, at the growth in the balance sheets of the banks between 2003 and 2008 … the banks were lending, but they were effectively lending to a longer-term asset class, which was property, but they were funded by short-term cheap, wholesale money market deposits. So, they were borrowing at, you know, one month, three month, six months at around 2% … a lot of it, you know, German money coming into Ireland, looking for a home. And, you know, once the crisis happened, all those depositors withdrew, took their money back and the banks were left long on assets but short on cash.”⁶

Global Driver: Europe and the Euro

A number of factors within the single currency context contributed to the liquidity crunch preceding the economic crash of 2008, principally:

1. EU monetary union and control of monetary policy
2. Design faults of the Euro
3. Foreign exchange risk eliminated
4. Interest rate harmonisation

1. EU monetary union and control of monetary policy

The free movement of capital and its attendant benefits provided a critical rationale for the introduction of the euro. The EU’s developed and expanding status bolstered available liquidity. European investors began to look favourably on Ireland, given its impressive economic performance throughout much of the 1990s and into the mid-2000s.⁷ A major expansion in liquidity in Ireland was the result.

“…Prior to monetary union, Ireland and Spain had probably under-invested in housing as we had a higher cost of capital than in countries like Germany or France. Given the demographic profile, we needed to invest in housing. In permitting a more rapid adjustment to the housing stock, the lower cost of capital was beneficial. However, it was the failure to appropriately control this surge in investment which eventually proved fatal…”⁸

2. Design faults of the Euro

The Eurozone was an economic and monetary union that lacked a banking union. The Stability and Growth Pact continued only certain aspects of the convergence criteria, considering that others would be successfully addressed by the European System of Central Banks (ESCB) and European Central Bank (ECB). In the absence of the exchange rate and the domestic interest rate, the behaviour of the Irish economy was allowed to change in ways that would not have been previously possible due to external pressures placed on the punt as the real effective exchange rate deteriorated.

Professor John FitzGerald, Research Professor at the Economic and Social Research Institute (ESRI), told us:

“You do not have the interest rate tool to manage an economy or to manage inflation and, in particular, asset market bubbles. You have to use other instruments, that is, fiscal policy. It was something which we did not anticipate or talk about. It is clear from the literature before monetary union, people were barking up the wrong tree about the problems of monetary union, not just in Ireland but elsewhere that one needs to use fiscal policy to manage housing market bubbles.”⁹

In the absence of a banking union, where free capital flows were facilitated by the new currency system, Ireland needed to modify its approach to policy formation in the fiscal and monetary spaces. The gaps between the convergence criteria and entry into the Eurozone on 1 January 1999 were sizeable refer to following table. The reference criteria were:

• Inflation no more than 1.5 percentage points above the average of the three countries with the lowest rates.
• Long term interest rates no more than 2 percentage points above the average of the three countries with the lowest rates.
• Exchange rate – within normal band of the Exchange Rate Mechanism for previous two years.
• National budget deficit less than 3% GDP.
• National debt less than 60% of GDP – or heading in the right direction.

The criteria of an optimal currency area highlights the importance of consolidated fiscal policy across members of the currency zone and the importance of fiscal transfers, as well as labour mobility. These facts were present but considered of the utmost importance in the Irish context. The Irish approach to fiscal policy was coloured by the experience of the 1980s and the fiscal consolidation that took place as part of the protracted recession, and Ireland’s labour market was nearing full employment at the time. According to John FitzGerald:

“…there was a need to use fiscal policy in a different way. In terms of the economics literature, the use of fiscal policy to manage the cycle had gone out of fashion, as the Senator is probably aware, saying fine tuning is not possible. This is not fine tuning, this is stopping disaster by using fiscal policy differently. Hopefully we have learned our lesson.”¹⁰

Historical compliance with the Maastricht criteria

Source: Centre for Economic Policy Research.¹¹

3. Foreign exchange risk eliminated

The introduction of the Euro eliminated foreign exchange currency risk across the majority of EU Member States. That provided a platform for access to cheap liquidity by financial institutions from large client deposit bases in different countries. It also helped foster a perception outside the EU that the risks of euro Member States were pegged to that of the best performers, notably Germany with its AAA status. Thus, for certain types of investors, a 10 year Irish bond paying annual interest of 2% was more attractive than a 10 year German bond paying annual interest of 1%. In such a scenario, the short-term gain and risk would trump the longer-term gain and risk, even though the scale, structure, markets and risks of the Irish and German economies were vastly different.

As was stated in the Nyberg Report:

“…The Irish economy and Irish financial institutions were, furthermore, exposed to the expansionary financial incentives associated with membership of the Euro area. The disappearance of exchange risk and the absence of euro-wide inflationary pressures caused a significant reduction in interest rates, compared to the Irish Punt historic rates, while there was virtually unfettered access to funding from European and other capital markets (Figure 1.2). At the same time competition increased via new non-Irish entrants into domestic financial markets…”¹²

The EU financial institutions used the new Euro denominated liquidity to invest in bond offerings from the Irish financial institutions for an incremental return. The Irish institutions lent to developers who in turn invested in property and construction, seeking to obtain an even higher return. Some investors formed syndicates (group of borrowers pooling monies together) to invest in tax designated and non-tax designated property-related ventures. Householders, along with investors, also borrowed monies to purchase housing and second properties.

Brendan McDonagh said:

“…While some of the lending was to professional, well-managed entities, much of it was to individuals or syndicates whose primary business was not property developments, or who became involved in property developments relatively late in the cycle”¹³ and went on to say “They were new arrivals, a lot of the professional class. A lot of the professional class got into syndicates, particularly to buy land, and particularly to buy land mainly in … a lot of it in regional Ireland…”¹⁴

4. Interest rate harmonisation

Under European Monetary Union (EMU), the ECB sets interest rates to meet the needs of the Eurozone economy as a whole. This resulted in an interest rate which, for many years in the run-up to the crisis, was set at a level which was too low for Ireland. That resulted in a low or, at times, negative real interest rate for Ireland, further aggravating the boom. For countries experiencing low growth or recession, the opposite effect occurred.¹⁵

David Doyle, former Secretary General, Department of Finance, said:

“…Prior to the establishment of the ECB the Irish Central Bank was fully responsible for monetary policy and financial stability and regulation. It set interest rates at a level that were appropriate to the specific conditions of the Irish Economy. It lost this authority following the entry into the Euro. The ECB did not appear to regard the question of curbing asset prices or excessive credit growth through the interest rate mechanism as appropriate, viewing this as a matter for the domestic central banks and regulators…”¹⁶

Bertie Ahern, former Taoiseach, said:

“…We were … able gradually to remove incentives from the property market but membership of the euro meant that we were unable to raise interest rates. Accordingly… according to the IMF report in the summer of 2009, the housing boom was caused mainly by cheap credit due to low interest rates, along with rising incomes and a strong demand for housing…”¹⁷

An IMF Staff Report contained the following:

“The boom years stored up immense problems. Following a decade of export- and FDI (foreign direct investment) led growth supported by broad-based productivity gains, from about 2003 on the Irish economy embarked on a domestic boom underpinned by lax lending. Stiff competition for market share from foreign-owned as well as domestic banks pushed underwriting standards lower, and the feedback effect of rising collateral values fuelled the leveraging process. Rapidly rising property prices also drove high fixed investment in commercial and residential property, and a positive wealth effect fed private consumption, raising incomes and employment. Wages and prices rose, eroding competitiveness and compressing real interest rates. The integration of the Irish financial system into the broader euro area financial landscape, as well as the apparently strong fiscal position of the sovereign, gave Irish banks unfettered access to wholesale funding that turbocharged their asset expansion.”¹⁸

Irish Financial Institutions

During the Context Phase of the public hearings, the Joint Committee heard evidence from Peter Nyberg, Rob Wright, Patrick Honohan and Klaus Regling, all of whom had completed reviews of the crisis. The key findings of these reports as they related to the banks were as follows:

• The Banking Crisis occurred because there was a malfunctioning of risk mitigating controls (Nyberg).¹⁹
• Domestic factors were decisive in causing the Crisis, facilitated by international factors (Nyberg).
• Banks engaged in overly risk –taking behaviour in which the authorities behaved passively (Nyberg).
• The enhanced wholesale funding available from the single currency “turbo charged” growth prospects for the Irish banks (Nyberg).
• There was a property bubble and unsustainable growth between 2002 and 2007 (Wright).²⁰
• Ineffective micro-prudential regulation due to reliance on light touch regulation that trusted the banks (Honohan).²¹
• Even though the banks might have accepted subliminally that there were risks, they brushed those aside (Honohan).
• The stress tests in 2006 were not severe enough (Honohan).
• Commercial property lending was the biggest problem (Regling).²²
• The huge concentration of some banks in commercial real estate should have sounded the alarm bells in advance of the crisis (Regling).
• Aggressive lending policy pervaded the banks at various grades, junior and senior (Regling).

The Joint Committee wanted to establish, through evidence given by bank executives and board members, the extent to which the findings outlined above were the reasons for the collapse of the banking industry in Ireland. In particular the Committee examined the following key areas:

• The scale of Wholesale Funding Growth
• Competition
• Commercial Property/Real Estate
• Residential Property
• Large Exposures/Cross-Bank Lending
• Interest Roll-Up
• Regulation of the Banks (covered in Chapter 4).

The Joint Committee then examined how these key issues were dealt with within the banks and focused on lending practices.

Scale of Wholesale Funding Growth

Bank lending had traditionally been funded from customer deposits. This was regarded as a stable means of funding banks since deposits generally stay with a bank. Some financial institutions were completely funded by deposits in the late 1990s.

The introduction of the single currency enabled Irish banks to access credit with a low interest rate from the wholesale markets. These markets are an important part of the funding mechanism of banks, but the Irish banks became increasingly dependent on such funding. The Loan to Deposit Ratio (LDR) of the Irish banks which reflects the ratio of the size of lending book to that of customer deposits began to increase. Where the LDR exceeded 100%, it became necessary to borrow from the wholesale money markets to fund lending. Some banks funded their lending primarily through issuing bonds, while others funded their lending primarily through a mixture of short-term deposits and bonds. The Joint Committee explored the growth of such funding with witnesses, and the effect or otherwise that the ability to borrow cheaply from the wholesale markets had on the Irish banking system.

The Loan to Deposit Ratios of the Covered Banks between 2002 and 2008 were set out in the Nyberg Report in the following graph:

Source: Nyberg Report.²³

Access to substantial euro denominated liquidity enabled the Irish banks to finance the substantial growth of their loan books from 2002 to 2008 through the increase of debt securities and wholesale deposits. This altered the refinancing pattern of the banks dramatically from 2003 onwards. Customer deposits needed to be supplemented with additional wholesale borrowings to finance the strong credit growth.²⁴

The Irish banks rapidly increased the size of their balance sheets in the years from 2000 to 2008.²⁵ Lending expanded by some 25% per annum, which was roughly twice the rate of growth in the Eurozone as a whole as shown in the following table.²⁶

Source: Nyberg Report²⁷

However, as the financial institutions had insufficient deposits on their books to fund their balance sheet growth, they became increasingly reliant on short- and medium-term funding from the wholesale money markets to provide the liquidity they needed.

Access to wholesale funding enabled a ten-fold increase in the bond issuance activities of the main Irish banks between 2000 and 2008. Indeed, in the five years to mid-2008 the net foreign liabilities of the Irish banking sector increased from about 20% to about 70% of GDP, and wholesale funding rose to 55% of assets.28

Borrowings on the Irish financial institutions’ balance sheets derived from wholesale sources grew from €26 billion to €129 billion,²⁹ between 2002 to 2008, as shown in the following table, at which stage Ireland had the highest Loan to Deposit Ratio in the European Union.

Source: Nyberg Report³⁰

By 2007, due to growing concerns about the risks of inter-bank lending, available liquidity became more difficult to obtain across Europe, and indeed worldwide. The ECB acted to provide additional liquidity to the Eurozone from August 2007, through the injection of substantial funds.

Philip Lane said to the Joint Committee:

“During 2007-2009, the availability of eurosystem liquidity provided an important buffer during the international financial crisis: banks in the euro area could replace private funding with central bank funding. For banks with insufficient eurosystem-eligible collateral, national central banks could also provide emergency liquidity assistance (ELA), within the framework set out by the eurosystem.”³¹

Key Figures From Banks 2000-2008

The Joint Committee shows the key figures of the Financial Institutions between the years 2000 to 2008 below. See graphs and table below:

Source: All figures taken from published Annual Reports. IL&P figures include figures for banking activities only. For 2005-08 the Assets figures are extracted from consolidated IFRS statements.

The degree of dependence on wholesale markets of each of the banks is set out below.

Allied Irish Bank

In 2003, AIB had a LDR of 114% and this grew to 143% in 2006.³² In a proposal to revise the Adjusted Loan Deposit Ratio in the June 2007 forecast, a 2007 figure of 162% was indicated for LDR on a balance sheet that had moved from €78.2 billion to €188 billion in the same period. The presentation to the AIB board, dated 21 June 2007,³³ highlights the use of an Adjusted Loan Deposit Ratio, which AIB had been using since 2004, to introduce amendments to the use of Mortgage Trust Promissory Notes, Issued Covered Bonds and Wholesale Funding (greater than one year) as adjusting factors.

John O’Donnell, former Chief Financial Officer of AIB, said that the bank’s level of wholesale funding was in line with peer banks and suggested long-term wholesale funding “may be the most reliable and stable funding available in a crisis.” He noted that the bank was conscious of the “greater risks”of shorter-term wholesale funding and steps were taken to put a proportion of it on a longer duration. He said that, prior to the crisis, AIB’s funding profile would not have been considered high risk and referred to a 2007 Standard & Poor’s Report. To his knowledge, no more than 20% of the bank’s funding would mature in a year.³⁴

Bank of Ireland

Ronan Murphy, former Group Chief Risk Officer, BOI, noted the “super-abundance of liquidity”after 9/11 and prior to the liquidity crisis of 2007. He noted that the bank’s “Strategy 2012”, signed off by the board in July 2006, called for significant growth which could only be funded by access to wholesale funding, which he then believed was “an acceptable and reasonable risk.”³⁵

John O’Donovan, former Chief Financial Officer of BOI, noted the shift from retail deposit funding towards wholesale funding after 2000. He indicated that 41% of the Group’s balance sheet was sourced from the wholesale markets in March 2008 and the expansion of the bank’s loan book, particularly into areas that did not generate deposits, had brought a greater reliance on wholesale funding. He said that the funding was diversified by geography and product line and that the risk was mitigated by the extension of the maturity profile. However, these measures were not sufficient to cope with the closure of wholesale markets.³⁶

Anglo Irish Bank

In his opening remarks, Tom Browne, former Managing Director of Lending Ireland, Anglo, said:

“over the ten years to 2005, Anglo Irish Bank had transformed from being a small player in the Irish marketplace to becoming a serious player in terms of market share in chosen segments in Ireland.”³⁷

The bank achieved this, in his opinion, by reason of a number of factors:

“a very active long-standing client base, many of whom had become the leading players in the property development and investment sectors; very strong customer loyalty across the core client base, which ensured a high level of repeat business for the bank; and an economic environment with low interest rates and wholesale bank funding at unprecedented levels.”³⁸

He pointed out that throughout the early part of 2007, while there was no indication of stress

“…the pressure which emerged ultimately, post the Northern Rock issue, demonstrated that the funding base was not sufficiently wide, deep or stable to underpin the scale of the loan book.”³⁹

Matt Moran, former Chief Financial Officer, Anglo, pointed out that the bank’s funding model had a limited degree of geographic diversity with the main sources from within the Irish and UK markets. He said that the bank, not being a retail bank with a wide branch network, did not naturally have a customer funding franchise linked to current accounts. He said that the availability of money and the different sources available in capital markets was unprecedented post the introduction of the Euro. He also said:

“The ample supply of money made it relatively easy for banks to access funding. This is undoubtedly one of the core factors which set the environment for the root cause of the crisis experienced across Europe. Its impact should not be underestimated.”⁴⁰

He went on to point out that following the collapse of Lehman’s Brothers, the bank was

“…far too small to control its destiny in this area. The Market set the mix, maturity profile and cost. From the 15 of September 2008 onwards, it was very difficult to raise any funding in the markets”⁴¹

Peter Fitzgerald, former Director of Corporate and Retail Treasury, Anglo Irish Bank, pointed out that “Anglo was always attracting funds that were highly mobile in nature. In hindsight this was a risk that quickly escalated in line with the rapid growth in that business.”⁴²

He acknowledged that this growing dependence on wholesale funding was an issue and that it was obvious to them in late 2007, early 2008. He said:

“…I think one of the messages from the 2008 results was that the aim of the bank, predominately through the customer deposit side, was to be 100% loan to deposit ratio by 2011.”⁴³

Ulster Bank

RBS Group Treasury assumed responsibility for treasury and balance sheet management and undertook to meet the capital and funding needs of Ulster Bank directly. This effectively took control of the liquidity funding out of the hands of the Irish entity and the capital funding requirements were viewed in the context of the overall RBS Group situation. By September 2007, 45% of Ulster Bank’s group funding was provided by wholesale markets.⁴⁴

The former Group Finance Officer, Michael Torpey, said “… I very much regret that, like so many others, I did not foresee… the extent or duration of the turbulence in wholesale funding markets.”⁴⁵

Irish Life and Permanent (IL&P)

The Nyberg Report found that “IL&P was very dependent on wholesale funding”and it was noted that:

“IL&P had the backstop of being able to use residential mortgages (which are deemed to be less risky than commercial mortgages) to access ECB funding when wholesale funding markets became less accessible.”⁴⁶

David Gantly former Group Treasurer of IL&P, told the Joint Committee that:

“Irish Life and Permanent’s balance sheet differed from the two main banks in that 85% of the assets comprised of residential mortgages, which were highly liquid in normal market conditions.”⁴⁷

He explained that the bank’s funding “was broadly split into three thirds: long-term debt, customer accounts and short-term wholesale debt.”⁴⁸

Towards late 2007, however, the bank was increasingly aware of potential problems arising from its exposure to wholesale market funding. David Gantly said that the bank moved to prepare pools of mortgage assets as a contingency measure. He said in his witness statement: “This is exactly what we would have done if we were to prepare a portion of the mortgage portfolio for a conventional securitisation.”⁴⁹

Despite having the ability to securitise these assets, the bank found itself in severe difficulties during the crisis. David Went, former Group Chief Executive of IL&P, informed the Joint Committee:

“Events subsequently proved this funding model absolutely inadequate. External events together with negative views on Irish credit portfolios ensured that very rapidly all capital markets were closed to IL&P with the disastrous effects that we now know. The error here was clearly failing to recognise Peter Nyberg’s point that in the capital markets there is only one counter-party and hence if one source closes to a borrower all will close simultaneously.”⁵⁰

He was asked by the Joint Committee “were you aware of the issues and did you regard this as a fundamental risk or not?” to which he replied:

“Well, we were clearly aware of the issues because we reviewed on a monthly basis the make-up of our funding portfolio. However, we concluded that for us the primary thing that we looked at was the extent to which customer deposits, long-term debt and securitisation funded our total loan book. And that was about two-thirds of it was funded through that, and these were seen as relatively stable source of funding … and that proportion had been relatively stable over a number of years.”⁵¹

On the issue of wholesale funding, he told the Joint Committee that Irish banks “had been somewhat constrained in terms of their access to funding”⁵² before the Euro but after its introduction “they now had access to the second, or one of the two widest and deepest and most liquid markets in the world.”⁵³ He concluded that the access the Euro gave Irish banks to wholesale funding “was seen as a very attractive proposition.”⁵⁴

“The Group’s lending book grew aggressively from €12.9bn in 2001 to €39.2bn in 2007. This growth was largely funded through the wholesale markets … customer accounts only grew from €9.5bn to €13.6bn in the same period… The Group’s position was highly precarious in 2008 due to its high level of short term funding and therefore its high loan to deposit ratio.”⁵⁵

IL&P did not go down the commercial property route to growth. However, it did fund the expansion of its loan portfolio to a noticeable degree through the wholesale markets.

David Went also told us that the bank, as part of its contingency plans,

“assumed that the regulatory authorities would be aggressive in providing support to the system, making Central Bank borrowing effectively the swing factor in ensuring the survival of the institution.”⁵⁶

It would appear that, for IL&P at least, the assumption that the regulatory authorities and the Central Bank would not only have, but would implement, a contingency plan formed part of their own assumptions about what a worse-case scenario would actually entail.

INBS

John Stanley Purcell, Director and Secretary, INBS said:

“INBS was funded in equal amounts from customer accounts and the wholesale market…The funds raised on the wholesale market extended the maturity profile of borrowings”⁵⁷

When Michael Fingleton, former Chief Executive, INBS was questioned in relation to access to wholesale funding at the time of the Guarantee he said “We in 2008 and prior to the guarantee, had no need to access the…wholesale market.”⁵⁸

Michael Walsh, former Chairman, said that, with the benefit of hindsight, “I believe that the difficulties which the Society subsequently encountered and the associated losses arose from a combination of factors.”⁵⁹ He outlined these as the bubble of cheap credit, hyper competition, markets freezing and inability to finance. He stated that the inability to refinance due to:

“…the resulting drying up of liquidity in the international inter-bank markets (Lehmans, Bear Stearns) meant that banks could not source adequate funding and therefore the Society’s customers found it increasingly difficult to refinance their short term loans from the Society with other lenders as had been traditionally been the case.”⁶⁰

EBS

Fergus Murphy, former Group Chief Executive Officer at EBS said in evidence that the society had traditionally pursued a conservative funding strategy, but the impact of the contraction in the global funding markets that began in mid-2007:

“…was significantly impeding EBS’s access to the wholesale and corporate funds…The complete dislocation of the wholesale funding markets in the latter half of 2007 prevented EBS from securing any long term funding.”⁶¹

Fergus Murphy explained:

“when this influx of liquidity across the world churning around was taking place we received, and our financial institutions received, more of that liquidity than we should have and it meant that Irish banks were able to go to the wholesale markets in a way that they never were before. For example, in 1998, the EBS balance sheet was 100% funded by retail deposits. When I took over in 2008, it was 26% funded by retail deposits. So what had happened in the interim was the effect of what I was just describing.”⁶²

Competition

Faced with increased competition, some of the financial institutions responded to market pressure in order to protect their customer base and market shares. Management in these banks were also concerned about peer group comparisons.

Michael Walsh commented on market share:

“if you look at [total] market shares … basically Anglo increased its market share and AIB and Bank of Ireland decreased. But if you were to actually look at it in terms of […] property and construction, you’ll find that, you know, the two big lenders into property and construction in this country were AIB and Anglo. Bank of Ireland is less than half of either of those.”⁶³

In his evidence to the Joint Committee, Michael Fingleton said:

“following the entry of Bank of Scotland and the other foreign-owned banks into the market in 1999 it became increasingly difficult for the society to compete in the residential loans market.”⁶⁴

Allied Irish Bank

In particular, evidence was given to the Joint Committee to the effect that hitherto established lending policies were relaxed, or re-interpreted, as mere “guidelines”in the rush to secure new business at AIB. For example, Jim O’Leary, former Independent Non-Executive Director of AIB, stated that:

“There was no doubt that the activities of competitors influenced decisions made by AIB…in the area of mortgage lending, for example, in order to protect market share, AIB felt compelled to relax its underwriting standards, (most obviously in respect to LTV ratios) over time, in response to aggressive competition.”⁶⁵

When asked to compare the growth of the development, property and construction book in AIB as against BOI and Anglo, Eugene Sheehy, former Chief Executive Officer, AIB, responded as follows:

“I note the comparators you’re making and I’m only going to talk about a comparison between ourselves and Bank of Ireland because that’s the only equivalence. They were a retail commercial bank; so are we. There was a slight difference in our customer base. We were much heavier than they were in the SME sector and property and construction was widespread. We had, you know, in the … we had very large customers and then we had 650 customers who had property and construction loans of over €1 million, so it wasn’t … it was very broadly spread and reflected our franchise and the nature of our franchise.”⁶⁶

Bank of Ireland

Bank of Ireland, in turn, saw AIB as their “most significant competitor.”⁶⁷ The evidence given to the Joint Committee by Bank of Ireland included an analysis carried out in 2005 of all its competitors across the retail spectrum.⁶⁸ This analysis, which focussed on retail banking, set out the view Bank of Ireland had of others such as Ulster Bank, Danske, BoSI and Rabobank but it did not refer to Anglo.

However Richie Boucher, Chief Executive Officer, BOI, said, in his evidence to the Joint Committee, “certainly, we did compete with Anglo at the higher end…corporate property market.”⁶⁹

Brian Goggin, former Chief Executive Officer, BOI, gave evidence that:

“Bank of Ireland had a market share across most of its product lines, ranging depending on which product line one would pick, but market shares ranging from kind of high teens right up to mid-30s, mid-30s in the case of working accounts or current accounts.”⁷⁰

Anglo

Tom Browne addressed the question of Anglo and market share in his evidence. He said:

“Over the ten years to 2005, Anglo Irish Bank had transformed from being a small player in the Irish market place to becoming a serious player in terms of market share in chosen segments in Ireland. The success of Anglo over the ten-year period to 2005 was reflected not just in the growth of the loan book, but also in year-on-year increases in earnings and a strong market rating.”⁷¹

He also said that competition grew in the domestic banking sector and that “this competition came from existing universal banks in Ireland and from emerging foreign lenders in the market.”⁷²

Tom Browne also referred to a decision taken by the board of Anglo in early 2006:

“on the basis of management advice, to change its lending policy reflecting the concerns we held about the acceleration in asset values and given the growing intensity of competition.”However, he said that “the failure to more forcibly implement the policy decision […] was a serious mistake.”⁷³

Despite the fact that Anglo “could see from early 2006 that the market was getting seriously overheated”,⁷⁴ the bank did not strictly adhere to the board’s decision.

Ulster Bank

Robert Gallagher, former Chief Executive Corporate Markets Division, Ulster Bank said that “the bank’s strategy was to become a third force in the Irish universal banking market, to challenge the dominance of the big two.”⁷⁵

Upon further questioning with regard to Ulster Bank acting “in support of the Group’s ambition to be the Number One Bank in Ireland”Robert Gallagher said that “We had … we had an ambition for that, yes.”⁷⁶

In addressing that same point, Michael Torpey said:

“it is entirely acceptable from a business perspective, in my view, that a small challenger can seek to grow significantly more rapidly than the general marketplace and significantly more rapidly than a competitor’s, in the interest of bringing competition to the marketplace and growing its position relative to the incumbents.”⁷⁷

He also dealt with the question of how the bank attempted to grow market share, by saying:

“The assumptions we made, unfortunately, were the wrong assumptions and it … it is unfortunate and in every respect – and it’s something that I very much regret – that we didn’t in fact challenge sufficiently on the variety of assumptions that underpinned the expectations of continuing growth in the market.”⁷⁸

Irish Life and Permanent (IL&P)

David Gantly was asked about the bank’s position on market share. He said that “a very stated objective of the group to be the No. 1 provider of retail financial services so I think there was an element of cross-sale seen in this, to be fair, as well.”⁷⁹ David Went also said that IL&P “decided essentially to be, you know, a mortgage lender, a plain vanilla mortgage lender.”⁸⁰

In expanding on the business model, David Went said:

“The adopted strategy won market acceptance at the time, and appeared logical focussing on lower risk widely spread portfolios of lending in a home market where we had operated successfully for many years and had substantial market presence while exiting a number of overseas investments that were high risk and sub-scale in order to invest capital in Ireland that appeared to offer substantial opportunities.”⁸¹

INBS

In his written submission to the Joint Committee, Michael Fingleton said that:

“The Society was not focused on increasing its market share but concentrated on lending to customers who were well known to the Society and who had been tried and tested and performed successfully in the past.”⁸²

Michael Walsh, corroborated Michael Fingleton’s evidence, when he said in his statement that “Hyper Competition: progressively from 2004 onward larger financial institutions piled into the market in which the Society had operated since 1992.”⁸³

In explaining the effect of the entry of foreign-owned banks into the market, Michael Fingleton said: “They undercut everybody, competition intensified, our book was attacked and we, effectively, couldn’t compete …”⁸⁴

EBS

Fergus Murphy said, to the Joint Committee, that his view of EBS’s approach to market share was that it was driven “More by survival than market share.”⁸⁵

The society, according to Fergus Murphy’s evidence, had concerns about its future as a mutual society. In the early 2000s “EBS were looking at options in terms of was there another way to preserve the mutual or mutual-like environment and code and heritage and, at the same time, get access to a bigger balance sheet and a more powerful engine…”⁸⁶ Interestingly, he did not see these concerns purely in terms of market share.

EBS was using land and development lending as part of a strategy to hold residential mortgage market share, and this strategy, in the opinion of Fergus Murphy, was a factor in its demise as an independent society.⁸⁷

Former Finance Director at EBS, Alan Merriman, gave evidence regarding the problems the society faced in maintaining its mortgage lending market share. He told the Joint Committee that two of the society’s core areas of business were the mortgage refinance market and the first-time buyer market, and that it found itself under increasing pressure from its competitors for market share in these areas. Alan Merriman noted that:

“… EBS as a traditional building society, having in an environment where it was one of the few players in a normal mortgage market, now found itself in a market where both ends were being very aggressively competed for.”⁸⁸

The issue of increased competition was also discussed by Fidelma Clarke, former Chief Risk Officer and Company Secretary, who said:

“I think I would and have described it as excessive competition. Absolutely there was excessive competition in the market, which led to downward pressure on the society’s core business, which led it to take decisions about what it could do to remain viable…”⁸⁹

Commercial Property/Real Estate

Having seen the increased use of wholesale market credit by Irish financial institutions, the next question to ask was: to what purpose was this credit put?

It is no secret to say that in the years leading up to the 2008 crisis, Irish financial institutions were over-concentrated in real estate lending, both commercial and residential, at home and abroad. The purpose of this section is to summarise the evidence the Joint Committee heard in relation to commercial real estate credit activity, and to decide whether or not it played a systemic role in the crisis experienced by Irish financial institutions in late 2008. Whereas the focus is on the engagement or otherwise of the financial institutions in this market, rather than the market itself, there is still a need to give a brief overview of the market for clarity. There is more to real estate than home mortgages.

As can be seen later in the report, the transfer of loans from the covered institutions into NAMA crystallised losses in the banks. These losses were covered by government recapitalisation. NAMA had commercial property transferred onto its book, as can be seen in Chapter 9. The total par value of these loans was €74.4 billion for which NAMA paid €31.7 billion. Residential property only consisted of 16.5% of the latter amount, which is similar to office developments which made up 16.6% and hotels alone accounted for 9.6%. Of the loans that remained on the banks’ balance sheets, commercial real estate had an impairment rate of 56.9%⁹⁰ which was over three times that of residential mortgages and over twice the average of all impaired loans.

The issue of commercial real estate lending and its impact on individual banks was discussed with the bank economists.

Pat McArdle, former Group Chief Economist, Ulster Bank, said: “However, the real problem was commercial and not mortgage lending, and this was not adequately stress tested.”⁹¹
Later on he said:

“But let’s assume that it was okay because no one ever reported these stress tests were going to cause any Irish banks to collapse, you know, we never got any inkling of that. So the banks, some banks anyway, Ulster Bank had stress tested for very significant house price falls and there was no problem. The problem was in the commercial mortgage book.”⁹²

Dan McLaughlin former Chief Economist, Bank of Ireland, said: “Plus, the major problem for the Irish banks wasn’t just Irish commercial property; US commercial property prices fell 40%, and UK commercial property prices fell 35%.”⁹³ He said, subsequently:

“I would point out is [sic] the major losses for the Irish banks were not in residential property, they were in commercial property … in commercial property. Not many people, if I recall, wrote anything about commercial property, and that was what caused the damage for Irish banks’ profitability and caused them to require significant capital inflow … injection from the State, not residential property.”⁹⁴

He also said:

“I think what happened for all of the banks, in 2008, 2009, was that having commercial property in different jurisdictions didn’t prove a very good risk diversification strategy, because in a crisis, unfortunately the correlations collapsed to one. In other words, they all collapsed together, and that is a rare phenomenon but that’s what happened.”⁹⁵

Later on Dan McLaughlin said: “I think just factually it is the commercial property price falls, asset price falls that opened up the huge capital losses in most of the banks.”⁹⁶

When asked, if house prices had not fallen but commercial property had fallen to the extent it did (67%), whether the banks would still have needed the amount of capital provided by the Irish state, Dan McLaughlin said:

“Well a lot of it, yes. They didn’t get the capital to cover residential mortgage losses because they haven’t put it in the results that they’ve had massive losses in residential mortgages.”⁹⁷

John Beggs, former Chief Economist, AIB Global Treasury, said:

“We had no information or very little information about what was happening in commercial property. We’ve done a lot of talking and analysis around housing because we had monthly statistics, we had population. When it came to the commercial side, we didn’t have that information. So we were acting in a very, almost naive way in that we didn’t have full information.”⁹⁸

When asked if he agreed with the opinion that commercial property broke the banks, John Beggs said:

“Yes, I do, based on the sort of analysis and the way they are thinking about it and looking at it. I mean, it wasn’t house prices that ended up requiring the additional capital… It was on the commercial property book, which had grown dramatically in the years leading up to the … to the banking crisis.”⁹⁹

The then Taoiseach Bertie Ahern agreed with this assessment. He said:

“I’m just talking about the debate – in the residential side. I mean, look what happened in the commercial property side. I mean, there was where the madness really took place…”¹⁰⁰

It is clear that commercial property loans were one of the fundamental fault lines in the Participating Institutions which led to them being rescued by the Irish State. A characteristic of this lending strategy was that it was, for the most part, concentrated within a very small number of borrowers.

In relation to the Irish real estate market, the Joint Committee heard evidence from John Moran, Managing Director of Jones Lang LaSalle Ireland. He started off by giving an explanation of the market:

“The Irish retail real estate market is made up of various components. There is the residential market, the development land and agricultural market, the investment market and the various occupier markets such as offices, retail, industrial, hotels and licensed and leisure premises.”¹⁰¹

He went on to give an overview of the Irish commercial real estate market from the perspective of Jones Lang LaSalle, which specialises in that market:

“Up to 2008 the commercial real estate market was growing strongly. There were increased levels of purchasing, leasing and construction activity. Ireland’s economy was performing well with GDP and employment driving the expansion. It is worth remembering that, at that time, we were the fastest growing economy in western Europe, the second wealthiest economy on a per capita basis measured by GDP and we had the fastest growing population in Europe. During that period unemployment averaged just over 4%, which was effectively full employment. That is important because the real strength in occupier and investor demand is what was supporting the property market. That demand was driving activity levels and increases in values and the capital values of Irish commercial investment property increased by 72% in the five-year period up to 30 September 2007, the date we define as the peak of the market in terms of value appreciation. Property yields were at record levels, which was a reflection of both the strong investor demand and the availability of significant amounts of debt.”¹⁰²

A supporting document from Jones Lang LaSalle, provided to the Joint Committee by John Moran, stated:

“Between 2004 and 2008 almost €8 billion worth of commercial investment property was sold in Ireland. 2006 was the peak year for investment volumes, with €3.6 billion traded in 12 months. For context, this compares to the previous record of €1.2 billion in 2005 and an average of €768 million per annum between 2001 and 2004.”¹⁰³

The document then went on to make a small but significant observation: “In addition to domestic spending, there was also considerable Irish investment activity overseas, particularly in the UK and continental Europe.”¹⁰⁴

In other words, according to Jones Lang LaSalle, the size of the Irish real estate market in the years leading up to the 2008 crisis was not the sum total of Irish developer investment in real estate, and neither should it be assumed that the Irish commercial property market was the sum total of credit advanced by Irish financial institutions alone for real estate investment purposes during the period under discussion.

Residential Property

Three key developments in the residential property market are considered in this section: Buy-To-Let Mortgages, 100% LTV Loans and Tracker Mortgages.

Buy-to-Let

As the property market became ever more buoyant, many of the banks’ retail customers were able to purchase a second or more properties leading to a significant increase in the buy-to-let market. This type of mortgage became more accessible for borrowers with the introduction of interest-only repayments for one, two or three years. When applying for one of these loans, an applicant would generally be permitted to use the equity of other properties that they owned as security.

Nyberg identified¹⁰⁵ two risks associated with the buy-to-let market that are not associated with mainstream residential lending:

• a borrower, when experiencing financial difficulty, would tend to prioritise the repayment of debt on the principal residence instead of the buy-to-let loan.
• ability to repay the buy-to-let loan was based on the potential rental income. Therefore if interest rates were to increase or the expected rental income was overestimated, the borrower may have difficulty in keeping the loan repayments up to date. This may also occur when the ‘interest only’ repayment term ended.

Richie Boucher, Group Chief Executive, BOI, stated that the buy-to-let lending “hadn’t been seasoned”in the Irish context and consequently “there hadn’t been sufficient experience of what would happen in a downturn.”¹⁰⁶

Increasing prevalence of 100% LTV loans

In 2005 Ulster Bank through First Active were the pioneers in offering 100% mortgages generally (i.e. applicants could borrow up to 100% of the purchase price of a property). As the purchase of property was not contingent on the borrower having to provide any capital, the bank bore 100% of the risk. To explain why Ulster Bank made 100% mortgages available in the first place, Cormac McCarthy, former Group Chief Executive and Director, said:

“…from a competitive position, we were losing share of the first-time buyer market because others were doing 100% mortgages. The second thing was we had seen customers who were to try and get the deposit for a house, were extending themselves on personal loans and credit cards, which is not the right way for people to find deposits for houses.…”¹⁰⁷

Some of the banks were less enthusiastic about the 100% mortgage as a product. In July 2005, David Went, the Group Chief Executive of IL&P, sent a “File Note”¹⁰⁸ to the other executive directors in the bank, in which he stated that he had spoken to the Regulator and “expressed reservations about the introduction of this product to the market.”He told us “…we concluded, having reviewed the options and having reviewed the risks that were inherent in this, we concluded that we had no option but to proceed.”¹⁰⁹

Similarly Brian Goggin stated that Bank of Ireland was a “reluctant follower”and that in order to protect its franchise, the bank offered 100% mortgages initially to professionals and then broadened the offer to first-time buyers.¹¹⁰

Tracker Mortgages

Another product innovation within the banking sector was the introduction of tracker mortgages. Banks offered tracker mortgages at a fixed rate above the ECB rate. They used this product as a method to gain market share. Tracker rates were considered stable and the commercial Irish banks could access low cost funding directly from the wholesale markets to fund their needs.

When asked if BOI thought it was going to make money from tracker mortgages, Richie Boucher said: “We had a presumption, I think, that we would always be able to borrow at or near ECB rates.” He then said that this presumption was:

“A very big mistake. You must always price your product based on the cost of your raw material, not of what you presume you might buy it. I don’t think a farmer would sell milk on the basis of what he thinks it might cost. You know we made a basic misassumption of not aligning the pricing of our product to the cost of the raw material. We presumed we could get the raw material and we guaranteed the customer that we always thought we could get the raw material at different price … it transpired we couldn’t.”¹¹¹

John O’Donnell, former Finance Director of AIB, stated that he “believed the risk was known and understood, albeit historically it had not been significant.”¹¹²

Ethna Tinney, former Non-Executive Director EBS, stated in her evidence to the Inquiry:

“And the volumes of tracker mortgages that, therefore, that we were attracting blinded us to the dangers of what would happen in terms of depressing the margin and so the final outcome … we can’t afford the tracker mortgages…”¹¹³

Large Exposures/Cross-Bank Lending

John Stanley Purcell was asked the following by the Joint Committee:

“Mr. Purcell, in the Project Harmony report, it would show that the society had a concentration of loans in the higher risk development sector, a concentration of loans in the higher loan-to-value bands, a concentration in its customer base – the top 30 commercial customers, for example, accounted for 53% of the total commercial loan book – and a concentration in sources of supplemental arrangement fees, representing 48% of profit in 2006. Indeed, 73% of those fees came from just nine customers. Did the board ever consider or did they become concerned or did they discuss those levels of concentrations and the correlation between them and whether or not they could increase the risk to the society’s business model?”¹¹⁴

In response, he said: “The board were aware of the concentration. The large exposures report would be produced and it would be a board document.”¹¹⁵

In her written statement, Niamh Brennan, former Non-Executive Director with Ulster Bank, wrote:

“In retrospect, it is now clear that growth in lending and, in particular, lending to the property development and construction sectors made Ulster Bank, like other Irish banks, vulnerable to a collapse in property values.”¹¹⁶

It is clear that a feature of lending to the property sector during the boom years was cross-bank lending whereby a number of different banks lent money to the same borrower.

In his evidence, Frank Daly Chairman of NAMA gave evidence that NAMA’s impression was that the banks seemed to have been acting “almost in isolation”from one another. “They didn’t really have much interest in what a particular client’s exposure was to another bank across the system.”¹¹⁷ NAMA’s view was that, not only did the banks not have sight of a particular client’s exposure to another bank across the system but also, “they didn’t really have much interest.”¹¹⁸ Frank Daly was of the view that retaining the client was undoubtedly a key factor: “there was an emphasis on a kind of relationship lending as much as lending for particular projects that actually seemed feasible.”¹¹⁹

Pat McArdle said that ‘cross borrowing’ by developers between banks “wasn’t known to me and I suspect wasn’t known to the banks either”, before concluding “so I think that was a key factor [in the problems that materialised].”¹²⁰

Apart from the clear need for effective regulatory oversight, the Joint Committee is of the view that the banks had a prudential duty to themselves to inquire, challenge and assess hidden risks arising from multi-bank borrowing by major clients.

Fintan Drury, a former Non-Executive director of Anglo Irish Bank, pointed out in his statement that:

“The property-related lending strategy of Anglo Irish Bank achieved exceptional returns over the period 2002 – 2008 and no one questioned their appropriateness over those years when the bank was revered by shareholders, analysts, rating agencies and commentators in Ireland and overseas.”¹²¹

He told the Inquiry that Anglo Irish Bank “… was, you know, clearly it was a monoline bank, that’s what it did”and in terms of investment property lending he believed that “somewhere between 80% and 90%”of the bank’s loan book related to property investment activities.¹²²
He continued:

“I was aware that there was a relatively small … that the ratio, if you like, in terms of the number, a relatively small number of clients who had quite a significant percentage of … of the lending, yes. Was I concerned about that? Not particularly.”¹²³

Matt Moran told the Inquiry:

“Concentration risk, amongst a small number of developers, partly due to the size of the economy, is now understood to have been too high and the ready availability of funding to banks led to too high a concentration of activity in such a small market.”¹²⁴

Distribution of NAMA debtor connections by size of nominal debt

Source: NAMA¹²⁵

Interest Roll-up

Interest roll-up refers to the practice whereby interest on a loan is added on to the outstanding loan balance ( “rolled-up”) where it effectively becomes part of the loan capital outstanding and accrues further interest. “Rolling-up”interest would generally allow a borrower not to repay interest as it falls due, but this would be done without placing the loan in default.

Of the €74.4 billion worth of loans which were transferred to NAMA, interest which had been rolled up amounted to €9 billion.¹²⁶ The breakdown of the interest roll-up figure estimated by NAMA for the Participating Institutions was as follows:¹²⁷

• AIB – €3.1 billion
• Anglo – €3 billion
• BOI – €1.8 billion
• INBS – €1 billion
• EBS – €0.1 billion

The provision of an interest roll-up facility to a borrower arose in two ways, either by an “interest repayment holiday” being agreed in advance between the bank and borrower or where the borrower had not been able to make a loan interest repayment and the accrued unpaid interest was added to the outstanding loan principal.

Michael O’Flynn, Founder and Managing Director, O’Flynn Construction, gave evidence that the banks’ practice was to allow interest to accumulate and be paid out of either the proceeds of a sale or rental income. The banks generally permitted such roll-up only for the limited period required to bring the project to market. The banks benefitted from a higher amount of interest and borrowers benefitted from not having to pay interest until the development or construction project had been completed.¹²⁸

In his evidence, Sean Mulryan, Chairman and Chief Executive, Ballymore Group, explained the concept and practice of interest roll-up in the following terms:

“In either a land or development scenario … interest is either cash serviced from borrower or shareholder equity or rolled up until ultimate proceeds are generated … Ballymore almost always requested interest roll up facilities over the term of the loan. Such was the competition in the lending market during the period 2001 to 2008, in Ireland and overseas, that interest roll up facilities were frequently offered by financial institutions.”¹²⁹

Brian Goggin gave evidence that “…roll-up of interest in a land bank transaction was perfectly in accordance with policy.”¹³⁰ Eugene Sheehy said “…there was interest roll-up because there was cash flow problems generally in the second half of ’08.”¹³¹

NAMA’s evidence to the Joint Committee was that, on acquisition of the property-related loans, the existence of interest roll-up per sewas not surprising. It was the extent of interest roll-up, especially cases where “new loans were being created to take account of the rolled up interest”that took NAMA by surprise.¹³²

Tom Browne was asked if interest roll-up had left Anglo exposed in the downturn. He acknowledged that it had and that it was a large concern for the bank. As a result of Anglo’s concern over property related loans, the bank changed their policy on interest roll-up in 2006 in an attempt to curtail this activity.¹³³

Interest roll-up benefited both banks and borrowers when market conditions were positive but, a serious difficulty arose when Ireland’s property market crashed and borrowers became unable to repay the principal into which the interest had been rolled up.

Gary McGann, Independent Non-Executive Director at Anglo, when asked in relation to interest roll-up “with such a narrow field of individuals did the bank consider that in terms of risk”,answered “Not specifically.”¹³⁴

Statement of Affairs

A “Statement of Affairs” is a summary of a borrower’s assets, liabilities and overall net worth.

Brian Patterson, former Chairman of IFSRA, said:

“after the crash, it emerged, as we know, that some large developers had never been asked by their bank to provide a statement of affairs nor had the bank properly assessed their net worth.”¹³⁵

Brendan McDonagh gave evidence that NAMA found that statements of affairs had frequently been relied upon by banks to provide comfort that a debtor’s financial position could support new lending and service liabilities, but that these were not always audited and were instead often self-certified by the borrowers themselves.¹³⁶

Reliance on Statements of Affairs was compounded by the fact that the assets of most relevant borrowers were comprised mainly or exclusively of property assets. As market prices had risen in the years up to 2007, the self-assessed net worth of borrowers also appeared to rise; this gave the banks “a sense of false comfort.”¹³⁷

Frank Daly explained the risk in the following terms:

“…once you begin to rely on personal guarantees then by definition you are relying on the personal wealth of the debtor. If the process by which that personal wealth is assessed is in any way doubtful – in other words if it is done on the basis of Statements of Affairs where the valuation of assets is essentially done by the debtor and maybe not rigorously examined or overseen by the banks – then you are getting into a cross-collateralisation right across the loan book and you are getting into it on the basis again of relationship banking, with not a huge amount of oversight.”¹³⁸

Michael O’Flynn, however, gave evidence of significant equity invested in the O’Flynn Group developments and also confirmed that the loans of the O’Flynn Group were not secured by any personal guarantee.¹³⁹

Types of Developers

At one end of the spectrum were developers who generally operated to high standards of governance, business case development and financial controls. At the other end of the spectrum were borrowers who lacked critical experience, knowledge and skills.

This classification was shared by a number of the developer witnesses. Sean Mulryan stated there were:

“ordinary people calling themselves property developers, buying properties, not alone in Ireland, in Bulgaria, in Romania, all over the world and in Ireland and building big portfolios on 95%, 100% finance.”¹⁴⁰

Michael O’Flynn, stated that there were:

“…part-time developers or people who had gone into the development business without having any understanding of the fundamentals involved.”¹⁴¹

Joe O’Reilly, Executive Chairman, Castlethorn Construction and Chartered Land Group also stated:

“…a number of people came into the business … they weren’t necessarily … they were in other businesses that changed into … that changed into … or they suddenly became a property developer overnight.”¹⁴²

Brendan McDonagh gave evidence that:

“The banks were quite clearly lending to individuals and companies that, notwithstanding the massive sums involved, had little or no supporting corporate infrastructure, had poor governance and had inadequate financial controls and this applied to companies of all sizes.”¹⁴³

In his evidence, Frank Daly said that there was also “…lending on hope value to people at the bottom.”¹⁴⁴
He added that a substantial amount of that type of borrowing was related to “land which wasn’t even zoned, which had hope value more than anything else.”¹⁴⁵ Brendan McDonagh said that in the case of some 600 or so such NAMA debtors, “…very few of them seemed to have any expertise in construction.”¹⁴⁶

The CRE sector loan exposure remaining in the Irish covered institutions at the end of 2013 totals €36.5 billion with an impairment rate of 56.9% totalling an amount of €20.8 billion. This issue will be considered further in Chapter 8: Post Guarantee Developments.

Outstanding loans and impairments of Irish banks, end-2013, (in €bn)

 Source: Schoenmaker¹⁴⁷

Bank Boards and Remuneration

Introduction

Significant changes in leadership in the banks took place in the years leading to 2007. The remuneration of the senior executives of those boards at that stage should be considered. The Joint Committee was provided with details of the top ten salaries and bonuses paid to the senior executives in each of the six Covered Institutions. We will now outline the position with regard to the CEOs.

Chief Executive Remuneration

The Nyberg Report showed CEOs remuneration in the covered banks as follows:¹⁴⁸

2007

The remuneration of the CEO, or person of equivalent standing, at each bank in 2007 was as follows:

Remuneration of Bank CEOs, 2007 (sourced from Audited Annual Accounts of the Banks)

* Pension capped therefore a clawback occurs or zero payment
** Retired 30 September 2007, Compensation payment of €1.87m on early retirement
*** Approximation of pension for year

The average industrial wage in 2007 was €37,726, according the CSO’s National Employment Survey. By comparison, the average senior bank executives in AIB were receiving total remuneration of over 42 times that figure and those in Bank of Ireland were receiving 48 times that figure, in the same year.

The Evidence of the Bank Senior Executives

The three Executive Directors of AIB, Eugene Sheehy, John O’Donnell and Colm Doherty, former Managing Director of AIB Capital Markets and former Group Managing Director of AIB, shared a total remuneration pot of €5.5 million in 2006, which was an average of €1.83 million each. When Donal Forde, former Managing Director AIB in the Republic of Ireland, is added to these three Executive Directors, the figure increased to €6.4 million, or an average of €1.6 million each. When asked to comment on the fact that the total remuneration for four AIB directors amounted to €6.435 million in 2007, Eugene Sheehy stated that there was no evidence of the bank crisis at that stage – “Well, at that stage there wasn’t any evidence of what was going to come.”¹⁴⁹

At BOI the equivalent remuneration figures for Brian Goggin and John O’Donovan in 2005/06 was a total of €3.64 million (averaging at €1.82 million each). With the addition of Richie Boucher, Des Crowley and Denis Donovan to the Board in 2006/07, the overall figure increased to €8.98 million, which averaged at €1.79 million each.

At Anglo the total figure for their five Executive Directors in 2007 was €8.5 million, giving an average of €1.7 million each.

In the course of Hearings before the Joint Committee, a number of the senior executives of the Irish banks gave evidence and defended the high remuneration received by them by reference to the independence of the process of determining their remuneration. They were questioned on whether they had been overpaid before the crash and having regard to the huge losses subsequently incurred. None of these witnesses said that their pay was particularly excessive, even though the banks within their charge ultimately exposed the Irish taxpayer to a cost of €64 billion to cover the losses. However, Eugene Sheehy, of AIB, said “The numbers are very high, not justifiable in my view in today’s terms.”¹⁵⁰

Similarly when responding to a question regarding bonus payments, Michael Fingleton stated that: “I certainly would say in hindsight they were excessive.”He explained:

“I did not determine my bonuses. They were done by the remuneration committee, which comprised the three, or all the non-executive directors, and they decided what my bonus was.”¹⁵¹

When asked if he had merited his remuneration, Brian Goggin stated:

“I was paid exceptionally well as chief executive of the bank. My remuneration as chief executive and the remuneration of the chief executive was determined by the board. I had no input or involvement in that determination.”

He also said “It wasn’t for me to determine.”¹⁵²

Richie Boucher said:

“My salary was approved by the Minister for Finance at the time and was voted on by the shareholders who were paying for it and that continues to be the case. Every year I stand before the shareholders to be elected as to whether I stay in my job or not and the shareholders decide what I’m paid. I don’t have anything further to say on that.”¹⁵³

A number of these witnesses explained how their remuneration packages were determined.

When asked to explain how he ended up with a salary of €2.4 million per annum and how it could be justified, Eugene Sheehy explained:

“…there were a number of components to it and they were scientifically constructed. We had three external consultants who looked at it.”

He also said:

“And if you look at the Nyberg report you will see that AIB was much, much lower…rather than…of the peer group, in terms of size. So, there was a science to it.”

and

“But the actual amounts that we were paid were too high … I mean, when I came from the States I was paid a lot less over there, but they had a totally different philosophy about long-term compensation.”¹⁵⁴

Gary McGann gave evidence to the Joint Committee that:

“…the remuneration arrangements in any business, particularly plcs, are based on best practice in the marketplace as advised by the various people who are expert in this area and Anglo Irish Bank’s structure was no different fundamentally than anybody else’s. There are obviously three elements to it – there is salary, there is short-term bonus and there is long-term incentive schemes. And the basis of each of those is against market practices, the quality and the size of the business and the performance of the business.”¹⁵⁵

Cormac McCarthy explained in relation to remuneration in Ulster Bank that:

“the salaries and remuneration, remuneration generally was bench marked and there was significant comparability and oversight from Royal Bank of Scotland, not just Ulster Bank. So at any point in time our salaries were independently benchmarked and found to be competitive. Certainly with the benefit of hindsight, Chairman, yes there was an excessive element to things, yes.”¹⁵⁶

Risk Management & Relaxation of Lending Rules

Some of the evidence presented to us indicated that a number of factors coalesced to bring about excessive reliance on the property market. These include:

1. Increased competition in the banking market.
2. Poor risk monitoring.
3. Inadequate management information systems.
4. Deteriorations in lending practices and criteria.
5. Ineffective regulatory oversight (covered in Chapter 4).

1. Increased competition in the banking market

This factor has been explored already and it has been found that increased competition was a significant factor in the issues that arose in the banking sector.

Brendan McDonagh, as Director of Finance, Technology and Risk at the NTMA, stated:

“There appeared to be a highly accommodating attitude among financial institutions towards the more prominent debtors and a concern that, if that institution was not particularly amenable, the debtor would look elsewhere for the funding of future projects. Clearly debtors were not slow to exploit the unusual lending market.”¹⁵⁷

It was noted in a Bank of Ireland memorandum, dated 28 August 2008, from Group Credit to Group Risk Policy Committee, that
“changes may be merited/required in the interests of protecting our “franchise”/market share…”¹⁵⁸ At the end of this memo, Group Credit expressed a warning:

“we are concerned that the proposal to significantly relax Income Multiples may result in an unacceptable level of exposure to High LTV, High Income Multiple FTB’s and it will be important that TMB monitors the quality of new business written under the revised Policy.”¹⁵⁹

2. Poor risk monitoring and exceptions to lending policy

As the competition for market share increased over the period, adherence to established policies and procedures, in at least some of the banks, weakened. An AIB report from 2010 noted that during the pre-financial crisis period
“……breaches of policy became common and were treated as routine events even if they were escalated.”¹⁶⁰

Evidence was provided to the Joint Committee in relation to exceptions to lending policies. In the case of Anglo, for example, exceptions to group lending policy were running at 26% to 28% of loans approved each month by early 2008 and by July of that year, they reached a high of 42%.¹⁶¹ The exceptions from the policy in the case of mortgage approvals by Ulster Bank, peaked at 40% of loans approved in July 2006.¹⁶² Exceptions to mortgage policy in AIB peaked at 30% in 2004 but had reduced to 21% in 2007.¹⁶³

3. Inadequate Management Information Systems

Evidence was provided that, in some cases, Management Information Systems (MIS) may not have been adequate and/or capable of providing consolidated, insightful information on the status and trends in loan portfolios, especially through filtering sectoral lending by debtor concentrations and accompanying risks. Robust MIS are crucial to providing the necessary information to management. In the absence of such systems, evidence-based decision-making at the institutional level is made more difficult.

Ronan Murphy said in his witness statement:

“…in retrospect as the OW [Oliver Wyman] report found, there was not enough Management Information System (MIS) functionality, controls, stress testing or scenario evaluation. As a consequence, inter alia, the risk committee structure to manage risk was not geared as it should have been towards fully understanding the aggregate risk profile of the book.”¹⁶⁴

David Dilger, former Non-Executive Director of Bank of Ireland also noted that:

“…as a result of the multiplicity of systems and technologies throughout the Group…all Group wide reporting had to be subjected to very considerable consolidation and manual processes rendering it difficult for management to assess or report on Group wide issues on a day to day basis.”¹⁶⁵

Kieran Bennett, former Group Chief Credit Officer AIB, stated that “AIB’s credit management information and stress test systems were poor and required considerable investment.”¹⁶⁶ He also said that “Very poor credit management information at portfolio level meant it was harder to measure and therefore manage concentration risk or correlated risk”¹⁶⁷ and he noted that: “There was an absence of a group-wide data warehouse, which makes the reporting on credit risk exposures a manual and time consuming process.”¹⁶⁸

Mike Aynsley, former CEO of Anglo, said in his evidence to the Joint Committee:

“What we found was that they were in such a hurry to transact business and write new business that they had put a minimum amount of information into the computer systems.”¹⁶⁹

Niamh Brennan commented as follows:

“As is usual on boards, the Ulster Bank boards only received data from management information systems (MIS) at a very high level. The financial-MIS data at board level was primarily accounting data, in the form of budgets, monthly management accounts and quarterly/half-yearly/annual financial statements.”¹⁷⁰

This view was underpinned by Helen Nolan, former Group Chief Internal Auditor, Bank of Ireland, who quoted from the 2009 Oliver Wyman report in her statement to the Inquiry, as follows:

“reporting to the Court [the Board] is weighted towards value adding commentary and contains minimal regular reporting of charts, thus limiting the Court’s ability for independent conclusions and challenge. In addition, current reporting does not allow easy drill-down.”¹⁷¹

David Dilger said, in relation to the question of information flow to the board:

“…as a result of the multiplicity of systems and technologies throughout the Group…assessing Group level risks and exposures was, therefore, rendered more difficult for management and non-executive directors.”

Notwithstanding this, he said that he believed that the board did receive sufficient information. He said:
“I was satisfied that, despite the shortcoming…the Board was at all times able to discern the financial position of Bank of Ireland…”¹⁷²

The opinion of NAMA regarding the management information systems within the five covered institutions was furnished to the Joint Committee.¹⁷³ This opinion was based on its interaction with the five covered institutions during the loan acquisition and due diligence phase from 2009 to 2011.

NAMA reported issues with:

• Multiple MIS systems¹⁷⁴
• Limited central data repositories¹⁷⁵
• Paper-based records¹⁷⁶
• Unreliable key performance metrics177
• Poor data collation capacity¹⁷⁸

Overall, based on interaction with staff from the covered institutions during the period 2009 to 2011, NAMA found it difficult to obtain key management information on the loan books, such as loan-to-value ratios (LTV ratios). That, according to NAMA:

“might suggest that their management information systems did not have the capacity to adequately monitor their exposures, both to individual debtor connections and in aggregate.”¹⁷⁹

It would appear from the evidence set out above, that there is a question as to the adequacy of the management information systems.

4. Deteriorations in lending criteria and practices

On the basis of evidence presented to the Joint Committee, it is clear that the drive for growth resulted in a deterioration in lending criteria and practices over the period 2002 to 2008 which manifested themselves in a variety of ways. These are considered below.

The net effect of such practices was that the banks provided all of the real cash funding and the safety zone of borrower equity usually existed only on paper. According to Frank Daly: “The result is that the borrower was typically not the first to lose. In the event of a crash the banks stood to take 100% of the losses, and that’s what happened.”¹⁸⁰

When asked whether Bank of Ireland engaged in the practice of using the equity growth in the purchase of one development as the security for another purchase, Richie Boucher stated: “We did……we didn’t do it to the extent of other people, but we did.”¹⁸¹

Eugene Sheehy stated the following, in response to a similar question:

“It wasn’t a business model. It did happen. And most of the uplift in valuation came from the investment side property. So, if you somebody who was a residential developer, but they had a successful let investment property, you would take an uplift value in that and pass it on. But I agree with Mr. Daly, you know, that it would’ve been a lot better off if the structure … the industry structure in Ireland around property, had more private equity, you know, and I think that’s happening now. It would have been far superior, and it did increase the bank’s exposure, the fact that we released funds on the basis of valuations of uplift.”¹⁸²

Michael Buckley, former Chief Executive Officer of AIB, was questioned by the Joint Committee as to whether he believed that the bank had taken too much risk in his time. He replied:

“No. In my view… in … property overall from €6 billion to €19 billion … I would say “No.” And from €4 billion to €11 billion in the Republic of Ireland I would say “No” in the context of what the economy required and what customer needs were at the time.”¹⁸³

In contrast, Eugene Sheehy, his successor, said, immediately prior to this comment, “I did yes.”¹⁸⁴ when he was asked if he believed that the bank had taken too much risk.

This divergence of views with regards to the level of risk being taken by AIB was further commented upon by Donal Forde who gave his view to the Joint Committee of the impact of the credit risk management policy within AIB:

“…with my personal conclusion that the failure of the bank was primarily attributed to the failure of our credit risk management policy. Our stress testing of customers’ repayment capacity was not sufficiently challenging, and our loan to value constraint on security was inadequate.”¹⁸⁵

When asked about the expansion of the loan book in AIB for property and construction, Donal Forde commented:

“I consider it ill-judged but I did not consider it reckless at the time, you know. And the reason I didn’t consider it reckless was for the very reason that you’ll see in those stress tests. My understanding was that the level of exposure we were running was not threatening to the bank even in an extreme case. That would be my definition of reckless.”¹⁸⁶

At IL&P the monitoring of the expanded loan portfolio in terms of risk appetite was, according to a special report, ‘somewhat lacking in structure; with no reliance on portfolio concentration limits.’¹⁸⁷

It would appear that, for IL&P at least, the assumption that the regulatory authorities and the Central Bank would not only have, but would implement, a contingency plan formed part of their own assumptions about what a worse-case scenario would actually entail.¹⁸⁸

Exposures resulting from poor property-related lending not only threatened the business and viability of individual financial institutions, but also of the financial system itself, for the following reasons:

a) all the institutions were acquiring property-related risk to varying degrees over the same period.

b) multiple bank risks were vested in individual major borrowers.

c) there was cross-bank lending whereby multiple banks were lending to the same borrower(s).

Role of Internal Auditors

Introduction

The objective of the Internal Audit (IA) function should be to ensure that the financial institution is not exposed to fraud or risks (both internal and external), to ensure that staff cannot process transactions or access data to which they are not authorised and to ensure that the financial institution complies with all other legal and regulatory requirements.

According to the Nyberg Report:

“IA is generally recognised as “a third line of defence” coming after business unit control functions (first line of defence) and risk/compliance control functions (second line of defence). IA is there to provide independent assurance on the continuing effectiveness of the institution’s corporate governance and control environment.”¹⁸⁹

The Public Accounts Committee Report on the Banking Crisis adopted this definition.¹⁹⁰

When performing an audit, Internal Audit is focused on reviewing the controls and processes underpinning all of the bank’s transactions. The Joint Committee sought and obtained evidence on the Internal Audit and risk control functions from relevant persons in BOI, AIB and Ulster Bank on a range of relevant lines of inquiry. In response, detailed statements were received from:

• John O’Donnell, who served as Chief Financial Officer of AIB from 2005 to 2009.
• Kieran Bennett, who served as Group Chief Credit Officer of AIB from 2006 to 2010.
• Professor Niamh Brennan, who served as a Non-Executive Director on the Board of Ulster Bank from 2001 to 2009. (Professor Brennan also served on the Ulster Bank Group Audit Committee and on the board of a number of subsidiary companies. She served as chairman of First Active from 2006 to 2008).¹⁹¹
• Helen Nolan, who served as Group Chief Internal Auditor of BOI from May 2003 to July 2009.
• John O’Donovan, who served as Group Chief Financial Officer of BOI from 2001 to 2011.
• Ronan Murphy, who served as Head of Group Risk Management, BOI from 2004 to 2009.

The Joint Committee also received a detailed statement describing the Internal Audit function of INBS from Eamon Daly, who served as Internal Auditor of INBS from 2000 to 2004. This was submitted in response to the testimony of several INBS witnesses, though he was not asked to respond to specific questions.

A number of directors from the banks were also asked similar questions relating to Internal Audit and risk control function, including Colm Doherty and Jim O’Leary, both of AIB.

Only a portion of the evidence can be examined here and the evidence examined relates to the following themes:

• The quality of business model setting and the internal culture of the banks.
• The adequacy of board oversight over internal controls to ensure risk is properly identified managed and monitored.
• Reviews of risk culture and risk appetite.
• The effectiveness of internal audit and the review of risks associated with customer concentration levels and short-term funding to service long-term lending.
• Staffing and resources of the Internal Audit divisions.

Quality of business model setting and internal culture of the banks

A number of events, which illustrated significant cultural problems within the credit institutions, took place during the period covered by this Inquiry. These events include the subject matter of the DIRT Inquiry, the Forex Probe¹⁹² and the investigation of Allfirst Bank scandal.¹⁹³ Having regard to these events, the Inquiry witnesses were asked to comment on the internal culture of their organisation, how ethics and values were defined within their organisation, whether written policies were in place to address these issues and the extent to which such policies were understood and included as personal objectives to be adhered to by all personnel.

John O’Donovan referred to the BOI Code of Conduct, which governs the relationship between the bank’s employees and customers, suppliers, fellow employees, shareholders, the Government and Regulators and sets out standards of behaviour. He also referred to the focus on “leadership excellence”in BOI’s business strategy.¹⁹⁴

Questioned on the internal culture of Ulster Bank, Niamh Brennan described three distinct cultures. She said that, when she joined the bank there was “a strong and distinctive conservative and prudent culture, with an emphasis on processes and procedures.” After the acquisition of Ulster Bank by RBS, Niamh Brennan said that “greater ambition and performance demands became apparent, together with a command-and-control management style.” She said that the acquisition of First Active in 2004 “introduced another culture.” Niamh Brennan noted that RBS had a full range of written governance policies reflecting its emphasis on governance with a “strong imperative from RBS that all group companies adopt RBS policies and that RBS policies operate consistently across the group.”Ulster Bank adopted RBS policies. Those particularly relevant to ethics and values were the RBS code of behaviour for employees and the whistleblowing policy. She stated: “To the Ulster Bank Boards’ knowledge, the policies were practised across Ulster Bank.”As a non-executive director, Niamh Brennan was not in a position to comment on personal objectives for individual personnel.¹⁹⁵

John O’Donnell noted that, given that he was Finance Director with AIB from 2005 to 2009, he was not able to comment on events prior to 2005, including those leading to the Allfirst Bank investigation and the Forex Probe. He stated his view that: “a very strong emphasis was placed on operating to a high level of compliance and ethics”in the bank which was, in part, a response to the Allfirst Bank and Forex events. He noted that the ethics and values of the organisation were defined by a Code of Business Ethics and a separate Code of Leadership Behaviours from 2004. He referred to a 2006 review of the Code by the Institute of Business Ethics, which confirmed that AIB was “following good practise in training, assessing effectiveness and reporting on the working of its ethics policy.” He believed that these policies were practised by the Managing Director, Directors and Senior Management.¹⁹⁶

Adequacy of Board Oversight Over Internal Controls to Ensure the Proper Identification, Management and Monitoring of Risk

The January 2011 Promontory Financial Group/Mazar report noted failings in AIB’s corporate structure and stated: “there appears to have been considerable reluctance among senior management to give priority to robust governance and risk practices.”¹⁹⁷

These criticisms were put to John O’Donnell of AIB. He stated that he was not aware of these weaknesses and noted: “that the Bank was very strongly focused on ethics and regulatory and compliance issues.”He stated: “Board meetings generally spent a very clear majority of its time on such issues.”He referred to a number of favourable external valuations of the AIB’s Group Audit function by PwC and positive reviews of the bank’s Corporate Governance by Governance Metrics International. He noted the May 2006 report by Promontory Financial Group praising the bank’s progress in enhancing risk management systems and its conservative appetite for risk.¹⁹⁸

Niamh Brennan stated: “Ulster Bank boards actively discussed and, where appropriate, challenged management in relation to all issues brought to the boards attention”and management “generally”took the necessary remedial actions. She referred to the actions taken to address operation risk at the Dublin Mortgage Centre as an example.¹⁹⁹

Review of risk culture and appetite

Several witnesses were asked whether a review of the risk culture and risk appetite of their bank had been carried out by external consultants or the internal audit divisions within their institutions.

John O’Donovan, former Group Chief Financial Officer with BOI stated that:

“aspects of risk culture and appetite were reviewed by Group Internal Audit (GIA) in a range of audits, but no single review focussed exclusively on these matters, prior to the financial crisis.”

He listed several reviews of the BOI’s risk culture carried out by external consultants in 2009, 2010 and 2012.²⁰⁰

Helen Nolan of BOI gave similar evidence, stating that: “elements of risk culture and appetite were reviewed in a range of internal audits, but there was not a review which focused exclusively on risk culture and appetite.”²⁰¹

Ronan Murphy was “unaware”of any review of the risk culture and appetite of the BOI being carried out during his tenure as Chief Risk Officer, though he believed “a strong level of risk awareness prevailed in the Group and was a material influence in behaviours.” He noted that BOI’s approach was “conservative relative to its peers”but that “there was not enough Management Information System functionality, controls, stress testing or scenario evaluation”which meant the risk committee was “not geared as it should have been towards fully understanding the aggregate risk profile of the book.” Ronan Murphy referred to the creation of a “Group Risk Framework document”in 2007. He noted that the recommendations in the Oliver Wyman report²⁰² , including those relating to risk appetite have been accepted and were in the process of implementation.²⁰³

Kieran Bennett, Group Chief Credit Officer, AIB noted that the AIB Group Internal Audit had conducted a number of audits in 2005 relating to management of credit across the bank which had noted the absence of a group-wide credit risk strategy and risk appetite and a lack of stress-testing at group and divisional levels. A 2006 AIB Group Internal Audit review of processes for sanctioning and monitoring property/construction exposures identified a number of problems and recommended that a more formal framework be considered to ensure a more consistent approach. Kieran Bennett also referred to the findings of a PwC review conducted in November 2008 which examined property concentrations.²⁰⁴

John O’Donnell could not “recall a review specifically addressing risk culture and appetite”within AIB, though he referred to the 2006 Promontory Report which described AIB as having a conservative appetite for risk. He also referred to a 2006 report prepared for Group Internal Audit, which indicated that Group Risk was designing and implementing a management process to identify, measure and manage property concentrations. A further report, prepared in 2007 in response, concluded that AIB had a significant property concentration and recommended specific limits for the portfolio.²⁰⁵

Jim O’Leary stated: “I don’t recall that Internal Audit carried out any explicit review of risk appetite during my term.”²⁰⁶

Colm Doherty said that he was: “not aware of any specific review of risk culture and appetite having been carried out by either external consultants or Internal Audit in AIB.”²⁰⁷

Niamh Brennan said in her evidence that, to her knowledge, no independent review by an external party or internal auditor of the risk culture and appetite of Ulster Bank was carried out.²⁰⁸

Eamon Daly, former Internal Auditor of INBS, was not questioned on this issue but did note that the Internal Audit Division of INBS had no role in strategy or planning and that there was no specific Risk Officer or Risk Unit within INBS “so it was unclear where the responsibility for risk assessment and risk mitigation rested.”²⁰⁹

Wholesale Funding: Auditors

Several witnesses were asked whether the level of wholesale funding in their institution was a concern and whether the associated risks were clearly understood at Senior Management and Director Level.

Helen Nolan indicated that this was addressed in a range of internal audits during her time as Group Chief Internal Auditor with BOI and was subject to significant senior management oversight, supported by the liability management infrastructure and contingency arrangements, a comprehensive governance process and regular management information updates to senior management. BOI Group also communicated on this issue with external debt and equity investors and the rating agencies.²¹⁰

Ronan Murphy noted the “super-abundance of liquidity”after 9/11 and prior to the liquidity crisis of 2007. He noted that BOI’s “Strategy 2012”, signed off by the bank’s board in July 2006, called for significant growth which could only be funded by access to wholesale funding, which he then believed was “an acceptable and reasonable risk.” Ronan Murphy stated that wholesale funding was “carefully scrutinised”by senior management within BOI and that the risks were recognised and managed. In his view, the risks were clearly understood at both senior management and director level and stress tested. However, he said that the complete collapse of the wholesale markets was not anticipated.²¹¹

John O’Donovan noted the shift by BOI from retail deposit funding towards wholesale funding after 2000. He indicated that 41% of the Group’s balance sheet was sourced from the wholesale markets in March 2008 and the expansion of the bank’s loan book, particularly into areas that did not generate deposits, had brought a greater reliance on wholesale funding. He said that the funding was diversified by geography and product line and the risk was mitigated by the extension of the maturity profile. However, these measures were not sufficient to cope with the closure of wholesale markets. He pointed to a number of other factors which had increased BOI’s reliance on wholesale funding. John O’Donovan said that he believed that the quantum and composition of the bank’s wholesale funding was clearly understood by BOI’s senior management and board.²¹²

In relation to AIB, John O’Donnell stated that the bank’s level of wholesale funding was in line with peer banks and suggested that long-term wholesale funding “may be the most reliable and stable funding available in a crisis.”He noted that AIB was conscious of the “greater risks”of shorter-term wholesale funding and that steps were taken to put a proportion of it on a longer duration. John O’Donnell stated that, prior to the crisis, AIB’s funding profile would not have been considered high-risk and referred to a 2007 Standard & Poor’s Report in this regard. He said that, to his knowledge, no more than 20% of the bank’s funding would mature in a year, but “the level of risk which emerged in the crisis was…unprecedented and accordingly would not have been understood in advance.”²¹³

Kieran Bennett, former Group Chief Credit Officer with AIB, said he did not have direct knowledge of this area.²¹⁴

Effectiveness of Internal Audit: Staff and resources

Several witnesses were questioned on whether the Internal Audit Division within their bank had staff with sufficient skills and experience to enable them to perform reviews on all risks relating to commercial lending and funding risks.

John O’Donovan of BOI stated that it was not the responsibility of BOI Group Internal Audit to perform reviews on risks relating to commercial lending. He said that the responsibility lay with Group Credit Review, which, in his view, “had the required skills and personnel to deliver on its responsibilities.” In his view, Group Internal Audit had the “requisite skills to perform audits/reviews on funding risks.”²¹⁵

The minutes of the BOI Group Audit Committee meeting on 10 November 2008 noted that the Group Internal Audit was then operating with 14 fewer staff than when it was established with a staff of 96. Questioned on this minute, Helen Nolan stated that it did not affect the scheduling of audits on high risk or areas or the quality of audits. She noted that Internal Audit “reassessed on a quarterly basis, the risks facing the business and adapted the Audit Plan to ensure it remained focussed on the key risks.”She suggested that staff and budget increases in the Internal Audit division indicated that management had provided required resources, as required. She stated that the skills and experience to perform reviews on all risks to commercial lending were within Group Credit Control, rather than Internal Audit. She also provided details of the qualifications of several staff members in BOI Internal Audit.²¹⁶

With regard to AIB, John O’Donnell stated: “There was no shortage of staff or skills that I was aware of.”He noted that staff numbers were increased by 243% between June 2005 and June 2008, with a comparable increase in the division’s budget.²¹⁷

Chapter 2.10 of the Nyberg Report examined the effectiveness of the Internal Audit departments in the banks. The Nyberg Report refers to a review of Anglo by external consultants in April 2004, which classified the bank as a “strong performer”but “with a number of opportunities for improvement”, particularly in relation to the “greater clarity of the role of IA in the risk management framework.” Their review described the Internal Audit function in INBS as “inadequate in the growth orientated commercial lending market”and “lacking the requisite knowledge and skills in key areas as IT, Treasury and Commercial Lending.” Responsibility for these areas had been outsourced to a large auditing firm.²¹⁸

Eamon Daly, former Internal Auditor with INBS, stated that the Internal Audit Division was not prohibited from auditing any specific area of INBS operations but that the “very limited resources” allocated to the department was a limiting factor in practice. He regarded the Division as “very under-resourced at the time and in hindsight even more so.”Eamon Daly also recalled comments by the Central Bank describing the department as “clearly under-resourced”in 2000.²¹⁹

KPMG, after a review of the INBS Internal Audit Function in 2009 observed that:

“…the Society’s Internal Audit department needs to build up its experience training in order to perform reviews of key risks areas which are currently outsourced to third parties.” KMPG also noted that the INBS Internal Audit performed compliance work and were not acting as “a second line of defence.” KPMG recommended that “Internal Audit should be more focused in the key risk areas of the Society.”²²⁰

While the Internal Audit units of the other financial institutions were not singled out specifically in the Nyberg Report, they are covered by a general comment that: “The other banks had well developed IA functions”but their “remit…tended to be somewhat constrained and limited in relation to their role in reviewing the effectiveness of risk management”resulting in “certain credit risk areas receiving inadequate scrutiny from an independent IA unit.”²²¹

Effectiveness of Internal Audit: Review of risks associated with customer concentration levels and short term funding to service long-term lending

A number of witnesses were questioned on whether the banks’ Internal Audit units reviewed the risks associated with commercial lending, including customer and sectoral concentration levels and the risks associated with short-term funding to service long-term lending.

Ronan Murphy stated that BOI Group Internal Audit did not carry out these functions, but the Portfolio Review Committee reviewed the composition of the Group’s portfolio and identified emerging risk concentrations. He also stated that the Group Asset and Liability Committee reviewed the funding profile of the book and reported to the Group Risk Policy Committee.²²²

Helen Nolan stated the examination of the risks associated with commercial lending was carried out by BOI Group Credit Control, rather than Internal Audit. She stated that aspects of funding risks were reviewed by Group Internal Audit, including management of liquidity and funding, intra-group funding and reflection of the cost of funding in product pricing decisions, the accuracy of the information supplied to the Group Asset and Liability Committee, management of securitisation, internal liquidity management in normal and stressed conditions and reporting practises and compliance with the Financial Regulator’s requirements.²²³

John O’Donovan noted that BOI Group Internal Audit did not perform reviews or audits of risk relating to commercial lending. He said that, in his view, responsibility for this lay with Group Credit Review, whose work was audited by Group Internal Audit. He gave similar evidence to Helen Nolan on BOI’s review of funding risks.²²⁴

With reference to AIB, John O’Donnell believed that Group Internal Audit did address management of concentration risk in a 2005 Credit Framework Audit but he said that he was not on the AIB board at that time. He said that he was not aware of AIB addressing the issue of short-term funding servicing long-term lending but suggested this would have been addressed through the bank’s liquidity policy. John O’Donnell noted the results of the ICAAP Report, which concluded that credit concentration risk was acceptable. He referred to December 2008, when AIB had carried out an audit of risk management of concentration risk which identified a number of “important”issues, but none of which were “material or significant.”²²⁵

Kieran Bennett of AIB referred to the December 2008 Group Internal Audit review, noting that this did not include an audit of funding structure. He said that, though action plans were put in place to address the “important”issues “ultimately the situation was too far gone for the GIA recommendations to have any material impact.”²²⁶

In the context of INBS, Eamon Daly said that: “internal audits of Treasury were conducted in accordance with the risk-based internal audit programme and various issues for improvement were identified.”²²⁷

The evidence given to the Joint Committee indicated that, up to 2008, Internal Audit in the banks did not normally involve a review the banks’ funding decisions or their liquidity position, nor did they comment on the quality of the underwriting performed by the lending teams.

When asked by the Joint Committee whether she had concerns over the concentration of the loan portfolio in property and construction, Niamh Brennan noted that concerns had been expressed by non-executive directors at board/audit committees within Ulster Bank, of which she was a member. She said that management had assured the Ulster Bank board that there were no sectoral concentration issues and that Ulster Bank had operated within regulatory sectoral limits. She said that the board received limited data on sectoral concentrations which influenced its views. Niamh Brennan also noted that as RBS made capital available to support the business and that she had no concerns about concentration risk.²²⁸

Niamh Brennan did suggest that “the increasing demands of the shareholder, RBS…adversely affected Ulster Bank’s risk appetite”and RBS’s oversight of risk in the bank.²²⁹

John O’Donovan, CFO BOI, in his witness statement submitted to the Inquiry, stated that “Group Internal Audit did not review loan advances concentration levels”and that this was reviewed by Group Credit Control. In relation to Internal Audit reviewing short term funding, he stated “It was not possible to match fund all assets on the Bank of Ireland Balance Sheet, principally because of the quantum of residential mortgage lending on its balance sheet.”²³⁰

Helen Nolan noted that:

“…A number of years before my appointment as Group Chief Internal Auditor, responsibility for the function of assessing the quality, control and safety of lending was transferred from Group Internal Audit to Group Credit Control. Minutes of the Group Audit Committee in 1992 record the change. While Group Internal Audit (reporting to the Group Audit Committee) had responsibility for reviewing Group Credit Control’s processes and controls and reviewed all other aspects of risk, it did not have an audit function in relation to lending or credit policies. Instead, lending portfolios were reviewed by Group Credit Review, who reported as the third line of defence to the Board through Group Risk Policy Committee (GRPC), a subcommittee of the Board. Concentration risk was monitored by the Portfolio Review Committee, which also reported to the Board through GRPC…”²³¹

Findings of the Joint Committee

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

Recommendations of the Joint Committee

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

Chapter 1 Footnotes

1. Klaus Regling & Max Watson, A Preliminary Report on The Sources of Ireland’s Banking Crisis, PUB00168-011.

2. David Duffy, former Chief Executive Officer, AIB, transcript, INQ00134-029.

3. Philip Lane, Professor of International Macroeconomics and Director of the Institute of International Integration Studies, Trinity College Dublin (Now Governor of the Central Bank of Ireland), transcript, CTX00059-003.

4. David Duffy, former Chief Executive Officer, AIB, transcript, INQ00134-029.

5. Massive increase in credit, The Irish financial assistance programme, John McCarthy, Chief Economist, Department of Finance, 15 May 2014, DOF07710-004.

6. Brendan McDonagh, CEO, NAMA, transcript, PUB00331-061.

7. OECD Report 2006, PUB00161-009/022/023.

8. John FitzGerald, Research Affiliate, former Research Professor, ESRI, transcript, PUB00287-003/004.

9. John FitzGerald, Research Affiliate, former Research Professor, ESRI, transcript, PUB00287-032.

10. John FitzGerald, Research Affiliate, former Research Professor, ESRI, transcript, PUB00287-032/33.

11. Centre for Economic Policy Research: Nice Try: Should the Treaty of Nice be Ratified, Table 6.2, PUB00437.

12. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, PUB00156-019.

13. Brendan McDonagh, CEO, NAMA, transcript, PUB00331-011.

14. Brendan McDonagh, CEO, NAMA, transcript, PUB00331-035.

15. European Commission, Economic Papers 491, Design Failures in the Eurozone, Paul de Grauwe, April 2013, PUB00389-009.

16. David Doyle, former Secretary General, Department of Finance, statement, DDO00001-011.

17. Bertie Ahern, former Taoiseach, transcript, INQ00109-008.

18. IMF Staff Report for the 2012 Article IV Consultation, DOF00382-004.

19. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, PUB00156.

20. Strengthening the Capacity of the Department of Finance, Report of The Independent Review Panel, December 2010, PUB00175.

21. The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008: A Report to the Minister for Finance by the Governor of the Central Bank, PUB00075.

22. Klaus Regling & Max Watson, A Preliminary Report on The Sources of Ireland’s Banking Crisis, PUB00168.

23. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, Figure 2.18, PUB00156-056.

24. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, PUB00156-054.

25. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, PUB00156-029.

26. OECD Report 2008, PUB00162-054.

27. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, Figure 2.1, PUB00156-029.

28. IMF, statement, IMF00001-027.

29. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, PUB00156-036.

30. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, Figure 2.11, PUB00156-036.

31. Philip Lane, Professor of International Macroeconomics and Director of the Institute of International Integration Studies, Trinity College Dublin (Now Governor of the Central Bank of Ireland), statement, CTX00041-010.

32. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, PUB00156-056.

33. Global Treasury Proposal to Revise the Adjusted Loan Deposit Ratio – Board Presentation, 21 June 2007, AIB01299-004/005.

34. John O’Donnell, former Finance Director, AIB, statement, JOD00001-007.

35. Ronan Murphy, former Group Chief Risk Officer, BOI, statement, RMY00001-009.

36. John O’Donovan, former Group Chief Financial Officer, BOI, statement, JDV0001-005/006.

37. Tom Browne, former Managing Director of Lending Ireland, Anglo Irish Bank, transcript, INQ00095-004.

38. Tom Browne, former Managing Director of Lending Ireland, Anglo Irish Bank, transcript, INQ00095-004.

39. Tom Browne, former Managing Director of Lending Ireland, Anglo Irish Bank, transcript, INQ00095-005.

40. Matt Moran, former Chief Financial Officer, Anglo Irish Bank, statement, MMO00001-014.

41. Matt Moran, former Chief Financial Officer, Anglo Irish Bank, statement, MMO00001-016.

42. Peter Fitzgerald, former Director of Corporate and Retail Treasury, Anglo Irish Bank, statement, PFI00001-010.

43. Peter Fitzgerald, former Director of Corporate and Retail Treasury, Anglo Irish Bank, transcript, INQ00083-014.

44. Credit Liquidity Market Update, UBI00329-077.

45. Michael Torpey, former Group Finance Director, UB, transcript, INQ00088-004.

46. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, PUB00156-056.

47. David Gantly, former Group Treasurer, IL&P/ptsb, transcript, INQ00080-003.

48. David Gantly, former Group Treasurer, IL&P/ptsb, transcript, INQ00080-003.

49. David Gantly, former Group Treasurer, IL&P/ptsb, statement, DGA00001-013.

50. David Went, former Group CEO, IL&P/ptsb, statement, DWE00001-010/011.

51. David Went, former Group CEO, IL&P/ptsb, transcript, INQ00084-012.

52. David Went, former Group CEO, IL&P/ptsb, transcript, INQ00084-013.

53. David Went, former Group CEO, IL&P/ptsb, transcript, INQ00084-013.

54. David Went, former Group CEO, IL&P/ptsb, transcript, INQ00084-013.

55. PTSB Report to the Oireachtas Joint Committee of Inquiry into the Banking Crisis: Significant Changes in the Management of Property-Related Credit Risk and Funding/Liquidity Risk 2008-2013(2015), PTSB02660-008.

56. David Went, former Group CEO, IL&P/ptsb, transcript, INQ00084-024.

57. John Stanley Purcell, former Director and Secretary, INBS, transcript, INQ00078-004.

58. Michael Fingleton, former CEO, INBS, transcript, INQ00077-067.

59. Michael Walsh, former Chairman, INBS, statement, MWA00009-011.

60. Michael Walsh, former Chairman, INBS statement, MWA00009-011.

61. Fergus Murphy, former Group CEO, EBS, statement, FMU00001-010.

62. Fergus Murphy, former Group CEO, EBS, transcript, INQ00120-006.

63. Michael Walsh, former Chairman, INBS, transcript, INQ00079-036.

64. Michael Fingleton, former CEO, INBS, transcript, INQ00077-003.

65. Jim O’Leary, former Independent Non-Executive Director, AIB, statement, JOL00001-007.

66. Eugene Sheehy, former Group CEO, AIB, transcript, INQ00133-012.

67. Developments in Retail Banking in Republic of Ireland, 07 April 2005, BOI01169-001.

68. Developments in Retail Banking in Republic of Ireland, 07 April 2005, BOI01169-001.

69. Richie Boucher, Group CEO, BOI, transcript, INQ00085-008.

70. Brian Goggin, former Group CEO, BOI, transcript, INQ00139-042/043.

71. Tom Browne, former Managing Director of Lending Ireland, Anglo Irish Bank, transcript, INQ00095-004.

72. Tom Browne, former Managing Director of Lending Ireland, Anglo Irish Bank, transcript, INQ00095-004.

73. Tom Browne, former Managing Director of Lending Ireland, Anglo Irish Bank, transcript, INQ00095-004.

74. Tom Browne, former Managing Director of Lending Ireland, Anglo Irish Bank, transcript, INQ00095-009/010

75. The “big two” being AIB and BOI. Robert Gallagher, former Chief Executive Corporate Markets Division, UB, transcript, INQ00088-005.

76. Robert Gallagher, former Chief Executive Corporate Markets Division, UB, transcript, INQ00088-043.

77. Michael Torpey, former Group Finance Director, UB, transcript, INQ00088-016.

78. Michael Torpey, former Group Finance Director, UB, transcript, INQ00088-054.

79. David Gantly, former Group Treasurer, IL&P/ptsb, transcript, INQ00080-013.

80. David Went, former Group CEO, IL&P/ptsb, transcript, INQ00084-021.

81. David Went, former Group CEO, IL&P/ptsb, statement, DWE00001-004.

82. Michael Fingleton, former CEO, INBS, statement, MFI00001-017.

83. Michael Walsh, former Chairman, INBS, statement, MWA00009-011.

84. Michael Fingleton, former CEO, INBS, transcript, INQ00077-036.

85. Fergus Murphy, former Group CEO, EBS, transcript, INQ00120-021.

86. Fergus Murphy, former Group CEO, EBS, transcript, INQ00120-021.

87. Fergus Murphy, former Group CEO, EBS, transcript, INQ00120-026.

88. Alan Merriman, former Finance Director, EBS, transcript, INQ00137-011.

89. Fidelma Clarke, former Chief Risk Officer, EBS, transcript, INQ00135-028

90. Dirk Schoenmaker, “Stabilising and Healing the Irish Banking System – Policy Lessons”, PUB00371-015.

91. Pat McArdle, former Group Chief Economist, UB, transcript, INQ00087-006.

92. Pat McArdle, former Group Chief Economist, UB, transcript, INQ00087-059.

93. Dan McLaughlin, former Chief Economist, BOI, transcript, INQ00087-020.

94. Dan McLaughlin, former Chief Economist, BOI, transcript, INQ00087-032.

95. Dan McLaughlin, former Chief Economist, BOI, transcript, INQ00087-033.

96. Dan McLaughlin, former Chief Economist, BOI, transcript, INQ00087-058.

97. Dan McLaughlin, former Chief Economist, BOI, transcript, INQ00087-058.

98. John Beggs, Chief Economist, AIB Global Treasury, transcript, INQ00087-027.

99. John Beggs, Chief Economist, AIB Global Treasury, transcript, INQ00087-059.

100. Bertie Ahern, former Taoiseach and Minister for Finance, transcript, INQ00109-041.

101. John Moran, Managing Director, Jones Lang LaSalle, transcript, CTX00047-003.

102. John Moran, Managing Director, Jones Lang LaSalle, transcript, CTX00047-003.

103. Jones Lang LaSalle (2015), Issues relating to the nature and functioning of the commercial real estate market in the period prior to 2008 in the context of the Banking Crisis in Ireland. CTX00023-001.

104. Jones Lang LaSalle (2015), Issues relating to the nature and functioning of the commercial real estate market in the period prior to 2008 in the context of the Banking Crisis in Ireland. CTX00023-001.

105. Nyberg Report, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, PUB00156-053.

106. Richie Boucher, Group CEO, BOI, transcript, INQ00085-033.

107. Cormac McCarthy, former CEO, UB, transcript, INQ00086-022/023. Note: other financial institutions were providing 100% mortgages to specific categories of customers.

108. PTSB File Note re IFRSA and 100% mortgages, PTSB00447-001.

109. David Went, former Group CEO, IL&P/ptsb, transcript, INQ00084-010.

110. Brian Goggin, former Group CEO, BOI, transcript, INQ00139-019.

111. Richie Boucher, Group CEO, BOI, transcript, INQ00085-023.

112. John O’Donnell, former Finance Director, AIB, statement, JOD00001-008.

113. Ethna Tinney, former Independent Non Executive Director, EBS, transcript, INQ00138-030.

114. John Stanley Purcell, former Director and Secretary, INBS, transcript, INQ00078-022/023.

115. John Stanley Purcell, former Director and Secretary, INBS, transcript, INQ00078-022/023.

116. Niamh Brennan, former Audit Committee Member/Chair, UB, statement, NBR00007-028.

117. Frank Daly, Chairman, NAMA, transcript, PUB00331-022.

118. Frank Daly, Chairman, NAMA, transcript, PUB00331-022.

119. Frank Daly, Chairman, NAMA, transcript, PUB00331-022.

120. Pat McArdle, former Group Chief Economist, UB, transcript, INQ00087-059.

121. Fintan Drury, former Non-Executive Director, Anglo Irish Bank, statement, FDR00001-004.

122. Fintan Drury, former Non-Executive Director, Anglo Irish Bank, transcript, INQ00142-044.

123. Fintan Drury, former Non-Executive Director, Anglo Irish Bank, transcript, INQ00142-021/022.

124. Matt Moran, former Chief Financial Officer, Anglo Irish Bank, statement, MMO00001-011.

125. Distribution of largest debtors, Table 2, NAMA00015-001.

126. Brendan McDonagh, CEO, NAMA, transcript, PUB00331-032/033.

127. NAMA submission to the Banking Inquiry, 31 March 2015, NAMA00104-002.

128. Michael O’Flynn, Founder and Managing Director, O’Flynn Construction, statement, MOF00006-010.

129. Sean Mulryan, Chairman and CEO, Ballymore Group, statement, SMU00001-018.

130. Brian Goggin, former Group CEO, BOI, transcript, INQ00139-050.

131. Eugene Sheehy, former Group CEO, AIB, transcript, INQ00133-032.

132. Frank Daly, Chairman, NAMA, transcript, PUB00331-025.

133. Tom Browne, former Managing Director of Lending Ireland, Anglo Irish Bank, transcript, INQ00095-036.