This is the official archived website of the Joint Committee of Inquiry into the Banking Crisis. It was last updated in March 2016 and will not be updated further.
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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.
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
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.”
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
The Irish Times carried an article on 7 September 2007 entitled ‘Banking on Very Shaky Foundations’ written by Professor Morgan Kelly.21
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
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
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
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
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
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
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
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.
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