In its final report published today the Oireachtas banking inquiry concluded that there were two crises - a banking crisis and a fiscal crisis. These were directly caused by four key failures - in banking, regulatory, Government and Europe. The theory of a soft landing or gradual slowdown for the Irish economy was never substantially tested or challenged, and the idea of a guarantee was not conceived on a single Monday night in September 2008. Among the report’s key findings are the following points. The almost universal adoption of the soft landing theory, without any substantial test or challenge, must be regarded as a key failing for the Government, Central Bank and the Department of Finance. The night of the guarantee has become something of a myth. In reality the idea of a guarantee was considered as part of a range of options as early as January 2008. No independent in-depth deep-dive investigation of the banks had been commissioned by the authorities before September 2008, and the guarantee was decided upon in the absence of accurate information about the underlying health of financial institutions.
By October of 2010 Ireland’s entry into a bailout programme was inevitable. However, the timing of the entry into the programme was determined by factors outside the Government’s control. The ECB put the Government under undue pressure to enter a programme but also insisted that there would be no burden sharing with bondholders.
The crisis in the banks was directly caused by decisions of bank boards, managers and advisers to pursue risky business practices, either to protect their market share or to grow their business and profits. Banks moved far away from prudent lending principles in their dealings with the property development sector in favour of a riskier asset value-based lending model. 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. No single event or decision led to the failure of the banks in the lead-in period to the crisis, but rather it was a cumulative result of a series of events and decisions over a number of years.
Ultimately, the end result was that exposures resulting from poor lending to the property sector not only threatened the viability of individual financial institutions but also the financial system itself. The Financial Regulator adopted a light touch and non-intrusive approach to regulation. The Central Bank underestimated the risks to the Irish financial system. The committee found that both institutions had the powers to intervene, but neither did so decisively. The Central Bank and Financial Regulator were aware as early as 2003 that the Irish banking sector was placing increasing reliance on lending to the property sector and that different lending practices were being adopted. Neither the Central Bank, at a macroprudential level, nor the Financial Regulator, at a microprudential level, intervened decisively at the time or in the years prior to the crisis.
Government taxation policy reduced direct taxes and transferred reliance on pro-cyclical taxes leading to a structural deficit. Government fiscal policy resulted in significant, long-term expenditure commitments funded by unsustainable transaction-based revenue streams. Fiscal policy after 2001 was not focused on mitigating and managing property price increases. If steps had been taken, for example, through reducing or abolishing property tax incentives, as originally planned from 2002 to 2004, the severe overheating from 2003 to 2007 could have been mitigated, at least to some degree. In this regard tax incentives were introduced and extended without sufficient analysis of the costs, benefits and impacts. They fuelled an already strong construction industry during most years from the mid-1990s up to and including 2006. Government, including individual Ministers, made policy decisions based on a range of considerations, including having regard to, but not always accepting, the advice of the Department of Finance, the Central Bank and international organisations, and during the public hearings ultimately accepted overall responsibility for decisions made.
The committee has recommended changes for banks, external auditors, State institutions and Government policy and the Oireachtas to minimise risk in the future. Among the recommendations are the following points. All members of bank boards should have requisite financial skill sets and experience to include banking, risk and governance. The risk of a mismatch between liabilities and assets in terms of composition, stability, currency and tenure should be reviewed regularly at board level. The capacity for direct reporting of critical business risk to the regulatory authority by an external auditor should be strengthened. A detailed and comprehensive commercial property price register should be introduced. Membership of the board of the Central Bank, appointed by Government, must include sufficient expertise and relevant direct experience in financial stability and prudential regulation. In situations where there are conflicts between the advice provided by the Department of Finance on matters in which exceptional risks are involved and the decision proposed by the Minister, a formal process with clear procedures should be established through legislation. Bands should be set with regard to the proportion of the total State tax revenue accounted for by defined cyclical transaction taxes, which should also include triggers for action when breached. Oireachtas committees should be reviewed and resources provided to increase their effectiveness. An independent budget office should be established to provide independent costings of budgetary and pre-election proposals made by political parties and Members of the Oireachtas.
Each crisis has at its origin a belief that this could never happen again or that this time it is different. One description of this recent crisis was that it was a systemic misjudgment of risk, that those in significant roles in Ireland, whether public or private, in their own way got it wrong, and that it was a misjudgment of risk on such a scale that it led to the greatest financial failure and ultimate crash in the history of the State. This is one part of the story. The failure to identify the potential risk posed to the overall financial stability of the State by the banking system is another key lesson which must be learned. Recognition must also be given to the lack of an overall framework, at a European level, for dealing with the financial crisis.
This report’s findings and recommendations show that lessons must be learned and applied. There is no certain formula to avoid another crisis, but constant vigilance and early preventative action are critical. The final report laid before the House contains three volumes. Volume one is the main report, volume two explains how the inquiry operated and deals with recommendations for the running of future inquiries, and volume three involves the publication of all the documentary evidence considered in preparing the main report. The inquiry was asked to examine the reasons Ireland experienced a systemic banking crisis. In reality, however, there were two crises - a banking crisis and a fiscal crisis which combined to bring about the crash.
I thank the members of the joint committee for their hard work and commitment throughout the inquiry, which commenced 18 months ago. The determination of all the members of the inquiry to complete the task put before the committee is, I believe, unique in Irish political life. Despite varying party political affiliations, all members participated fully and worked together to deliver the best report possible within the framework of the Act and on time. However, it must be acknowledged that Deputies Pearse Doherty and Joe Higgins, while they continued to remain as members of the joint committee, were in the end unable to support the final report. Committee members are the visible side of the inquiry, but there is another. Enormous credit is due to the staff of the inquiry and to members’ staff, to the investigation team, the legal team, the secretariat and all those who worked behind the scenes, working long days and long hours in the evenings and through weekends. The dedication, determination and commitment they gave to supporting the committee make them exemplars of good public service in this country.
I also acknowledge and welcome the co-operation we received from institutional participants and individual witnesses through their attendance at public hearings, preparation of written statements and provision of documents to the inquiry. However, co-operation was not evident across the board and the joint committee is critical of the failure of the ECB in particular to co-operate with the inquiry. While acknowledging that there was no legal obligation on it to do so, the stance of the ECB stands in stark contrast to the full co-operation and engagement offered by both the European Commission and the IMF.
It was a privilege to serve on this committee. It was an opportunity to shine a light on a dark and difficult time in our recent past, an opportunity to piece together the events of that time, an opportunity to learn from the mistakes that were made and an opportunity to ensure those mistakes are never repeated.