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Joint Committee of Inquiry into the Banking Crisis debate -
Wednesday, 15 Jul 2015

Nexus Phase

National Treasury Management Agency - Mr. John Corrigan

As we have a quorum, the Committee of Inquiry into the Banking Crisis is now in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? I would like to welcome everyone to the public hearings of the Joint Committee of Inquiry into the Banking Crisis. At our first session this morning, we will focus again on the role of the National Treasury Management Agency during the crisis and we will hear from Mr. John Corrigan, former CEO, NTMA. Mr. John Corrigan joined the NTMA in June 1991 as a director in the funding and debt management unit. In 2001 he was assigned responsibility in the NTMA for the National Pensions Reserve Fund. He was appointed NTMA CEO in December 2009 and retired in January 2015. Mr. Corrigan, you are very welcome.

Mr. John Corrigan

Thank you, Chairman.

Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these are documents and that they are confidential and should not publish any of the documents so displayed.

The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Mr. Corrigan please.

The following witness was sworn in by the Clerk to the Committee:
Mr. John Corrigan, former Chief Executive Officer, National Treasury Management Agency.

If I can invite the witness to make his opening statement please.

Mr. John Corrigan

Thank you, Chairman. In the interests of brevity - I understand I have about ten minutes - my opening statement will be an abbreviated version of the written statement I made to the inquiry.

So, by way of background, the NTMA has a number of diverse functions, all of which are clearly defined in legislation. A common theme running through all of its functions, with the exception of its State Claims Agency, is its engagement with capital markets. Its original mission was to fund the Exchequer borrowing requirement and manage the national debt in a cost effective manner. This mission has been added to by various Governments over the years. The additional function most relevant to the banking crisis was the NTMA's role as manager of the National Pensions Reserve Fund, NPRF, and I was the director responsible for the fund up to December 2009. The NPRF was controlled by the National Pensions Reserve Fund Commission, a body corporate which was independent in how it made its investment decisions. When I was appointed CEO of the NTMA in December 2009, I became an ex officio member of the commission. The legislation governing the fund was amended in 2009 in the context of the banking crisis to enable the Minister for Finance to direct the commission to make investments in Bank of Ireland and AIB. In reporting on the fund's investment performance, the commission clearly delineated between the performance of those investments which it had made under its own discretionary powers and the so-called discretionary investments in Bank of Ireland and ... or directed investments in Bank of Ireland and AIB. The NTMA had no role in relation to the oversight of the banking system and no responsibility in relation to the provision of liquidity to the system. We believed that the role of lender of last resort fell to the Central Bank and ECB.

2007-2008: The function of the interbank money markets became increasingly problematic through 2007, culminating in the UK in September 2007 in the collapse of Northern Rock, a financial institution which heavily relied on non-retail funding in a way not dissimilar to Anglo Irish. There were sharp falls in 2008 in the share prices of Irish banks with, for example, the share price in Anglo Irish falling by 18% in one day. These falls reflected concerns about the impact of the continuing fall in Irish property prices on the banks' earnings and also the wider international background of non-functioning money markets. In September 2008, the NTMA was invited to attend, with the Department of Finance, meetings of the domestic standing group and, depending on my availability, I attended meetings of that group. The deteriorating liquidity position of the Irish banks, in particular Anglo Irish and INBS, was the group's biggest concern and, on foot of those concerns, the Department of Finance put in hand, as a contingency measure, the drafting of legislation providing for a scheme for bank and building society nationalisation.

On 14 September 2008, Lehman Brothers filed for bankruptcy. Around that time, the Minister for Finance asked the NTMA to retain corporate finance advisers in the area of bank resolution. I was involved in procuring the services of Merrill Lynch in that context. Merrill Lynch subsequently provided advice which formed an input to the deliberations culminating in the Government decision to guarantee the deposits and debt liabilities of six domestic financial institutions, the covered institutions. As the committee is aware from evidence given by my colleague, Brendan McDonagh, the NTMA was not involved in the deliberations of 29 and 30 September.

While the guarantee helped the covered institutions, in particular Anglo Irish, to attract funding through the interbank market and retail deposits, at least in the near time ... term, the share prices of the quoted banks continued to perform poorly, signalling continuing market concerns about their profitability and possible requirements for fresh capital. In a statement issued on 30 November, the Minister for Finance said that, in certain circumstances, it would be appropriate for the State, through the National Pensions Reserve Fund or otherwise, to consider supplementing privately sourced additional capital for the covered institutions. On Saturday 13 December 2008, with my colleague Brendan McDonagh, I attended a day-long meeting in the Department of Finance, where the question of bank recapitalisation was considered. We pressed strongly at that meeting for the nationalisation of Anglo Irish, which was also the approach recommended by Merrill Lynch. In the event, the view that Anglo should be recapitalised, rather than nationalised, prevailed. A Government announcement on 21 December 2008 on recapitalisation said that there would be an initial State investment of €1.5 billion in Anglo and that agreement had been reached with Bank of Ireland and AIB that each would issue €2 billion of preference shares to the State. At the request of the Minister for Finance, I was heavily involved in the discussions with Bank of Ireland and AIB, leading up to that announcement.

At the outset of those discussions, the banks resisted the suggestion that they needed fresh capital and, in particular, the provision of capital by the State.

2009: The proposed recapitalisation of Anglo was abandoned with a statement by the Minister for Finance on 15 January 2009 that it would be taken into public ownership citing "a weakening in its funding position and unacceptable practices". In the meantime, there were ongoing discussions with Bank of Ireland and AIB on how their €2 billion capital injections could be achieved. Against an international backdrop of banks generally increasing their core tier 1 capital, it was agreed in discussions, which I chaired, that the State would provide €3.5 billion core tier 1 capital for each bank through preference shares. It was the view of the NTMA that, given its bigger balance sheet, AIB was likely to require more capital than Bank of Ireland but AIB stuck to its view that its problem was no bigger than Bank of Ireland and that it would only recommend to its shareholders a deal based on its quantum of additional capital being the same as Bank of Ireland’s. The Minister for Finance decided that the €7 billion of capital was to be provided by the NPRF. The NTMA engaged PwC and Arthur Cox to undertake due diligence on the two banks. To help us oversee this exercise we retained Sir Andrew Large, a former deputy governor of the Bank of England, as a "trusted adviser". In response to a request from the Minister, the due diligence exercise was tasked with forming a judgment with respect to the probability of each bank’s core tier 1 capital being above the regulatory minimum at end-2011 and with identifying matters or issues which might reasonably be considered of a "red flag" nature.

The National Pensions Reserve Fund Commission reported in March 2009 to the Minister on Bank of Ireland. The due diligence results indicated that there was a reasonable prospect that, allowing for the proposed capital injection of €3.5 billion by way of preference shares, the bank's core tier 1 capital would be above the then current regulatory minimum 4% at end-2011. The National Pensions Reserve Fund Commission reported the Minister on AIB in May 2009. The results painted a doubtful picture about whether the bank would be above its regulatory capital minimum of 4% at end-2011. The Minister directed that both capital injections be proceeded with and the NTMA, on behalf of the NPRF, executed on them.

As CEO of the NTMA, I was an ex officio member of the NAMA board from its inception in 2009 and, in its early days, was heavily involved with Brendan McDonagh in recruiting its senior management team. I believe that the decision to set up NAMA was the correct one and, based on the NTMA’s engagements with institutional investors and the credit rating agencies. I am strongly of the view that its success played a huge role in Ireland later regaining access to the debt capital markets.

In June 2009, the Minister for Finance invested €3 billion in share capital of Anglo Irish. The Minister invested a further €1 billion later that year. These investments were made in cash drawn from the Exchequer and the NTMA was not involved in their execution. As the committee will be aware, subsequent capital injections were made in the form of promissory notes. The use of the promissory notes had the advantage that their redemption by the Exchequer was spread out over a 20-year period, thereby easing the pressure on the NTMA to access capital markets. At end-2009 Ireland remained relatively highly rated by the major credit rating agencies, notwithstanding downgrades over the previous 18 months in response to the deterioration of the public finances and the very evident stress in the banking system. Ireland was broadly rated AA or equivalent, but generally with a negative outlook. The NTMA raised €35.4 billion in long-term funding in 2009.

2010: In February 2010, the Minister for Finance announced his intention to delegate certain functions in the banking area to the NTMA. This announcement stated "All of these functions will be carried out on behalf of the Minister, and in close consultation with the Minister and relevant officials in his Department and building on the existing very close co-operation between the two organisations." The initiative to delegate the function was the Minister’s own and was not in response to representations by the NTMA. From a policy setting point of view, very little changed in reality with the Department maintaining a tight grip on policy issues, albeit with input from the NTMA, among others. However, the delegation order brought all of the covered institutions operationally within the remit of the NTMA. Following the making of the delegation order, the NTMA built up a banking unit staffed by experts in banking, bank analysis and corporate finance. In March 2010 the Central Bank announced that banks would be required by year-end to meet a base capital ... core tier 1 capital ratio of 8%. The Central Bank also announced the results of a prudential capital adequacy review, PCAR, which indicated that both Bank of Ireland and AIB had additional capital requirements. The AIB requirement was further increased in September 2010 based on experience of the actual discount rate or haircut applied by NAMA. The NTMA banking unit was involved in executing, on behalf of the NPRF, the necessary transactions, which, in the case of Bank of Ireland involved private sector capital, to address the capital shortfalls. The Central Bank also identified significant additional capital requirements for Anglo, INBS and EBS.

The extent of the additional capital requirements and, in particular, the huge loss announced by Anglo during this period were major factors in Ireland subsequently having to withdraw from the bond markets.

The NTMA's funding and debt management unit raised €19.9 billion in long-term funding in 2010. We concentrated a significant portion of our long-term borrowing programme in the earlier part of the year in order to maximise the advantage to the Exchequer of the good terms for Irish sovereign debt which existed at the start of the year. As a result, the NTMA had achieved its borrowing target for 2010 before conditions deteriorated markedly during the final quarter of the year and we had to cancel auctions which were scheduled for October and November. At end 2010, not least because of Ireland’s entry into the EU-IMF programme, Ireland’s credit rating was barely investment grade and, indeed, one rating agency subsequently marked it down to sub-investment grade. The tone of eurozone sovereign bond markets was severely damaged in October 2010 when, at an EU summit in Deauville, Chancellor Merkel and President Sarkozy said that holders of eurozone sovereign debt should be forced to take losses or haircuts as part of any debt restructuring.

I was a member of the team of Irish officials who were directed by the Minister for Finance to hold discussions with the EU Commission, ECB and IMF in mid-November 2010. At the time, there were ongoing substantial losses of corporate and retail deposits by the Irish banks. In response to a request from the Minister for my views on whether Ireland should apply for an EU-IMF programme, citing the severe liquidity strains on the banking system and the risk of a collapse of the system, I wrote to him on 21 November 2010 recommending that an application be made. I said I envisaged that such assistance would provide for a capital strengthening of the banking system and, although likely to be expensive, would also provide sizable funding to the State. I stressed that appropriate liquidity support from the ECB would be a necessary complement to a decision to apply. Unfortunately, such liquidity support was, in my view, only grudgingly provided by the ECB to the extent that their public utterances could have been much more supportive.

On Saturday 27 November 2010, I wrote again to the Minister, at his request, furnishing comments on the proposed programme of financial assistance with particular reference to its implications for debt sustainability. I said that the €35 billion earmarked in the proposed programme for proposed ... for potential capital injections in the banking system would, if implemented, substantially increase the risk of sustainability of the national debt. I recommended that, with a view to mitigating the extra burden on the Exchequer represented by such additional borrowing, the question of a formal bail-in should be considered through aggressive liability management or a resolution regime with respect to the subordinated debt and senior unguaranteed debt on the banks' balance sheets. Together with the Secretary General, Department of Finance, and the Central Bank Governor, I attended part of the Government meeting held that night where consideration was being given on whether to accept the proposed terms of the programme to be told by the Minister that the question of a formal bail-in, which he himself apparently had favoured, had been flatly rejected at a meeting earlier that day of the G20 in Korea, a fact of which I was not made aware until then.

2011-2012: As part of the conditions of the EU-IMF programme, the Central Bank undertook in early 2011, under the supervision of the ECB, a further PCAR exercise. In the context of mitigating the cost to the State of providing further capital support to the banking sector which was expected to arise for that ... from that exercise, and for which, as I mentioned already, €35 billion had been earmarked, the NTMA commissioned a study to look at a bail-in-burden-sharing scheme involving senior as well as subordinated debt holders in the covered institutions. The scheme identified substantial potential savings, depending on the level of discount or haircut applied. For the scheme to proceed, the support of the troika was critical but once again such support was not forthcoming. Nevertheless, liability management exercises were pursued through 2011, which helped mitigate the cost to the State of the Central Bank's 2011 PCAR, the results of which were announced on 31 March and which identified an additional capital requirement of €24 billion. During the first quarter of 2011 the NTMA banking unit conducted the sale by auction of the deposit books of both Anglo Irish and INBS.

Following the entry into the EU-IMF programme and an announcement in February 2011 by the Minister for Finance to second the NTMA banking unit to the Department of Finance, the strategic focus of the NTMA shifted back to what we regarded as one of our core roles - funding and debt management - and the challenge of regaining access to the capital markets so that Ireland would have sufficient funding visibility at end 2013 to exit the programme. That challenge was made all the more difficult because, in addition to demonstrating that we had enough cash to meet day-to-day Exchequer needs after the end of the programme period, there was an Irish Government bond falling due for repayment in mid-January 2014 in an amount of some €12 billion, which we would have to demonstrate to the market was "money good". Irish sovereign euro denominated bond yields hit record highs in July 2011 with the yield on the two-year bond reaching 22% and that of the benchmark bond hitting 14%, implying huge falls in the market values of those bonds.

The spiking of Irish bond yields well into double-digit figures, more or less coincided with Moody's downgrading Ireland to sub-investment grade, which meant that part of Ireland's long-standing investor base was no longer open to us. We therefore embarked in mid-2011 on a vigorous programme of engagement with over 200 existing and potential institutional investors in Ireland, the UK, the rest of Europe, the US and the Far East. The investor relations programme yielded relatively early results when, in 2012, we raised €5.2 billion on the market in long-term debt, regained regular access to the short-term markets and succeeded in reducing the outstandings on the January 2014 bond to €7.6 billion. A hugely supportive development in 2012 was the statement by the President of the ECB that the ECB was prepared to do whatever it takes to save the euro.

2013: there were two further supportive developments in 2013. These were the commitment by the EFSF and the EFSM to extend the maturities on their programme loans and the replacement, on the liquidation of IBRC, of the promissory notes provided to IBRC with long-dated floating rate sovereign bonds carrying maturities of up to 40 years. The combined effects of these two initiatives was to reduce by €40 billion the amount that otherwise would have to be refinanced over the next ten years and to extend the average maturity on Ireland's public debt from seven and a half to 12 and a half years. The NTMA raised €7.5 billion in long-term debt in 2013 and reduced the outstandings on the mid-January 2014 bond to €2.7 billion. The Exchequer ended 2013 with sufficient cash and other short-term investments to cover 12 to 15 months' financing needs, facilitating the exit from the programme.

Conclusion: I believe that the NTMA responded positively to the expectation of the Minister of Finance that we work closely with him and his Department in seeking a resolution of the banking crisis. Our involvements brought us into areas which were well outside what were our core functions. The crisis was domestically generated but the complexity of its resolution was added to by the global banking crisis, which had seen the collapse or rescue of household names and the major dislocation of international bank markets. The apparent absence of crisis management skills in the ECB - in contrast with the IMF - was, I believe, also a complicating factor. Ultimately, in Ireland's case the crisis resulted in, among other things, capital markets being closed to us. Forming judgments and making decisions to try to come to grips with the crisis was obviously complicated by a lack of reliable information in a hugely volatile environment. Decision making in such circumstances can seem like trying to catch a falling knife. So, for example, it was only on the third attempt and with the benefit of knowing what the NAMA discounts or haircuts were likely to be that the banks were adequately capitalised. I trust, Chairman, that the committee will find my statement helpful. Thank you.

Excellent. Thank you very much, Mr. Corrigan, and I now move on to invite questioners. The first questioner this morning is Senator Susan O'Keeffe. Senator, you have 25 minutes.

Thank you, Chair. Mr. Corrigan, on page 9 of your own statement you say that this crisis was domestically generated. What leads you to say that?

Mr. John Corrigan

Well, there was a bubble in the property market which caused the problem and, in my humble opinion, inadequate regulation of the financial sector. So to that extent, I would be of the view that it was domestically generated.

When the NTMA adopted the safe harbouring policy that Mr. McDonagh told us about in August 2007, in other words not putting deposits in Irish banks, what signal do you believe that could or should have sent out to the Central Bank, to the Department of Finance, to anybody?

Mr. John Corrigan

Well, it obviously should have sent out a signal that those people, i.e. the National Treasury Management Agency, who had a strong market-facing role, had very fundamental concerns about the stability of the financial system. I mean, that was the obvious message that it should have sent.

And at the time that you made that decision did anybody approach you to discuss your decision to do that? Was there any concern shown by any parties to your policy or did business just carry on as normal?

Mr. John Corrigan

Well, Brendan McDonagh would have been the man who would have been the appropriate point of contact because as head of risk, among other things, he would have been responsible for setting the counterparty limits. So, to the extent that there was contact it probably would have been with Brendan. But just to, maybe if I could, just step back from it for a minute, I mean, 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. However, you know, the Minister who ultimately gave us a direction to place deposits with the, with the banks, he, again in my opinion, would have had a much wider public policy take on the issue and would have taken into account, presumably, considerations that were outside the narrow remit of the NTMA. But I mean the signal was very clear and, and left ... could not have left anybody in any doubt.

Was it the first time that the NTMA had made that kind of decision in relation to putting deposits in the Irish banks?

Mr. John Corrigan

To the best of my knowledge, yes.

So it was ... it would have been ... was it a decision that was arrived at lightly or with serious consideration?

Mr. John Corrigan

No it was ... it was arrived at after very serious consideration. It was a decision again that to the best of my knowledge the senior management team would have been involved in, so it wasn't a decision that was taken lightly.

When Mr. McDonagh was here last week, and I'm moving forward a whole year, to the time of the guarantee, and he talked about the view that the NTMA had about nationalisation versus the guarantee, and he said there was a strong view on the part of the NTMA. So obviously, you're here with us today so perhaps if you could tell us what your view was about the approach of nationalisation and on what analysis did you base the view? If it is correct that your view was that the bank ... that those, that the two banks be nationalised. Or indeed maybe all of them, I don't know.

Mr. John Corrigan

Well, certainly, I shared the view with Brendan McDonagh, and I think the chief executive was of the same view that Anglo should have been nationalised. But what informed that view would have been the business model which clearly was different from the mainstream banks, if I could use that term. So I referred in my opening statement to the collapse of Northern Rock. I mean, that had a business model, in a way not dissimilar, it wasn't entirely the same but not dissimilar to Anglo Irish, to the extent that it relied for its funding on non-retail deposits, and it seemed to us that for the foreseeable future, the interbank market was hopelessly broken, not just in Ireland but globally and so it, it also .... I think the information to the extent that we were involved, from September 2008 .... we were, we were directed by the Minister for Finance to assist in, in looking at the problems which were arising, that there was a lack of visibility, really, around Anglo and its funding and we felt that the earlier you got your hands around the throat, so to speak of Anglo, the better. Whether, ultimately, it would have made any difference to where we are today, that's a matter of conjecture, but we felt looking at the business model, looking at the background intuitively it was the way to go. I mean, we didn't have ... we ... it wasn't based on a detailed, sort of, business case, if that's the question you're asking me.

Was it not based on a business case because ... because you couldn't or didn't have time or because you didn't bother?

Mr. John Corrigan

Probably because we didn't have time and also at the early stages of all of this, as I think Mr. McDonagh mentioned during his evidence ... the locus standi of the NTMA was challenged by the Financial Regulator.

And can you elaborate on what that challenge meant, in terms of how you operated then?

Mr. John Corrigan

Well, it became apparent to us when we got involved in the crisis in September 2008 that the information available within the regulator appeared to us to be sadly deficient. And we would have pushed strongly, and I think Brendan McDonagh may have mentioned this in his evidence, for the regulator to get a third party in, which ultimately was PwC to do a deep dive, so to speak, on the books of all the financial institutions. And that was the first time, certainly from our point of view, that it became obvious to us that various connections had exposures to all the financial institutions, and when you aggregated those connections, it was a frightening vista.

Before I, I'll come back to that if I may, but I ... I just want to pursue the matter of nationalisation if I may, because in your statement on page 3, you've moved on now to Saturday, 13 December 2008. And you say that you and Mr. McDonagh had a meeting with the Department of Finance on that day. Before I ask you about what happened at the meeting, I'm just wondering why did it take place on a Saturday? Do you know, can you recall?

Mr. John Corrigan

I can't recall.

Okay, that's fine. You say that you pressed strongly, with the Department, for nationalisation of Anglo Irish Bank. So, again, what was the analysis ... at this point, at this time ... and why ultimately was your pressure resisted? Why did the Government decide instead to recapitalise?

Mr. John Corrigan

Well, again, my recall of that meeting is that there was ... it was quite a big meeting ... there, the Department was there, the regulator, the Central Bank, legal advisers and others. And it was only ... it was only towards the back end of the meeting that we got a chance to, to, to express our views and indeed I remember at that stage, the chair of the meeting saying to me, who was the then Secretary General of the Department of Finance, when I tried to express a view that, in fact, I didn't have a view because I was the agent for the Minister for Finance. But notwithstanding his ruling, so to speak, I did forcibly express the view ... that the proper course would be to nationalise the bank.

So let me be clear, the chair was saying to you, you couldn't express a view because you were the agent of the Minister but you were not deterred by this, you-----

Mr. John Corrigan

No, no but I mean, that's, that's what he said. I couldn't understand where he was coming from but I had a vivid recollection of that.

Yes, I'm sure. And so anyway, you put your view forward, which was nationalise; and again here you were two months later, talking about nationalising, again what was your view, what was your reasoning, what was the basis for you at this point, pressing again for nationalisation?

Mr. John Corrigan

Well again the, the discussion revolved around whether the bank, among other things, should be either nationalised or whether it should have ... the State should buy preference shares in the bank in the same manner as was being proposed in AIB and Bank of Ireland. We took the view that buying preference shares, depending upon the conditions of the preference shares, which would have to obviously be discussed, had potential, as I said in the written statement which I've submitted to the inquiry, for letting subordinated debt holders off the hook and that in itself was a compelling argument for nationalisation. And we repeated that view in a subsequent e-mail that we sent to the Department of Finance early the following week. But notwithstanding that view, as I said, the decision was taken. Now, we wouldn't have been party to the detailed discussions in the Department, presumably with the Minister and whoever else, in arriving at the decision to go the recapitalisation route, rather than the nationalisation route but our clear ... our views were very clear and we also, as I said, adduced that argument that it could have the potential to let the subordinated debt holders off the hook.

Now you, you recall that that meeting on the Saturday was a large meeting, there were a lot of people there-----

Mr. John Corrigan

Yes.

Were you the only people saying nationalise, or were others saying nationalise, or do you remember?

Mr. John Corrigan

I don't remember, certainly ... it was Merrill Lynch's view, to the best of my recall, that the nationalisation route, again, on the basis of the argument that the business model ... in drawing a line between Anglo Irish and the other banks, you could clearly make ... justify the distinction on the basis that they were ... they were essentially different business models. I don't recall whether there was support from the other people present.

The official statement that was put out by Government on 21 December, and it's in Vol. 1, page 45, of Mr. Corrigan's own book. It'll come up before you, Mr. Corrigan, and, basically, it said, "The Government will continue to reinforce the position of Anglo Irish Bank and will make further capital available if required so that it remains a sound and viable institution." What was your view of that part of ... it's obviously a longer statement and I've taken that sentence from it. What was your view of that particular sentence?

Mr. John Corrigan

Well, our view was that the business model was fatefully flawed so I clearly wouldn't subscribe to that view.

When, Mr. Corrigan, did you yourself come to the view that it was a broken model or a flawed model?

Mr. John Corrigan

It crystalised probably from 2007 onwards, starting with the issue of the placing of deposits which would have been, if you like, where our internal discussions would have kicked off in the context of our brief which was the management of the Exchequer balances. And then, as we got drawn into the controversy or the crisis in September 2008, which was when we attended the very first meeting with the Central Bank, I think it would have been around then that the view crystalised that it was a broken model. As I said, the collapse of Northern Rock would have been strongly supported. Anecdotal evidence of what can happen in those circumstances.

Mr. Corrigan, when you heard about the blanket guarantee for all the banks - I appreciate you were not in the country at the time; you were in the States I believe - what was your response? What went through your head?

Mr. John Corrigan

I was certainly taken aback because I wasn't aware that the system, if you like, was that close to making such a big decision, but I wasn't there on the night and it's easy, or not easy as the case may be, to sit and second-guess. I mean, looking at it, you could take the view that it probably was the least bad solution. I don't know. I ... they could have nationalised Anglo Irish that night, or announced that it would be nationalised but I was a bit taken aback mainly because, as I said, I had been involved in some of the discussions the previous week, but not all of them, and I certainly hadn't got the impression that we were that close to making such a big call.

So in the conversations the previous week, I assume that was with officials from Central Bank, the regulator, the Department of Finance, if you like, the usual people that you'd been talking with. Was the conversation at that point centred on all options or had it centred on a particular option, do you remember?

Mr. John Corrigan

I think there was a meeting on the Wednesday of the previous week which the Taoiseach was at and the Minister for Finance and I was certainly at that meeting, and all the options were tabled at that meeting. And we would have indicated, to the best of my recollection, that we would have favoured the nationalisation route. Now, I was out on the Thursday and Friday. Again, I had no sense of ... I ... at the risk of delaying the committee, I was due to travel to Germany to meet my grandchildren on the Wednesday and I postponed my visit because of the meeting with the Taoiseach and I headed off on Thursday and I think I came back on Saturday and I went off to New York for a meeting in connection with the pension fund on Monday. So I had no sense of impending doom, if "doom" is the word that can be, sort of, attached to the, sort of, circumstances at the time.

Did you have a view on whether Anglo and INBS were solvent on the night, I mean, solvent at that time? I know you weren't there, but did you have a view on their solvency in those days, I suppose, leading up to that moment, given the conversations you'd had and the knowledge you had?

Mr. John Corrigan

Well, there was a huge debate or debates with the regulator at various meetings I was at from, you know, in September on whether the banks were solvent or not. Now, I'm not an accountant but he assured us that they were solvent. It seemed to me, as a non-accountant, that it was highly debatable as to whether they were solvent or not, on the basis of my understanding of the definition of "solvency" is an institution's ability to meet its obligations as they arise. And if you just take the snapshot of the night of the guarantee, but for the guarantee, presumably, Anglo wouldn't have been able to meet its obligations and, therefore, arguably, could have been regarded as being insolvent.

Mr. McDonagh talked about the ... when he engaged with meetings at that time, the lack of information or the lack of knowledge. And he then ... he put together this particular e-mail with the 33 questions that he says that he did on, I think he said, his BlackBerry when he went home and he copied ... he sent it to Kevin Cardiff, William Beausang, Oliver Whelan and you. And the questions are fairly straightforward questions, I think, and that's what he said himself, you know; what is the current value of the top 30 loans and so on? It's not really to go through the questions, but rather to ask do you recall getting this document? And again did you have a view? Were you surprised or not to find that these were the level of questions that were being asked at this point by your colleague? Did you expect that information would have been known? He certainly, I think, did.

Mr. John Corrigan

Well, I think that the content of that e-mail underline the point that Brendan McDonagh and I have made, or make, that there was a dearth of knowledge, of detailed knowledge around the institutions and one of the things - if I could just comment on it and I know you don't want to got through the questions individually - but again, as a non-accountant, one of the things that surprised me when I got involved in this controversy was this notion of rolled-up interest which features in the questions that he raised. And the rolled-up interest was part of the loan conditions made to certain debtors. And, by definition, with the interest being rolled up, the loans couldn't be in default because there was no interest payable. But what we found interesting, and again as a non-accountant I found extraordinary, was that the banks were accruing as income the interest in those rolled-up arrangements. So I remember when we did our due diligence on AIB, we asked them about the extent of the rolled-up interest because with the collapse in the property prices, it was obvious to us that rolled-up interest probably would never be collected, and yet for prior years those rolled-up interests had been treated as income and would have been reflected in the profits of the banks who clearly ... which clearly, therefore, with the benefit of hindsight, would presumably have been overstated. So I remember that was one of the issues that we focused on but I think it's the extent of the questions underlines, or punctuates, the lack of detailed knowledge, which is the point that I've already made.

And the matter of the rolled-up interest came as a surprise or a shock or not?

Mr. John Corrigan

Well, it came certainly as a surprise ... I would have had no reason because we weren't involved in the regulation of the banks but, you know, when we got involved in September 2008 this jumped out on us fairly quickly as a key issue and, arguably, it's something that the regulatory authorities should been more sensitive to.

On page 7 of your own statement, and I'm skipping to 2010, you talk about the meeting on 7 November when you say you discover that the question of burden-sharing had been rejected earlier that day by the G20 but that you hadn't been told about this. And you then wrote the following day ... I'm sorry, it's on page 173, I think, of Mr. Corrigan's book, the letter that he then subsequently wrote to Mr. Lenihan, the Minister for Finance, on 28 November, pointing out that you didn't know about this, and then giving your own concerns. Why ... why were you not told about that, do you know? And then, of course, if you could comment perhaps on the significance of that decision that was made by the G20 that you hadn't known about.

Mr. John Corrigan

I didn't know about it because we weren't told about it by the Department of Finance.

And I'm asking you do you know why you weren't told?

Mr. John Corrigan

I don't ... I don't.

Should you have been told?

Mr. John Corrigan

Absolutely. I mean, we were asked for our views by the Minister, which we gave in the detailed letter of 27 November. And a central plank to that letter was mitigating the cost to the State and increasing the chances of achieving that sustainability, which was very marginal in ... in our view, through burden-sharing, because this extra €35 billion which the troika insisted on, was a huge potential addition to the debt. So we weren't told about that. You'll have to ask the Department of Finance why they didn't tell us, but anyway we didn't know. I went along to the Government meeting and, as I have explained in my submission, I was told there by Minister Lenihan that the G20 had ruled that out. Why they ruled it out ... I gather it was a line, and I'm into hearsay, I don't know whether I'm ... or speculation, it was a line pressed by the American Treasury Secretary, who was worried about the systemic issues. Mind you, it seemed totally incoherent to us because if you go back to the statement made at Deauville by Chancellor Merkel and President Sarkozy, they were calling for the haircutting of sovereign bonds. And why would you haircut sovereign bonds, why would you not haircut the bonds which were the source ... at the source of the problem, i.e. the bonds issued by the challenged financial institutions? So it seemed to us in making that ... in making that submission, that it was certainly not inconsistent, or if you like, consistent with what ... what ... Merkel and Sarkozy had said at Deauville. And also, if I may, on page 95 of Vol. 2 of my green book there ... and I hadn't seen this 'til it was sent to me by the committee, if you look at the second paragraph there on page 95 of Vol. 2 of my green book, this is the IMF looking back on the experience of the programme, they say, "The second lesson is that it is unfair to impose the burden of supporting banks primarily on the domestic taxpayers while senior unguaranteed bank holders get paid". And then, in the last sentence in that paragraph, it says, "Eurozone partners precluded the Irish from imposing haircuts on senior creditors of insolvent banks."

We'll conclude this now and you can move to a new line of questioning when you're wrapping up, Senator.

Mr. John Corrigan

So, I suppose, sorry, Chair, the point I'm making is that the line that we took against the backdrop of the "Merkozy" ... the Merkel-Sarkozy call for haircutting of sovereign bonds ... and, certainly, looking at this comment, was a perfectly reasonable suggestion to make, I believe.

Okay, thank you. Deputy McGrath.

Thank you very much, Chair. You're very welcome, Mr. Corrigan. Can I start by asking about the haircut on the acquisition of loans by NAMA from the participating institutions. It ended up around 57%. Can you comment on the level of discounts which were ultimately arrived at and the reasons why you believe those discounts were so high?

Mr. John Corrigan

Well, I was on the board of NAMA - I was an ex officio member - but I wasn't involved operationally in ... in NAMA. But the haircuts ... the haircuts would have arisen, to the best of my recollection now, and I'm struggling a little bit here, on the basis of the fall in the property values - the underlying property values - which would be an obvious consideration, but also the fact that, in a lot of cases, the supporting legal documentation was deficient. So that, in taking over the loans, the ability of NAMA to rely on the underlying collateral, on foot of legal enforcement, was undermined by ... in the absence of those documents.

Sure. I think it's generally accepted that the NAMA process over the course of 2010 took longer than expected, so to what extent were the delays in that process as a result of the, you know, incomplete security documentation, incomplete documentation generally, large collateral or differences in loan valuations? What type of difficulties did NAMA encounter when they went in and did the due diligence on a loan-by-loan basis? And did that feed into the overall delay in transferring the loans across?

Mr. John Corrigan

I'm sure it did feed into the overall delay, Deputy, but, frankly, as I wasn't involved in NAMA operationally, I wouldn't feel competent to comment in detail on your question.

Okay. Overall, you are the supportive of the establishment of NAMA, is that correct?

Mr. John Corrigan

Absolutely. I mean, I mentioned earlier that when we got the initial PwC reports, which were commissioned by the regulator, the extent of the system's ... the banking system's exposure to individual debtors became clear. In other words, that a debtor went along to Bank A and borrowed, went along to Bank B and borrowed, C, D, and E, and the NAMA process brought the resolution of the individual debtors together. Otherwise, if it was left to each individual bank to do it, I think we'd still be struggling.

So do you agree ... disagree with the views expressed by Dr. Somers last week, who seemed to take the view that the banks knew where the bodies were buried, as he put it, and that they were best placed to collect the loans and that while you might have an overarching structure of NAMA, with a small number of people in the NTMA, that the actual workout of the loans would be best left to the banks? You may not be familiar with his evidence but that's the broad thrust of it on NAMA.

Mr. John Corrigan

I don't think that was the solution. I don't think that was the solution and-----

Do you think the loan-by-loan acquisition was the way to go?

Mr. John Corrigan

I think there had to be a centralised approach to each debtor, otherwise each of the banks would be vying with each other to get in ... a piecemeal approach, I don't think, would have worked.

Okay. And then over the course of 2009 and 2010 when there were various rounds of bank recapitalisation, what was the nature of your discussions with Government and your advice to Government in relation to recapitalising the financial institutions?

Mr. John Corrigan

There were ... as I mentioned in my evidence, there were three rounds of recapitalisation. And in the first round, it was very much left up to the NTMA, on foot of a request from the Minister for Finance, to determine some estimate of the likely requirements of the banks for extra capital. And it was on foot of those discussions that the initial capital injections of €3.5 billion in Bank of Ireland and AIB arose. Then things assumed a more orthodox setting, if that's the right word, when, in 2010, the Central Bank did its PCAR. Because, as I said at the outset, the NTMA, in a formal legal sense, had no role in relation to the banking system but we did have substantial assets in the National Pensions Reserve Fund and, through the amendments in the legislation, the Minister took power to be able to direct the fund to invest. And the first investment was ... all three rounds of capitalisation, to the extent that the fund was involved, were done by way of direction from the Minister. But the first round of recapitalisation, the Central Bank really wasn't involved in it and maybe that in itself says something.

Senator O'Keeffe dealt fairly comprehensively with the issue of the view within the NTMA that it would have been better to nationalise Anglo even in September 2008. Was that the corporate view of the NTMA or was it just a view of individuals? Did you collectively arrive at a view which was then the NTMA view?

Mr. John Corrigan

I'm not sure if it was corporately the view in the sense that the management team would have discussed the nationalisation but, certainly, the directors who were directly involved, that's to say, Brendan McDonagh, myself, Oliver Whelan and the chief executive, would have been of the view that was probably the ... that was the best solution.

Okay. And then you said a while ago that it would be a matter of conjecture as to whether or not it would have made any difference to the ultimate outcome but can I ask your view? Would it have saved any money, for example, to nationalise Anglo in September 2008 as opposed to in January 2009, which is what subsequently happened? Would it have made any difference?

Mr. John Corrigan

I don't know.

Okay. I suppose the question is nationalise in September '08 and then do what? What would have followed that in your thinking? And your preference was to nationalise Anglo, but what were the next steps then that would have been taken?

Mr. John Corrigan

Well, the next step-----

I mean, the only way that money would be saved is if somebody didn't get paid - senior bondholders, depositors. How could some money have been saved?

Mr. John Corrigan

I don't know whether money would have been saved but it would have, as I said to Senator ... earlier, we would have got our hands around the throat of the problem much sooner and, clearly, there would have been changes at board level and management level, which is what arose in January.

Mr. John Corrigan

But, I mean, operating in the dark is never a comfortable position and I think that's the situation in which we found ourselves.

Can I ask how it came about that the pension reserve fund, which had been built up over many years, was to be the source of recapitalisation for AIB and Bank of Ireland?

Mr. John Corrigan

Well, again, I would have chatted to Minister Lenihan about this and in the back of his head, he felt that that in recapitalising those two banks, there was a strong probability that the State would get its money back and while it wasn't a commercial investment which the board of the fund would make of its own accord, there was a strong prospect that we would get the money back and, therefore, he thought it was within the spirit, if you like, of the fund. Whereas in his mind in relation to the other institutions, I think he saw that the prospects-----

Mr. John Corrigan

-----wouldn't come through, you know.

Can I take you to your own witness booklet, Vol. 2 and page ... start with 59, just to show the cover page, and this is the bail-in strategy with holders of senior and subordinated debt, an NTMA paper dated 28 March 2011. So this is when the new Government were preparing the announcement on the banking strategy and the issue of burning senior bondholders as well as junior bondholders resurfaced. So on page 62, if we can take us to page 62 of that. The NTMA is setting out a proposal for burden-sharing and, in total, the proposed burden-sharing is of the order of €15 billion but the proposed burden-sharing for senior bondholders is over €9 billion, €9.1 billion if you add all of those up, and the NTMA actually recommended that the Government would proceed with this burden-sharing. So, can you tell us the background to this, Mr. Corrigan. Were you asked to prepare this paper? You refer in your witness statement to commissioning a study. What assistance did the NTMA get in preparing this paper? And what is the origin of it?

Mr. John Corrigan

Well, I think, during his evidence, the former Secretary General, Cardiff, referred to the so-called "Johnny Logan" group, as he humorously put it, and this was where the domestic standing group was, if you like, decided to do an exercise on brainstorming to see to what extent the €35 billion, for example, by way of extra recapitalisation, which was earmarked in the programme, how we could mitigate some of the provisions in the programme. So, it was on foot of that we revisited the question of burden-sharing and I think it's fair to say that in the paper, we do say the haircuts are indicative only but, I mean, it was a strategy that we recommended, which was consistent with what we recommended back the previous November.

Mr. John Corrigan

But that was the background to it. I mean, we were now in a programme. The Department was looking at various ideas of its own, none of which came to pass, but this was something concrete that we had-----

So can you explain how you arrived at a proposed haircut on senior bonds for AIB, EBS and Irish Life and Permanent of 60%; Bank of Ireland senior bonds, 45%; and then Anglo and Nationwide, 63%? How did you arrive at those figures?

Mr. John Corrigan

I can't remember. I mean ... they are for ... it does say in the paper they're for illustration but I parsed the same question myself when I read it but, to be frank with you, Deputy, I can't remember but I mean the figures are illustrative.

Well, it says they're indicative only and are subject to negotiations with creditors-----

Mr. John Corrigan

Yes.

-----but then at the end, there is a clear recommendation from the NTMA to proceed. Well, the recommendation is: "... subject to a view being taken by Government [on page 64 at the bottom] on the potential implications of an adverse reaction from the external authorities and the implementation of an appropriate legal framework, immediate steps should be taken following the announcement of the PCAR/PLAR results to enable burden sharing with both senior and subordinated debt." So you're not saying there that the Government should only do this if the external authorities endorse it; you're saying that the Government should take account of potential implications from an adverse reaction from the external authorities. So I suppose what I'm asking, Mr. Corrigan, was it the NTMA view, at the end of March 2011, that the Government should proceed with burning senior and junior bondholders?

Mr. John Corrigan

Yes.

Yes. And do you believe that the indicative figures there of burden-sharing to the tune of €9 billion with senior bondholders was a realistic proposition and that that could potentially have been achieved?

Mr. John Corrigan

It was very much, I suppose, an opening gambit because, presumably, if the Government decided to proceed with this, they would have opened discussions with the troika and, from a negotiating point of view, it would make more sense to pitch the figure high, if you could get them in to conceding the principle of burning of the bondholders but, as we all know, they wouldn't even concede on the principle, so the thing went no further.

And did the NTMA bring in some external assistance to help in the preparation of this? Can you recall who that was?

Mr. John Corrigan

Yes, we did, yes. We engaged Lazards.

Mr. John Corrigan

Yes.

Okay. And the figures that are there for the haircut on junior bondholders, the total is about €5.7 billion. That largely subsequently did happen. I know the previous Government imposed about €10 billion of losses on junior bondholders, the current Government about €5 billion, so that would be out of the pool which is identified there, I would imagine. Is that correct?

Mr. John Corrigan

No, you're absolutely right and I did acknowledge in my submission that the liability management exercises did impose substantial losses on the junior bondholders and you're right that the €5 billion or so here was, in fact, realised subsequently. I mean, the key issue was around the senior bondholders and whether they should have been haircutted.

So what is your understanding as to the reason why the proposed imposition of losses of over €9 billion on senior bondholders did not happen at that time?

Mr. John Corrigan

Well, because the troika ... my understanding is the troika wouldn't countenance it. Again, I wasn't involved directly in the discussions but Minister Noonan would have been and it was a flat rejection by the troika.

And was it your view that because we were in the relatively early days of a three-year programme and the NTMA would not be borrowing on the sovereign bond markets that the impact of imposing losses, even on senior bondholders, while it might have an adverse effect on bond yields, didn't really matter because we weren't in the markets? Was that your view?

Mr. John Corrigan

Well, again, our anecdotal evidence was that a lot of the bonds, both junior and senior, had moved into the hands of hedge funds.

And, you know, they're fairly tough nosed individuals and they are not the type of institutions that over the long term we would have relied on for funding. So upsetting hedge funds wasn't something that particularly worried us.

The other thing I should mention was that in internal simulations which we did within the NTMA around the debt sustainability it all ... it hinged to a ... there are three moving parts within that issue of whether the debt is sustainable. First, there is the nominal GDP growth rate, second, there is the average cost of funding the stock of that and, thirdly, there is the primary surplus that you have to run in order to sustain the debt. The growth rate ... there was a lot of uncertainty attaching to the growth rate if you back to 2011. We had come through the horrors and if, for example, you took the growth rate projected for Ireland by the ECB, you were looking at debt to GDP ratio rising to 160% according to our internal simulations. So the situation was far from clear and, indeed, one of the issues which I didn't mention in my submission was that the reduction in the interest rates by the external authorities was an important factor in actually bringing about the sustainability of the debt. That, coupled with the extension of the maturities. So, if you like, what appeared like a very challenging situation back in 2011; there were certain measures which eased the challenges.

But the NTMA view at that time in March '11 was that savings of in the order of €9 billion were possible in terms of senior bondholders across the different banking institutions?

Mr. John Corrigan

Well, certainly savings were possible-----

Mr. John Corrigan

As of the €9 billion ... is illustrative. But, I mean, if you just take half of that, €4.5 billion, it is still an awful lot of money.

It's not insignificant.

Mr. John Corrigan

Yes.

Okay. Can I take you to again, your own booklet, Vol. 1, page 63, and this relates to an approach by the Libyan Investment Authority, no less, to the NTMA in November 2010 and they were proposing to make an investment in Bank of Ireland - proposing to take a 24% stake in terms of ordinary shares from the pension reserve fund and to invest €1 billion of the pension reserve fund shares in preference shares. Can you explain the background to this? What was the nature of this approach?

Mr. John Corrigan

Well, again, this was an approach made by the Libyan Investment Authority. The approach, as I recall it, was made in the first instance to Bank of Ireland who then approached us. And, around this time, there were a lot of approaches around different institutions. For example, there was a Malabraca Consortium, which was interested in Bank of Ireland and was also interested in EBS. This was at the early ... relatively early stages of the entry into the programme but before the entrance into the programme. We felt this was an issue worth pursuing.

Had the NTMA done business with Libya prior to this? Were you in business with them in terms of any investments or-----

Mr. John Corrigan

No, but the Libyan ... I know we can all look at this with the benefit of hindsight what's happened in Libya. But certainly, the Libyan Investment Authority were a very highly-regarded sovereign investment fund and had a very substantial diversified portfolio of investments globally. So again, to the best of my recollection, we would have checked with the Department of Foreign Affairs as to the appropriateness and ... of ... from a political point of view, if I can use that term, of engaging with the Libyans and they were comfortable for us to do so. In the event, the Libyans didn't ... they didn't pursue the negotiations and the reason they didn't pursue the negotiations is because they couldn't be comfortable around a third round of recapitalisation which might arise and they weren't prepared to write a blank cheque-----

Mr. John Corrigan

-----in terms of executing on a transaction in November 2010 in the ... based on the fact that they might have to come up with more money in 2011, which would have been case. So, from their point of view, it probably was a clever decision not to proceed with it.

And did the meeting happen in Tripoli in-----

Mr. John Corrigan

It did.

-----in December 2010?

Mr. John Corrigan

Yes.

A number of officials from the NTMA would have travelled out and met with-----

Mr. John Corrigan

Yes, yes.

Okay, and did it go any further beyond that then?

Mr. John Corrigan

No, it didn't. We spent a day with them but the whole discussion concentrated around a possible third round of recapitalisation and, as I said, in the event, it didn't proceed. They pulled out of it.

And the initial proposal seemed to be that they were prepared to make an investment of ... in the order of €1.4 billion. €1 billion in preference shares and to pay the market value of 24% of the ordinary shares in Bank of Ireland which were ... was about €400 million. And so Colonel Gaddafi didn't quite almost own a good share in Bank of Ireland, Mr. Corrigan? Not quite.

Can I take you to the shareholder management unit within the NTMA which was announced in February 2010 and was established by order in March 2010? So this was going to be a new banking unit as such within the NTMA. Can you clarify the role which was fulfilled at that time? And then you make reference to in August 2011 that the banking unit of the NTMA was seconded to the Department of Finance. So for a year and a half it remained within the NTMA building, is that the case?

Mr. John Corrigan

That's the case, yes. When the Minister made this delegation order, we built up a banking team and that banking team obviously dealt with the question of the recapitalisations and so on and so forth. And also, it dealt with certain operational issues which-----

Yes. So to what extent was there day-to-day contact between that team and the financial institutions? I mean, would the shareholder unit have been getting minutes from the banks, for example, on a-----

Mr. John Corrigan

Yes, yes.

And would they also have gone to the Department?

Mr. John Corrigan

I don't believe so. At the early stages, before the establishment of that unit, we ... the NTMA supplied a six-monthly report to the Minister on the banks. When the delegation order was made shortly after the making the delegation order, the ... those formal reports were discontinued. But we would have got the minutes of the various board meetings so-----

Mr. John Corrigan

Sub-committees, to the best of my recollection. And to the extent that there were, for want of a better term, red flag issues in those minutes or issues which would be a potential concern, we would have flagged those up to the Department.

Okay, finally, you made reference to the ECB grudgingly providing emergency liquidity assistance to the Irish banks in November 2010. Can you elaborate, what do you mean by that? The ECB was providing record levels of funding to the Irish banks as we know at that time. What was your reaction to the letter from Mr. Trichet of 19 November 2010 which essentially threatened that the ELA may not continue if the Government did not provide ... enter a programme?

Mr. John Corrigan

Well, I ... the ECB, while on the one hand they were clearly generous if that is the right word that you can use in terms of their support for the financial system to the extent of the amount of ELA and other assistance that they provided, it ... we pressed and we pressed at ... whenever we met the ECB and we pressed going into the programme in the pre-programme discussions that if Ireland signed up for this deal, that the ECB would come out with a statement which expressed support for the Irish banking system. My point is, while they signed the cheques, they never actually came out and said that they really stood behind the system.

And again the difference between that and when the ... Mr. Draghi made the statement that they would do whatever was necessary, confidence is a huge issue in financial markets. It's not all about writing the cheque. It's about the tone, it's about the confidence and that lack of public support which they ... which they failed to provide-----

Mr. John Corrigan

-----over the course of events was an issue.

So do you feel that if the ECB had taken a different approach November 2010 and had made a public statement of support for the Irish banking system, along with providing liquidity, that that would have been very helpful to our situation?

Mr. John Corrigan

Well I believe that in itself it probably would have actually helped them, because it probably would have reduced the amount of ELA that we would have required, because it would have ... it would have imbued a sense of public confidence in the system.

Thank you. I propose to just deal with one question with you, Mr. Corrigan, and then we'll take a very, very short comfort break, and return maybe in about three or four minutes. So just one question, if I could maybe begin, and I just want to get ... it's at page 7 of your own witness statement there of this morning, Mr. Corrigan, and it's the first full paragraph actually on the page, where you refer to being "a member of the team of Irish officials who were directed by the Minister for Finance to enter into discussions with the EU Commission, [the] ECB and [the] IMF in mid-November 2010", later to become known as the troika. On the same theme as this, could I put it to you, and ask you, did the NTMA commission a subordinated liability study upon their own authority or was it upon the request of the Minister's instruction?

Mr. John Corrigan

Sorry, Chair, you'll have to-----

In regard to the NTMA, the NTMA commissioned a subordinated liability study, and was that upon your own authority, did you ... and your own direction, or was it upon a request of the Minister's instruction?

Mr. John Corrigan

This is the study to which Deputy McGrath referred?

Yes, yes.

Mr. John Corrigan

I believe it was on our own initiative that we did that.

Okay. And who was appointed and what were the general terms of that appointment?

Mr. John Corrigan

Lazard, the French investment bank, were appointed, and I can't remember precisely what the fee was. I have a figure of €100,000 in my head, but I'd have to check on that.

Okay. And was a proposal identifying the key savings to the State made available to the troika as part of that process?

Mr. John Corrigan

Sorry, Chair, what was the-----?

I said was a proposal identifying the key savings to the State made available to the troika?

Mr. John Corrigan

No, this was a paper which-----

Mr. John Corrigan

-----we worked up with the help of Lazard, and we would have presented that to the ... to the incoming Government. I don't believe it was presented to the troika. They, they wouldn't countenance the idea of the senior bondholders being involved in a burden-sharing exercise.

Mr. John Corrigan

They, they didn't have an issue with the junior bondholders and, as Deputy McGrath pointed out, in fact the subsequent savings were of the order of €5 billion, as envisaged in this paper. But they had an issue of principle, and, as I said already, which issue of principle we couldn't understand, given the Deauville declaration, that, in fact, sovereign bondholders would be subject to burden-sharing.

Can you clarify was there subordinated liability management legislation prepared in and around this time, or is there ... as a result of this?

Mr. John Corrigan

It would have been passed in late 2010-----

Mr. John Corrigan

-----would be my recollection. And it was used, I think, only once, but, again, I could be subject to correction. It was used in the case of AIB. It was .... where there was a subordinated liabilities order made in the courts in relation to certain AIB bonds, which had the effect of reducing the interest rate on those bonds and, again, my recollection is extending the maturities. But the ... the formal SLO process was not invoked in the case of Bank of Ireland, for example.

Okay. Was it for AIB or Bank of Ireland in general that this legislation was prepared, or was it prepared in general on the basis that it would be enacted, and it would appear now that it was never going to happen?

Mr. John Corrigan

No, it was, it was prepared as a general measure. The SLO was applied to the junior debt-----

Mr. John Corrigan

-----in AIB, and so the force of law had to be applied in that case, and that resulted in, I think, an accretion of about €2 billion or so in capital to EIB, which ... to AIB, which otherwise would have to be provided by the State.

Just on the general theme of the negotiations that you were involved with the EU Commission, the ECB and the IMF in mid-November 2010, if those discussions had been, let's say, scheduled to take place at a later time, they may not have commenced, let's say, 'til January or February of the following year, would the ... would there have been any significant or measurable change in the overall costs as to what the ultimate package was going to be?

Mr. John Corrigan

I ... I don't think so. The IMF costs are given. They're fairly formulaic and there's no scope to renegotiate. In fact, as the inquiry will be aware, we prepaid those in better times-----

Mr. John Corrigan

-----by raising money on the markets in ... towards the end of ... or early 2014. As regards the other, the EFSF and the EFSM, they were pricing those off the facilities that they had given to Greece. Initially the discussions were they were looking at giving us very short-term facilities when we engaged with them in November, and we persuaded them in those discussions that if we were to go for a programme, that they ... for any programme to be meaningful, they would have to look at maturities of the order of seven years or beyond. They did, they did go for the extended maturity but the initial interest rates were well over 5% and they were ... they were reduced, I think, during the course of ... in mid-July 2011.

Okay, thank you. May I just propose that we take a very short break and try to return in and around 11.30 a.m., if possible? Is that agreed? Agreed.

In doing so, just to remind the witness that once he commences giving evidence to the inquiry he remains under oath, and is free to his own legal team if he wishes to speak to during that period of time. Okay? Thank you. So to resume in three or four minutes. Thank you.

Sitting suspended at 11.27 a.m. and resumed at 11.36 a.m.

I now propose that we go back into public session. Is that agreed? Agreed. Our ... continue our engagement with Mr. Corrigan of today. If I can invite Deputy Eoghan Murphy please. Deputy, you have ten minutes.

Thank you, Chairman, and thank you, Mr. Corrigan. You're very welcome. I just wanted to pick up on some earlier questioning in relation to this meeting on 27 November at the end of the bailout negotiations and you're told that a formal bail-in will not be happening. Was it your understanding at the time that that would be pursued or could be pursued at a later date?

Mr. John Corrigan

The impression I had, Deputy, and this revelation took place at a full Government meeting, so the impression I had was that it was off the table, period.

Off the table, period.

Mr. John Corrigan

Yes.

Are you aware that it wasn't referred to in a memorandum of understanding in terms of the agreement, that it was either explicitly allowed or not allowed? Was that discussed?

Mr. John Corrigan

With the troika?

No, in the Government meeting where you were informed that the bail-in wouldn't be happening and it was the end of the negotiations

Mr. John Corrigan

Yes.

The memorandum of understanding was there for agreement but it didn't refer to bailing in or burden-sharing. It talked about subordinated debt but not senior debt. So was there any discussion about whether that was a possibility given that it wasn't actually in the memorandum that it wasn't explicitly allowed?

Mr. John Corrigan

No. I mean, I was called in and I was asked certain questions. And I mean, the type of questions, which aren't recalled in my submission, was what would be the likely effect on Ireland's standing in the capital markets of going into an arrangement with the IMF and I expressed the view that there was a strong probability that we would end up, for example, in sub-investment grade and that we would struggle to get back into the markets. There were, sort of, discussions of those nature but as to whether the question of burden-sharing with the senior bondholders could be re-entered, that didn't come up. I was just told it was off the table, period.

Off the table, period. So was there a point then subsequently that you were told it was back on the table?

Mr. John Corrigan

No, it was back on the table through the memorandum, which we discussed earlier, and the Lazard work because we brought it back on the table. Again, we would have had serious concerns about the sustainability of the debt and, certainly, in their private moments, when the troika on those rare occasions when they would have dropped their guard, they would have shared, to some extent, our concerns at that point in early 2011 around the sustainability of the debt.

One side of the troika or the troika? I mean, are we talking about the IMF when we talk about-----

Mr. John Corrigan

The-----

-----the dropping of the guard?

Mr. John Corrigan

The IMF, the Commission and, indeed, on one rare occasion, I got the sense from the senior representative from the ECB that he would have had concerns as well.

And then, following this, the NTMA put the burden-sharing back on the table by engaging a consultant to do up the report that we spoke about earlier, is that-----

Mr. John Corrigan

Well, again, as I said, we did various simulations internally. It's what you do. That's ... we were responsible for the management of the debt and a question is, is the debt sustainable? And we did a number of simulations based on different growth rates and, as I said earlier, if you took ... if you took the Department of Finance's growth rate, which, to be fair to the Department, their projections over the period of the programme more or less turned out to be the case. But at the most pessimistic end of the scale, was the ECB, which would have envisaged, to the best of my recollection now, a growth rate ... a GDP nominal growth rate of, I think, 2% less ... lower than the Department's. You were looking, in certain circumstances, at a debt-to-GDP ratio of 160%. Now, you've got to go back ... you're looking at this in late 2010, early 2011 and it behoved us ... if that was in the range of possibilities as we saw in our simulations, it behoved us to bring back the question of burden-sharing back onto the table.

And so then your fears over debt sustainability were abated then ... because if they weren't abated through burden-sharing, was it through the interest rate reduction? Is that how you then came to the view that this didn't need to be pursued any further?

Mr. John Corrigan

The debt sustainability threat, as we saw it, was eased over the period of the programme by three key concessions. The first one was in July 2011, when the interest rates were reduced by around 2%. The effect of those was to reduce the interest rate on the stock of debt, which is the key metric in terms of debt sustainability ... to reduce the interest rate on the stock of debt by about a half per cent. So that was a big ... a big concession in July 2011. And then, the extension of the maturities of the EFSF and the EFSM from ... and finally, the substitution of the floating rate Government bonds with maturities of out to 40 years for the IBRC promissory notes. So the combination of those, certainly, significantly helped on the debt sustainability question.

Okay. Thank you. I just want to go back to the recapitalisation, if I may, for a moment. And in your opening statement, you go through the different recapitalisations but you talk about, in 2009, this ... a further €1 billion in share capital in Anglo and that, "These investments were made in cash drawn from the exchequer and the NTMA was not involved in the execution of the transactions." So why was this one done? Why was it done without your involvement? Why was the cash drawn from the Exchequer and not what had been happening beforehand, which was preference shares or share capital?

Mr. John Corrigan

: Well, I think ... if you get back to my earlier comments, I think the Minister for Finance had it in the back his mind that while the investments in AIB and Bank of Ireland wouldn't be investments which the Pensions Reserve Fund Commission - which is the governing board of the pension fund - would make on commercial grounds. He felt, in the back of his mind, that, ultimately, we would get the money back and, therefore, it was appropriate to take those investments out of the NPRF. And it was through our management responsibility for the NPRF that I became involved in it, as I think I explained in my submission. At that time, I was the director responsible for the NPRF. So it was really through the NPRF - and it was around the investments that were coming out of the NPRF - that the NTMA became involved. Subsequently, that responsibility or, if you like ... responsibility is the wrong word, that involvement widened out. But the initial cash injection for Anglo came out of the Exchequer and that deal would have been closed on by the Department of Finance officials. We would not have been involved in it.

Okay. Can I just ask then, I mean, was there resistance to the NTMA's advice in Government circles during the period of the crisis? We've heard about, you know, exchanges you told us about earlier on in December when you were talking about the favouring of the nationalisation of Anglo. We heard it from Brendan McDonagh in terms of his exchanges with the Financial Regulator. The NTMA wasn't in the room on the night of the guarantee. You didn't agree with the press release about the recapitalisations of Anglo at the end of 2010. Was there resistance to the NTMA's advice ... were-----

Mr. John Corrigan

Sorry, just on the press release, Chair----

Mr. John Corrigan

-----just to be clear on it, I commented on that with the benefit of hindsight. I was not given the opportunity at the time-----

Mr. John Corrigan

-----for my ... to contribute my ha'penny's worth.

Again, I might give you another example of the NTMA not being listened-----

Mr. John Corrigan

But coming back to your question, I ... we worked well with the Department but I felt, to give you my honest ha'penny's worth that we were unequal partners in the venture. That's probably the best way to put it. So, we were involved but we weren't always involved and, for example, the fact that the G20 statement - which was such an important edict - that that wasn't brought to our attention. Now, it may have been and probably was entirely accidental but I felt the partnership was somewhat unequal.

Why? Why was that allowed to develop?

Mr. John Corrigan

Well, I don't know. You'll have to ask the Department of Finance that. I mean, we complained about not being involved in certain meetings and-----

At what stage were you making these complaints about not being involved?

Mr. John Corrigan

Well, Rothschilds were brought in after Merrill Lynch. We had a competition for a banking adviser and Rothschild won that competition and there were occasions when the Department met Rothschild without us being present.

Okay. Were you aware of the domestic standing group's existence before you were asked to join it?

Mr. John Corrigan

Vaguely.

Mr. John Corrigan

Vaguely.

And do you think it was a mistake that you weren't involved in the process regarding the crisis sooner ... earlier?

Mr. John Corrigan

Well, it might have been ... it would have been better if we were but, I mean, that was the Department's call and the Minister certainly expressed an expectation that we work closely with the Department and, certainly, for our part we did work closely and we did whatever was asked of us. But, I felt, somewhere in the back of my mind because of certain absences and omissions which we have identified - whether they were accidental or otherwise, I don't know - but that we were ... maybe the best and the kindest way of describing it is we were maybe not quite equal partners in the venture.

Okay. Thank you.

Thank you very much, Deputy. Senator Michael D'Arcy.

Mr. Corrigan, you are welcome. In page 96 of your core documents, Mr. Corrigan, the conclusion says the sale of Anglo and INBS deposit books in January '11 which the NTMA managed and chaired. And it states:

[T]he deposits ... [sorry] the transfer of the deposits and NAMA bonds should proceed despite the operational risks involved ... The NTMA accepts that this approach is appropriate in the absence of agreement by the Troika to vary the commitment to this effect in the programme ... This is a risk but given the insistence of the Troika we appear to have no other option.

Can you comment upon the operational risks?

Mr. John Corrigan

I ... I have difficulty actually recalling the operational risks. But some of the ... some of the issues involved ... I looked back on papers which were given to me by the agency ... but, for example, and this surprised me when I looked back on it, in the case of the transfer of the deposits to Irish Life and Permanent, there were, for example, TUPE implications involved in that. So the thing was wider than just a simple financial transaction and again, I think, over 200 employees went to Irish Life and Permanent as a result of the transaction. So it was quite ... there were quite a number of strands to the transactions but, in the end, it was successfully executed on. There were ... it was an open tender. I think there were five bidders for one set of books and three bidders for the other.

But it wasn't something ... a process, to be frank with you, Deputy, that I was directly involved in. We would have left it to the banking team.

And what were the ramifications of non-completion with the troika?

Mr. John Corrigan

What were the ramifications of?

Non-completion with the troika's views.

Mr. John Corrigan

Well, this was one of the ... I mean, one of the main pillars of the troika programme was the downsizing and reorganising of the banking sector, and the Anglo Irish-INBS restructuring plan was a key part of that. So it was one of the key metrics. I mean, we had the Governor of the Central Bank, the Secretary General of the Department of Finance and myself would have had weekly telephone calls with the troika after we entered into the programme, so close was the degree of their monitoring on what we were doing, so this would have been an item that would have been ... would have featured at the time on the ... on the weekly telephone calls. I mean, frankly, we just got on and did it. There were dangerous risks recognised in the ... in the memo for Government. What the consequences would have been, it clearly would have set back the programme somewhat but, what the consequences would have been beyond that, I don't know.

Can I ask you, Mr. Corrigan, in terms of NAMA, the €42 billion discount, haircut, how much of that will the State get back?

Mr. John Corrigan

I, I-----

Did you hear NAMA is going to make a profit of a billion? But that's on the 31-point-----

Mr. John Corrigan

Well, that's what NAMA had said, so I've ... I was-----

Well, if they do that they make a profit on that money. But there was a €42 billion discount. Will they get any of that back?

Mr. John Corrigan

Well, if that's all NAMA recovered the rest must be written off. That's the way I would see it, if my understanding is correctly.

And that writing off is for the people who received the loans from the institutions, is that correct? Who is it written off on behalf of?

Mr. John Corrigan

Well, I mean, it's a ... it's ... the loans were ... were taken over by NAMA, they were taken over at a discount. That discount gave rise to losses in the banks; those losses in the banks gave rise to a need for recapitalisation; that recapitalisation was made good by the State. So in the case of AIB and Bank of Ireland, I think there is a reasonable expectation, which I would share, that the State will see most, if not all ... and it has, in fact, already in the case of Bank of Ireland and I would expect, with astute timing, it will get its money back in the case of, of AIB. Clearly, in the case of Anglo Irish, the money is lost to the taxpayer.

Can I ask you, Mr. Corrigan, in your view did the bank guarantee lead to the national bailout?

Mr. John Corrigan

I mean, despite what ... despite what has been said about us being bounced into the bailout, and I actually ... I have no information on ... on that, but I noted it was given here in evidence. I think that we were probably heading for a bailout anyway. I mean, we had a massive property bubble which collapsed, and the consequences of those had to be faced and we'd no access to the capital markets post-September 2010, and the only show in town was the IMF-EU programme.

In your view was Anglo Irish Bank a systemic bank within the Irish banking sector?

Mr. John Corrigan

The regulator was of the view that it was. I-----

Mr. John Corrigan

I ... again, it's not a particularly informed view but, based on my views around the business model, and so on and so forth, and it being sort of offline, I don't think it was of ... I don't ... I would question whether it was of systemic importance.

Could Anglo Irish Bank have been excluded from the Government guarantee on the night of the guarantee in question?

Mr. John Corrigan

Well, I don't think you could have just - again, my view - just excluded it, but you would have had to take alternative measures, and the alternative measure, as suggested by Merrill Lynch, I believe, at the time, was to take it into State control. That ... that probably was the only realistic alternative.

Mr. Cowen, former Taoiseach, stated that his preference was against nationalisation because that guaranteed all the losses in perpetuity for the State, rather than a time-limited guarantee. Can I ask your view about that?

Mr. John Corrigan

Well, I would take the view that just because something is nationalised doesn't necessarily mean the State is on the line for it. I don't think that absolutely follows.

Was there a possibility that the bank could have been liquidated sooner?

Mr. John Corrigan

It would have been very difficult, I think, to liquidate it. I mean, that was one of the options. I mean, the whole system was very fragile, and I think some sort of precipitated liquidation at that time probably would have had hugely damaging effects for the wider system. So I don't think liquidation was a possibility. But again, I ... I'm giving you my views. I hadn't the benefit of all the discussions that took place that weekend, and on 29 and 30 September.

You're probably fortunate you didn't have the benefit. There was a deep dive into the banks, that was a term that you used, subsequently to all the financial institutions by PwC. They subsequently reported to the Minister that the banks were solvent. Could I ask your view about that analysis by PwC? That's Project Atlas, where they took most of the valuations from the banks. Was that a worthwhile exercise?

Mr. John Corrigan

Well, it certainly was a worthwhile exercise in that it exposed the extent to which, for example, as I mentioned earlier, various developers were multi-banked, and it exposed the concentration of the system in various developers, which information the regulator didn't seem to have up until that. As to their conclusion that the banks were solvent, they ... this was, you know, as I said, trying to address this issue over the three or four years was like trying to catch a falling knife, which isn't ... which is a very dangerous exercise, so they ... I wouldn't question their judgment that at the point in time when they reported that it was their professional judgment that they were solvent. But clearly the property values continued to fall and the whole funding regime continued to come under more strain, so while they probably were solvent at that point in time, clearly the situation deteriorated rapidly.

Former Taoiseach Brian Cowen in previous evidence stated that the NTMA position on the night ... on the night of the guarantee was ... was clearly stated. Are you aware that that was the case? And then my final question, were you one of the people who ... it's been - again in previous evidence - it's been stated that representatives from the IMF and the Irish delegations did not believe that the national bailout was sustainable and it would not work. The first question was, the NTMA position clearly stated; are you aware if it was clearly stated? And then the unsustainable ... unsustainability of the national bailout?

Mr. John Corrigan

Well, I can't comment on the first one, Senator, because I ... I wasn't there. I ... if the Taoiseach says the position of the NTMA was represented, well then I take that to be the case, but I can't confirm it to you, which is the question you're asking me. On the second question, we had doubts about the sustainability of the debt under the programme. But, again, the programme was the only show in town. It was ... it was borderline, in our view, but, again, we recommended it on the basis that it was worthwhile going for. But, as I said to Deputy Murphy, then the subsequent concessions made in the form of the interest reductions and so on and so forth copperfastened the sustainability. But absent those, we could be having a different discussion today, I don't know.

Thank you very much. Deputy Joe Higgins please. Ten minutes, Deputy.

Thank you, Chair. Mr. Corrigan. Could we put up the Corrigan core document, first one there, please, 002?

I've given a note to the ... Mr. Corrigan, this ... just, I want to draw your attention this, its page 118 in the document you have in front of you, Vol. 1, and its up on the screen as well, the last two paragraphs on that page please. If you can scroll her up ... yes. Little bit more please, yes, thank you, that's it. This relates to post-nationalisation of Anglo and the transfer of deposits, etc., to Allied Irish Bank and then from Irish Nationwide Building Society to Irish Life and Permanent. And as you see there to ... that AIB received €8.6 billion in Anglo deposits, purchased senior NAMA bonds with a nominal value of approximately €12.2 billion, and "AIB has also made a cash payment of €3.5 billion". And then, Irish Life and Permanent received INBS deposits of over €3.6 billion, "purchased Senior NAMA bonds and other bonds with a nominal value of €3.7 billion in addition to share ownership of INBS' Isle of Man subsidiary". IL and P also made a cash payment of €2.3 million. In so far as you can, Mr. Corrigan, recall that those procedures which, were carried under the Credit Institutions (Stabilisation) Act, could you just give us a picture of the type of sale process that was involved here, how it was approached, the bids that were received, the evaluation that was carried out and then the completion of the transactions, the deposit transfers, etc.?

Mr. John Corrigan

I believe it was an auction process, Deputy, and in the, the NAMA bonds, the bidders were required, again to the best of my recollection, to bid 98.5% for the NAMA bonds because that was the rate at which they were then being discounted by the European Central Bank as collateral for liquidity. There were five institutions bid in one case, and three institutions bid in the other and the AIB was ... won the competition for the Anglo deposits and IL and P for the INBS. I think in the case of the INBS, I think there were five bidders and I think in the case of Anglo there were three but I'm not entirely sure. But, as I said to ... in response to a previous question, I wasn't intimately involved, but, I mean, there was ... it would have been a tender competition that was run internally and would have been overseen by an internal panel within the NTMA with appropriate external input.

And just in general, I understand what you said, what criteria would have been uppermost in the minds of those making the decision on who to give this ... these contracts to?

Mr. John Corrigan

The terms of the contract of the tender were set out clearly in a document and I suppose the main condition would have been, or the main consideration would have been the unconditionality of the bids. Some bids were submitted, again just looking back on it, which were conditional, which meant that they were sort of tails hanging out of it and it wouldn't have been a clean transfer. So the main thing was to get a tender proposal that conformed with the tender as laid down at the outset of the competition and that was the main criteria.

Mr. Corrigan, can you throw any light on this for me? In the Allied Irish Bank annual report 2011, they give on page 297 of that report - you don't need to have it - an account of the transfer of business from Anglo Irish Bank Corporation and then at the end of the explanation they say a net capital contribution of €1.5 billion was generated on the date of the transaction. Can you explain what that means?

Mr. John Corrigan

No, I don't-----

Does that mean a €1.5 billion gain for Allied Irish Banks on this transaction?

Mr. John Corrigan

It meant a ... that's apparently what it meant. I don't have the benefit-----

Have you had that document, Mr. Corrigan, no?

Mr. John Corrigan

No.

Okay. You can't throw any light on it. I appreciate you haven't the document-----

Mr. John Corrigan

I'm speculating now. If, for example, AIB had a different basis for valuing the NAMA bonds, for example, the competition required that they be tendered for at 98.5%, if AIB had them in their books, for example, at 100%, and I'm just speculating as to how it could give rise to a capital accretion, that would give rise to a capital accretion.

Yes, I think it did arise as a result of an ECB method of evaluating being different to AIB's method, so-----

Mr. John Corrigan

I haven't had the benefit-----

Okay, thank you. Just to move, Mr. Corrigan, if I could have the letter NTMA 002501, and this is a letter, Mr. Corrigan, that you wrote to the Minister, Brian Lenihan, on 27 November 2010, and if we can go to the second page of that letter please, it's .... yes. And you're very concerned here ... you're ... the letter is talking about a €35 billion requirement. Now, Deputy McGrath has covered some of this territory, I just really want to revisit for a little while. So, you ... €35 billion necessary for bank recapitalisation and you're extremely concerned about the effect of this on the national debt, etc. And then, you are recommending in the paragraph, "The NTMA recommends that all possible avenues towards mitigating the extra burden be pursued." You mention there the €12 billion, subordinated debt and the €20 billion in senior unguaranteed debt on the balance sheets. And then you want, or suggest, "An aggressive liability management exercise / resolution regime has the potential to significantly reduce the extra burden." At that stage in November, how much did you think could have been shaved off the burden that came onto the state and the taxpayers?

Mr. John Corrigan

I ... I don't know that we had a specific figure in our mind, but I mean the €35 billion that the troika had identified, that has to be seen in the important context of one of the objectives of the programme was to reduce the ... the loans-to-deposit ratios in the banks from something like - some of them were as high as 160% - to around 120%. Now that involved ... would have involved and did involve, the bank ... the banks selling assets. And it seemed to us at the time, and it was a big concern in the discussions with the troika, that there would be a fire sale of those assets because they were very gung-ho on getting the figure down to this figure of around 120%. And of course, that fire sale in itself would have given rise for more capital. So, we had a real concern that the €35 billion would be required. And it would've ... it ran the risk of ... in the event, the figure crystalised out at €24 billion and then allowing for liability management exercises and private sector capital injection into Bank of Ireland, the actual figure I think ended up around €17 billion.

Last question, then, Mr. Corrigan, is this. You were close to the National Pensions Reserve Fund for a long period of your working life and the legislation in 2009 was changed allowing the Government to direct funds to Bank of Ireland and Allied Irish Bank. You mentioned this in your statement, €7 billion. Can I ask you, you had been in charge, you had been seeing how these funds had been managed on behalf of the Irish people, what was your feeling about this particular change and to see this kind of money from the pension fund going into the banks, at the time?

Mr. John Corrigan

It was a bit like a death in the family, to be frank with you. We had built up a management team who had done a very good job. The performance of the fund was considerably ahead, over its lifetime, of the private sector analogues and ... but, I mean, we're subject to public policy direction but it certainly felt like a death in the family at the time.

Well, if it continued to be invested as you had been doing, would the returns have been much bigger than the banks would give in those circumstances?

Mr. John Corrigan

I believe so because at the time we consulted with some of our investment managers. We outsourced the management of European equities to some London houses, for example, and we asked them for their views on whether, for example, they would buy shares in the Irish banks at that point in time and the ... for all sorts of reasons, which are now obvious, they said that they wouldn't. So if it had been invested conventionally in the markets, the return, I believe, would have exceeded the return earned to date ... so far.

Should a notional figure like that be put into the ... when we come to the final balance of what was lost and what was gained in this whole scenario of guarantee, bailout, etc.?

Mr. John Corrigan

Well, that's not an unreasonable way of looking at ... looking at the opportunity cost but, I mean, that's a matter for the policy makers to decide but I ... I ... it's ... it's ... I ... it's not an unreasonable way to look at it.

Thank you, Mr. Corrigan.

Okay, can I just stay with that theme there, Mr. Corrigan, as we, kind of, move towards the wrap-up and ask you did the National Treatment Purchase ... sorry, the National Pension Reserve Fund Commission or ... review did it ... did they review their discretionary investment strategy in light of the directed portfolio instruction and was there any risk ... or any risk review taken of the overall portfolio, given that the concentration risk of 60% of total funds invested were now invested into Irish banks?

Mr. John Corrigan

Well, as I said in my written statement, Chairman, the board of the fund ... the National Pensions Reserve Fund Commission took the view - rightly, in my view - that the directed investments ... that they were not accountable for them. So when they reported on the performance of the fund, they reported two performance figures, one for what they called the discretionary portfolio, that which over they had control, and the other being the directed portfolio. I think one of the consequences of the direction was that the ... certain shares had to be sold off, certain bonds had to be sold off and the portfolio that was left under the management of the National Pensions Reserve Fund Commission had to be rebalanced back to what we considered a prudent, diversified, investment portfolio. So, again, there would have been costs involved in that rebalancing but they clearly delineated between, as I said, the discretionary portfolio and the directed portfolio.

But, in the overall scheme of things, was there any discussion regarding the appropriateness of the National Pension Reserve Fund being used for such a purpose?

Mr. John Corrigan

No, the board of the fund ... the National Pensions Reserve Fund Commission was ... acted in accordance with the legislation. Their mandate was defined to seek the optimal financial return on their investments, provided they were happy with the level of risk. So when this policy decision was made by the Government and the legislation was changed, that was not something that they expressed an opinion on. They were policy takers, not policy makers.

Okay. So on the position of risk and return, which are two significant factors in any level of investment, are you saying that having 60% of total funds invested in two Irish banks that that was considered good risk and good return?

Mr. John Corrigan

Sorry, Chairman?

I'm saying to you, having 60% of the portfolio invested in two Irish banks, in terms of risk and return, would ... was that considered a good risk and a good return by the National Pension Reserve Fund and the NTMA?

Mr. John Corrigan

No, because if the investment decision had been left to the National Pensions Reserve Fund Commission, it would never have happened because they ... they couldn't see such an investment decision being justified on commercial grounds. That's why there was a need to change the law and have a public policy direction.

Okay, thank you. Just a final question. One of the key requirements was your ability to fully inform potential investors regarding progress in consolidating public finances, recapitalising and restructuring the banks and regaining competitiveness. You also referenced a statement by the ECB President that the ECB was prepared to do whatever it takes to save the euro. So, Mr. Corrigan, can I ask you, can you outline the source and flow of information from the Department of Finance and the Central Bank of Ireland and can you please outline what form this took and how effective it was for your needs?

Mr. John Corrigan

Well, we, at the outset of the crisis, reinforced the small economic team that we had in the NTMA and, certainly, they were happy with the flow of information they got from the Department and from the bank. They developed what's known in the trade as quite a sophisticated pitch book, which is actually up on the NTMA website, and to the extent that they wanted information re-presented or reconfigured in a certain way for, if you like, marketing purposes, certainly, the bank and the Department were extremely helpful in that respect.

Okay, thank you. We'll move to wrapping things up, so. Senator O'Keeffe.

Thank you, Chair. Mr. Corrigan, were you ... did Indecon or Alan Gray consult the National Treasury Management Agency when it was preparing its advice or its opinion for Government?

Mr. John Corrigan

No, I don't believe we'd any contact with Indecon. I don't believe so.

Were you ever made aware of the correspondence that they shared with the Minister or with the Taoiseach?

Mr. John Corrigan

No.

No. Were you aware of any of the e-mails that were going over and back on the night of the guarantee? Were you either made aware of them at the time or subsequently? By that, I mean between Merrill Lynch and Mr. McDonagh.

Mr. John Corrigan

Yes, I ... I was aware of them and I would have seen them probably subsequent to the night of the 29th-30th, but I was certainly fully in the frame on them, yes.

Were you surprised or otherwise, or not, that the NTMA did not have an opportunity to be in the meeting on the night of the guarantee?

Mr. John Corrigan

I was surprised. I was surprised and ... but ... that's ... I can't ... can't say much more than that.

Okay. I mean, you talked a little bit about that idea of being less than equal partners and your former colleague, Mr. Somers, referred to it as an inner circle and when asked what meant he said ... in evidence, he talked about the Central Bank, the Department of Finance and sometimes the regulator and that, if you like, the NTMA was outside that, and you've talked about a less than equal partnership. So did that extend to Ministers ... either of the Ministers for Finance and your relationship ... the NTMA's relationship with the Ministers and then, particularly in relation to the pressure that you came under to ... first of all, to direct the deposits to be put and then for those deposits potentially to be increased, which I know they weren't, but can you just describe that relationship?

Mr. John Corrigan

Well, I mean, I've said what I've said about it being an uneven partnership and I think that's ... that's the way I would prefer to characterise it. In terms of access to the Minister, Minister Lenihan would have been the main player, obviously, and we ... I had good access to the Minister. The question of Trichet's letter was mentioned earlier and I don't think, actually, I responded to the question at the time, but we weren't shown Trichet's letter at the time. Again, just to ... just to, sort of ... I'm not into spinning any conspiracy theories but to underline the comment about the uneven nature of the ... the unequal nature of the partnership. So the officials, I think, like to think of the NTMA as providing technical advice. That was a word that they frequently used. I think the political expectation was for a lot more than that and, as I said, in the conclusions of my statement, I think we did whatever was asked of us. But at times we probably could have been brought more fully into the picture.

I have one final question. On page 4 you say ... you talk about AIB and it "stuck to its view that its problem was no bigger than [that] of Bank of Ireland". How did they express that view and why did they express that view?

Mr. John Corrigan

Well, there was extreme push back from the two banks at the outset of these discussions, which was the first round of recapitalisation negotiations. They felt ... and it's a question that I've asked myself repeatedly over the years, were they misguided or were they being willful in some form or fashion? I don't know the answer to that but certainly they resisted the notion of recapitalisation.

Now, Senator-----

Mr. John Corrigan

And, sorry, if I could just comment in relation to the establishment of NAMA, what that would lead you to conclude is that they would have engaged in a slow bicycle race in order to preserve capital and we'd still be looking at the land and development loans today but for the establishment of NAMA.

Were you surprised to finally ... I mean, again, what was your view when you saw this push back because, obviously, you were trying to move things on and-----

Mr. John Corrigan

Well, I was quite astounded and I remember at the time making certain unrepeatable comments to Minister Lenihan about the behaviour of the banks.

And what was the Minister's response?

Mr. John Corrigan

He agreed with me but his officials probably thought I was being a little bit too gung-ho.

Okay, thank you. Deputy McGrath.

Thanks, Chair. Mr. Corrigan, a number of differences have emerged between the NTMA's position on some issues and the Department's and Senator O'Keeffe went through some of those there - the nationalisation of Anglo, your view that AIB would need more capital than Bank of Ireland, the issue of placing deposits in the banks. So can I ask: do you believe that the NTMA was sufficiently listened to by the Department on all of these issues? Did the NTMA provide their written rationale to the Minister? And was it common or normal practice for the advice of the NTMA on some issues not to be reflected in the actual decision?

Mr. John Corrigan

Well, I mean, it was all part of the cut and thrust at the time and, you know, you've said that there were certain differences, and you're right, have emerged between ourselves and the Department. I don't necessarily believe that the emergence of differences was unhealthy. I mean, at the end of the day, the Minister is the decision maker at the Government and at the end of the day, while we had access to the Minister, it would be the natural inclination of a Minister, I would suggest, to listen maybe a little bit more closely to his officials.

You referred earlier to the NTMA's view that there was a need for what you called a "deep dive" into the banks to examine their underlying health and that happened first in September 2008 when PwC were appointed but when did the NTMA first start saying this, first start asking or suggesting that, look, we need to go in here and do a due diligence on the banks to see-----

Mr. John Corrigan

In September 2008. I believe it was a direct result of our intervention. I went to a meeting in the Central Bank in early September 2008 and it was clear that the bank didn't have the depth of information that one would have expected it to have and as a consequence of that, the "deep dive", as you describe it, was done.

But the NTMA wasn't suggesting that at a much earlier point. And I'm not saying it was your role to do so but in the spring and summer 2008-----

Mr. John Corrigan

The first meeting we were at collectively with the bank, the regulator and the Department was in September 2008. I came back from my holidays-----

The NTMA was at no earlier meeting of the domestic standing group?

Mr. John Corrigan

The meeting in September '08 wasn't a meeting of the domestic standing group-----

Mr. John Corrigan

-----the meeting in September '08 was a crisis meeting-----

A crisis meeting.

Mr. John Corrigan

-----held down at the Central Bank, where there would have been maybe 15 or 20 people present at the meeting.

Okay. But just to be clear the domestic standing group from 2007 onwards had been looking at bank liquidity, had been looking at a scoping paper on different scenarios of banks failing, insolvent banks, etc., and the NTMA were present at those meetings. Is that not the case?

Mr. John Corrigan

We were and we relied heavily on what the regulator and the Central Bank told us. It was only when we went to this plenary meeting in early September '08 and ... we asked very detailed questions at that and it only became apparent at that stage that the insights were pretty skin deep.

On 25 September 2008 - and I don't believe this minute is in your core booklet, so if you don't recall it, then, obviously, you can't answer - but it was one of these crisis meetings and the CEO of the NTMA, Dr. Somers, was present, you were present along with PwC, Merrill Lynch, the Financial Regulator, the AG, the Taoiseach, Arthur Cox and there was a reference in that paper to "D Doyle noted that Government would need a good idea of the potential loss exposures within Anglo and INBS - on some assumptions INBS could be 2bn after capital [...] Anglo could be 8½ [billion]." Mr. Neary said, "there is no evidence to suggest Anglo is insolvent on a going concern basis ... He felt INBS was in a similar situation." Do you recall that meeting and do you recall if the NTMA challenged that assertion that the banks were solvent, including Anglo and INBS, at that time and it was simply a liquidity issue?

Mr. John Corrigan

I don't recall whether we challenged it but, certainly, the question of Anglo's nationalisation would have surfaced at that meeting. Again, on the basis that we needed to get our hands around the throat of the problem. Whether the outcome, as I've said already, would have been any different, I don't know.

Very finally, the Deauville declaration - you made reference to it in your witness statement - of October 2010. Given Ireland had been borrowing on the markets up to the early part of September 2010 at reasonable rates, 4% to 5%, what impact did the Deauville declaration have when this issue of burden-sharing was floated, what impact did that have on Irish yields and-----

Mr. John Corrigan

Irish yields rose to over 7% at that time.

Directly as a result?

Mr. John Corrigan

Directly as a result. Absolutely no doubt about it.

So did it contribute to what happened subsequently in November or was that inevitable anyway, entering into a programme. What role did it play, if any?

Mr. John Corrigan

It probably was inevitable because we had cancelled the October and November 2010 auctions in a statement at the end of September but when we cancelled them, we did or the Minister indicated that they would be resumed in January, or whatever, that's my recall. But whatever chance we had of resuming and I'm not sure we had a chance anyway-----

Mr. John Corrigan

-----but the final nail was put in the coffin by the Deauville statement.

And before the formal negotiations begun into the programme, the Government were saying, you know, we're funded up to the middle of next year, up to mid-2011, so there's no urgency around all of this. Like, what would the NTMA's recommendation be as to how far ahead a country should be funded? How much cash, how much reserves would you have for the ongoing running of a country in the kitty?

Mr. John Corrigan

Well, in ... it's a very good question, Deputy. In normal times, probably up to six months. In more strained times, like in 2013 when we were coming out of the programme, we had to have 12 to 15 months visibility. So it's a bit of a moveable feast but it ... certainly when we had to cancel options, which was totally unprecedented, even if you had six months' funding ahead, you couldn't see beyond that and the clock runs fairly quickly in those circumstances.

Okay, thank you.

Thank you very much. I think the NTMA's position on NAMA has been covered but maybe if we could just revisit one aspect of it with you, Mr. Corrigan, before we close and just comment upon the assessment and reaction by the NTMA to Dr. Bacon's proposal in general?

Mr. John Corrigan

Well, Dr. Bacon was commissioned by the Minister to look at this question and the NTMA was broadly supportive of the NAMA proposal, as you heard from my former colleague, Dr. Somers. He subsequently felt that a slightly more ... a slightly different approach to how NAMA would do its business might be adopted.

I'd have to say that because people were multi-banked, it was a key to NAMA's success that the process be centralised. That would have been my view at the time, and is still my view.

Was multi-banked that big lenders had loans from various institutions, cross-securitised and so forth, yes?

Mr. John Corrigan

Yes, yes. So that to resolve those by each institution taking its own approach, I think would have been a much lengthier process.

Okay, thank you. With that said, I would like to bring matters to a conclusion, is there anything you'd like to add by means of a closing comment or statement or remark, Mr. Corrigan?

Mr. John Corrigan

No. Thank you, Chairman, for your courtesy.

Okay thank you. So with that said, I'd like to thank Mr. Corrigan for his participation here today and his engagement with the inquiry. I now propose to formally ... that the witness will be formally excused. I propose that we briefly suspend when Mr. Corrigan is absented from the room, just to return for a private session with the committee then afterwards. So, Mr. Corrigan, thank you very much for your engagement and you're now excused.

The joint committee went into private session at 12.31 p.m. and resumed in public session at 1.11 p.m.

Irish Banking Federation - Mr. Pat Farrell

We will now go back into public session. Is that agreed? Agreed. Okay. We will now commence on with our session of today with Mr. Pat Farrell, former CEO of the Irish Banking Federation. The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? At our next session, we will hear from Mr. Pat Farrell, former CEO of the Irish Banking Federation. Pat Farrell was CEO of the Irish Banking Federation and the Federation of International Banks in Ireland from January 2004 to June 2013. He is currently head of group communications and government affairs at Bank of Ireland. Mr. Farrell, you are very welcome before the committee this afternoon.

Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these are documents and that they are confidential and should not publish any of the documents so displayed.

The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Mr. Farrell please.

The following witness was sworn in by the Clerk to the Committee:
Mr. Pat Farrell, former Chief Executive Officer, Irish Banking Federation.

Once again, Mr. Farrell, welcome before the committee this afternoon. And if I can invite you to make your opening remarks to the committee please.

Mr. Pat Farrell

Thank you, Chairman. As requested by the Joint Committee of Inquiry into the Banking Crisis, I am providing this witness statement in my capacity as CEO of the Irish Banking Federation, the Federation of International Banks in Ireland, a position I held from January 2004 to June 2013. I'm endeavouring to address the broad themes which the joint committee has requested of me in my capacity as CEO of IBF for the period - the relevant period - to the extent possible in this capacity.

By way of background, IBF was established in 1973 on Ireland's accession to the European Economic Community to represent the Irish banking sector internationally as well as domestically. FIBI was formed following the establishment of the International Financial Services Centre so as to provide a particular focus for the needs of international banks.

My own appointment as CEO of IBF commenced shortly after the establishment of the Irish Financial Services Authority. My responsibility was to assist the council of the IBF in formulating strategy for the IBF and implementing that strategy. The council of the IBF typically consisted of either the group CEO or the head of the Irish retail banking division of the main Irish banks, domestically-focused international banks and the CEO-country managers of several of the internationally-owned, internationally-focused banks. I represented the sector at European level as a member of the executive committee of the European Banking Federation and I also represented the sector through membership of a number of relevant Irish industry and State-sponsored bodies. I also represented the sector for certain engagements with the media and in engagements with the State and with public representatives. Such engagement took place when common themes existed for the IBF’s membership, which themes had been endorsed by the council of the IBF.

My tenure covered two quite distinct, separate phases. The first phase was the period 2004 to 2008 which saw a significant increase in the number of financial services companies and banks operating in the domestic Irish consumer banking markets, culminating in, for example, over 13 providers of mortgages. This was a period of rapid but, as subsequently proved, unsustainable economic growth, with overseas banks entering the market - either directly or through acquisition - and with the established banks seeking to grow their business and/or responding to this wave of intense competition. At the same time, there was also considerable growth in the number of banks establishing internationally-focused activities to operate from Ireland.

The second phase involved the aftermath of the international and domestic banking crisis from mid-2008. The impact of this crisis and its aftermath on the stakeholders of the IBF’s member banks, including their customers, shareholders, staff and the taxpayers of their home countries - including, of course, Ireland - is well documented. The aftermath included some of the following outcomes - retrenchment, insolvency, restructuring, nationalisation and exit for a significant number of banks operating in or from Ireland. In some cases, this reflected the fact that entire banking groups' business model and activities were fatally or fundamentally flawed or a recognition that the business models for their Irish activities were either flawed or could not be maintained as they sought to preserve capital, liquidity and reduce costs. The designs of the group business models for these banks and of the business models for the Irish activities of these banks had a number of different features and they responded in a number of different ways to the challenges these business models faced. However, common business model flaws were: under-capitalisation; over dependence on wholesale funding; aggressive pricing; and loosening of credit standards coming into the crisis, followed subsequently by rapid retrenchment to core - often home country franchises - post the crisis. The burdens on the Irish taxpayers and on the shareholders of the domestic Irish banks from the flaws in their business models has been the subject of a wide range of reports and investigations, including this inquiry.

Noteworthy has also been the in excess of approximately €50 billion which has been borne by the shareholders-home taxpayers of overseas banks, who had to recapitalise their subsidiaries competing in the domestic Irish market, and/or losses they actually incurred as they retrenched from the Irish market. This retrenchment-exit also caused significant difficulties for Irish consumers as they sought to make alternative banking arrangements away from the products-product providers which proved to have been unsustainable and/or customers finding that their loans-mortgages had been sold to entities where the customer had no choice in the matter. I should also say that, as a member of the executive committee of EBF, I witnessed similar pre and post-crisis features across the banking industry to differing degrees of severity. Given the role of IBF as described above, we were not privy to, and did not have a role in adjudicating on, the funding or liquidity policies, the risk management models or the composition, skills and experience of the boards of individual banks.

My term as CEO of IBF commenced shortly after the formation of IFSRA, as I've said, and I noted early on that the consumer director sat on IFSRA's board whilst the prudential regulator did not. In the period up to September 2008, the primary interaction I had with IFSRA was on consumer-orientated regulatory matters and initiatives and this was the focus of the agreed strategy of interaction agreed with me by the council of the IBF for the domestic banks. For example, during my tenure the IBF had the responsibility for co-ordinating the implementation of a range of consumer focused initiatives such as the Dormant Accounts Act, interbank switching codes, IBF-money advice bureau - known as MABS - debt protocol, promotion of electronic payments, consumer protection codes and the establishment of the Social Finance Foundation. For the international banks, there was considerable focus on taxation-related issues and skill shortages in the Irish market. I sought on several occasions to have broader dialogue with the Central Bank on general banking issues but was given the clear message that IFSRA was the primary conduit for engagement. There was also a focus for the IBF on engagement, through the EBF, with the European integration agenda in terms of payments, consumer protection and other initiatives to complete the EU Single Market in financial services. From time to time, we also submitted technical papers prepared by members in response to regulatory consultations both locally and at EU level. To my recollection, business model discussions and general issues of prudential regulation in areas such as capital, liquidity or credit standards were not a notable feature of agenda discussions within the IBF or between IBF and regulatory or other authorities.

As CEO of late ... of IBF, I was, in late 2004, appointed by the Minister for Finance as a member of the financial services consultative industry panel, which was in existence up to June 2010. The role and mandate of the panel was to act in an advisory capacity to the newly-established Irish Financial Services Regulatory Authority. Its role was similar to panels operating in other jurisdictions, such as the practitioners panel which operates in the UK under the aegis of the Financial Conduct Authority. The panel published five annual reports covering the period 2005 to 2009, inclusive, the broad themes of which were as follows: a critical focus on the balance struck between the prioritisation and allocation of resources to the conduct of business - i.e. consumer - and the prudential regulation roles of IFSRA; a request that the regulator deepened its understanding of individual firms' business models given the diversity and complexity of regulated firms operating in Ireland; consideration be given to having a designated senior executive focused on IFSC supervision; with reference to EU legislative and regulatory agendas, it proposed the appointment of a dedicated senior executive with responsibility for co-ordination of the Irish engagement and response; it proposed reviews of competition barriers in retail banking; we called for extensions of provisions of consumer codes to non-deposit-taking entities then operating as mortgage lenders; and sought the application of regulatory impact assessments to major regulatory and legislative initiatives; called for investment in HR and IT support services and review of the associated shared services model which then in place between the Central Bank and IFSRA; we commented on proposed industry levies and methods of allocation and general commentary on IFSRA's annual budgeting process; and the promotion of benchmarking against best practice regulation in comparable jurisdictions.

In the interests of time, Chairman, I'm going to summarise the verbatim piece from the report. But the panel in its final annual report of 2009 noted that the panel was to ensure a meaningful participation in the debate around the reform then under way of the regulatory structure. We published a paper in that regard, and it was acknowledged subsequently as a significant contribution to that debate, and that culminated in the Central Bank Reform Bill of 2010. And among the things that we had stressed and that we found reassuring in the actual publication of the Bill, was that the single most important ingredient required for successful reform was the quality of the people. There was a very good beginning made with the appointment of Central Bank Governor, Patrick Honohan, and Financial Regulator, Matthew Elderfield. The regulator's strategy was proposed to the ... or presented to the panel prior to its public announcement and we noted very positively the fact that a lot of the recommendations we had made previously in relation to the critical importance of an appropriate skills mix in the regulator, an understanding that the regime should be risk based and not “one-size-fits-all”, and the importance of a strategic policy unit was all broadly contained within the strategy, so we were very pleased about that.

As the crisis unfolded during the second half of 2008 the various members of the IBF became increasingly focused on their own specific issues and it became apparent that for some of the subsidiaries of international banks the key decisions were being taken outside of Ireland. The members of the IBF had different senses of priorities, were reluctant to show their hands, for obvious reasons, and had differing degrees of mandates to articulate to the IBF as to what they wanted the IBF’s mandate to be in engaging with relevant authorities and regulators on solvency and liquidity issues. Engagement with the Central Bank, IFSRA and the State during this time tended to be focused on issues such as bank support mechanisms for customers, including those in mortgage arrears, and IBF obligations arising from the introduction of the credit institutions scheme.

Prior to 29 September 2008, IBF had no mandate from the IBF council to discuss specific Government liquidity or solvency support initiatives for the sector with the authorities and was not a party to considerations by the authorities on such matters. During 2009, and particularly after the arrival of Professor Honohan as Governor of the Central Bank of Ireland and Matthew Elderfield as regulator, there was increased evidence of cross-stakeholder working groups involving the Department of Finance and the Central Bank of Ireland, where IBF was a participant on sector wide issues such as mortgage arrears, codes of practice were ... where codes of practice, etc., were developed and enhanced, and I witnessed a high degree of co-operation and interaction.

With regard to the troika, we were used by the troika as a source of information, particularly during 2011 and 2012, and views were solicited on a range of themes including: competition-related matters and issues; sectoral initiatives and progress on mortgage arrears resolution. We had a number of discussions regarding judicial process, legislative and regulatory impediments we believed were exacerbating the problem and presenting barriers to resolution, and our views regarding proposed reform of the bankruptcy regime and the introduction of a personal insolvency framework. We also discussed access to credit for SMEs and support for firms with a sustainable business who were experiencing financial difficulties. All such interactions with the troika were either done in conjunction with the Irish authorities, or the details of the engagement were shared with the Irish authorities.

That concludes my statement. Thank you, Chairman.

Thank you very much, Mr. Farrell, for your opening statement. And if I can invite Deputy John Paul Phelan now. Deputy, you have 25 minutes.

Thank you, Chairman. Good afternoon, Mr. Farrell. Firstly, I wonder if you could outline for the committee the nature or, I suppose, how you were appointed chief executive of the IBF in June 2004? What was the nature of the process that led to your recruitment for the role?

Mr. Pat Farrell

As I recall it at the time, the position was ... I think I was approached by an executive search and select company. I think the name of the company, I think, was Amrop at the time. I know it was a competitive situation. There were obviously quite a number of applicants for the position. I was interviewed by a number of senior executives from the banking sector. I think I may have had more than one, perhaps two or three interviews. And subsequently I was made an offer of employment and appointed. I took up the position then in January 2004.

Okay. And you made the initial ... or sorry, you were initially approached yourself prior to making an application?

Mr. Pat Farrell

Yes, yes.

Okay. Can I ask you, and I'm aware that you may not wish to answer this, but the nature of the relationship between the IBF, which ... one of its functions, I suppose, is as a lobbying group for banking interests with Government, is part of the terms of reference of our inquiry. Are you prepared to divulge to the inquiry the remuneration package that you would have-----

Mr. Pat Farrell

That's a private matter.

That's outside the scope. Mr. Farrell, that's entirely your own gift to furnish.

Mr. Pat Farrell

No, I mean, it's a private sector organisation. It wasn't in receipt of any public funds and the matter of my salary is confidential to myself and my then employer, so I'm not prepared.

I'll have to ask you to move on, Deputy.

That's okay. How many people would have been working in the IBF in 2004 versus 2013 when you left? Can you-----

Mr. Pat Farrell

I think it roughly remained the same. It was about 15 to 16 people at the time. It was largely the same. Maybe a couple of more people at the end.

Okay. You served as general secretary of Fianna Fáil from 1991 to 1997. Did you remain on as a member of the party up until the time that you left the banking federation?

Mr. Pat Farrell

No, I did not.

Okay. Would you have been personally close to many of the Ministers who would have served in government in the period, we'll say, after your having left employment with Fianna Fáil and having taken up, in January of 2004, work ... employment with the bankers' federation?

Mr. Pat Farrell

Well, I had a professional relationship with all of these people obviously from my time as general secretary of the party. That wouldn't be surprising. I knew these people. I came into contact with them from time to time. As I said, I was not a member of any political party after that time and that was generally the nature of the relationship.

Can I ask would you have had reason to, you know, make contact with members of the Government in your function as chief executive of the bankers' federation, direct contact on banking matters in particular?

Mr. Pat Farrell

Of course, of course I would.

Yes. Would there have been ... how many times in your roughly ten years would you have dealt, specifically maybe with the Department of Finance, whether the Minister or the various Ministers, the various Secretaries General that would have been in the Department in that period?

Mr. Pat Farrell

Yes. Well, I suppose, first of all, over the period of my time as CEO of IBF I dealt with, I think, three different Governments. There was the Fianna Fáil-PD Government. Then there was Fianna Fáil, Green Party and the PDs. And then there was the Fine Gael-Labour Government. My modus operandi was the same in every circumstance. I developed a professional relationship with Ministers, with Oireachtas Members, with policy makers, with the senior civil servants and other civil servants, and other stakeholders that I had reason to engage with as part of my mandate. And my dealings with them was the same regardless of their political composition or direction.

That's fair enough, I'm not questioning that. But would you have had much interaction, I suppose? The level of interaction?

Mr. Pat Farrell

Oh, I would have had a reasonable amount of interaction. I mean, how much is how much? I mean, I suppose I had a very busy agenda. I had a mandate which was for a sector that was a regulated sector, which was subject to legislation. The Department of Finance had a particular role in relation to the sector. The Central Bank obviously and the Financial Regulator were the appropriate regulators and therefore in order to discharge my mandate, I had to have a reasonable degree of interaction. I had meetings with Ministers and officials. I had meetings sometimes, but not that often, I have to say, with Ministers themselves. And I would have had ... I'd say my primary action probably ... interaction was with officials.

Again, and this is my last question on this point and this area, as a former general secretary of Fianna Fáil and a former Senator, former Member of the Oireachtas, could you comment for the inquiry on the appropriateness of the relationship you and the banking federation had with Ministers for Finance and Government over your ten-year period, including, I suppose, a comparison as relative to other lobby groups?

Mr. Pat Farrell

Well, I think I've already answered that question but I will answer it again. I said, and for the record, that all my relationships and dealings with all politicians and with the public authorities was appropriate and professional, and at all times. Now, I would also add that it is not unusual for somebody with a background in public affairs or political life to be involved in advocacy or representation; it is actually quite common and it runs across organisations such as the IFA, such as ... I could go on at length to name the organisations, and there are lots of former politicians who are also ... work with, since they've retired from their positions, with public relations firms, with advocacy groups. So, it is absolutely a common occurrence and it would be surprising it if were other than that.

Okay. I do want to change now, Mr. Farrell, and just refer to your opening statement. You described in it the period 2004 to 2008 as a period of rapid, but, as subsequently proved, unsustainable economic growth. To what extent do you now consider that the banking sector has borne any responsibility for the unsustainable element of economic growth in that particular period?

Mr. Pat Farrell

Well, during my time as CEO of IBF, I think I came before many of the members here in different capacities on different committees. I also had a mandate to speak in the public realm on behalf of the sector and on all of those occasions, I readily acknowledged, freely acknowledged, the role that the sector had played in the economic crisis, and was unambiguous in stating that position.

Would you like to outline it, briefly perhaps, in your-----

Mr. Pat Farrell

Well, I have already outlined it in my witness statement-----

Mr. Pat Farrell

-----and, again, to ... if it bears repetition, banks, obviously, had loosened their credit standards; they had flawed business models; there were issues around unsustainable expansion of credit; I mean, the list is longer than that, but, if you take them together, obviously, it made a major contribution to the crisis.

Okay. In a draft memorandum to Government in October 2005, it stated:

The Irish Bankers Federation approached the Department of Finance in April 2005 regarding changes to the Investment Intermediaries Act. ... They [being the IBF] have engaged McCann FitzGerald Solicitors to draft the legislation in conjunction with all of the major issuers of Covered Bonds in Ireland who have been closely involved in the process e.g. Depfa, West LB, Bank of Ireland GM.

Is it usual, or, was it usual, in your time in the IBF, to draft legislation for the Department of Finance? How much of that legislation made it into the final Act? And what impact did it have, do you believe, on the banking sector?

Mr. Pat Farrell

Okay. There's a number of parts to that question so maybe I might just provide a bit of context first of all. The Asset Covered Securities Act was introduced in 2001, well before my time as CEO of IBF. It enabled the sector here to provide covered bonds as a method of funding, principally for the mortgage market. This is a system that had been in place in Germany for over ... a couple hundred years, same in Denmark, same in France, so what we were doing was merely coming into line with what was a very accepted funding instrument internationally. The Act of 2007 was an amendment to the original Act of 2001; it was an amendment. The reason for the amendment of the Act was triggered by the pending introduction of the capital requirements directive, otherwise known as Basel II. That was the EU's method of giving effect to Basel II. And, because this concerned capital, it cut across almost all elements of the Asset Covered Securities Act and these instruments. So, in order for the covered bonds legislation and the instruments to remain compliant, and to remain relevant and to be able to continue to be transacted, there had to be amendments made to the Act in order to align it with the capital requirements directive. So, that was the principal purpose of the amendments. It says in the note, and I have it in front of me, that it says we drafted the legislation. I would feel, and I, you know ... the note is what it is. We did not draft legislation. What we would have done was said, in order for the Act to align with the capital requirements directive, these are the areas we believe will require amendment. At the end of the day - and you will know this as legislators - parliamentary draftsmen, ultimately, frame legislation, Attorney General's office will have significant input and eventual sign-off, and, ultimately, it will go before a committee, and, ultimately, it will be placed before the House. So, that was the context and that was the actual background to it. Could I just say, as well, that, you know, it was fairly complex legislation and that may well again explain the rationale for having a third party, because I know, myself, the Department of Finance itself retains external legal advisers from time to time to advise them and support in looking at legislative issues and drafting of legislation.

In your time, the first part of my question was ... I admit, in your answer, that you said that it would be unlikely that you drafted legislation. I'm only referring to the note, but-----

Mr. Pat Farrell

No ... I completely accept that.

Would it have been common practice, in your ten years, that such interaction would have happened between the IBF and the Department on particular items of legislation, that you would be preparing documents, whatever nature they were, whether they were drafted legislation or just highlighting areas that you think needed to be addressed-----

Mr. Pat Farrell

No, I don't think it would.

Okay. I want to ask ... to turn now, maybe, to the area ... particularly the area surrounding the guarantee itself, and ask you if you had any interaction with the late Mr. Lenihan or Mr. Cowen between the end of 2007 and the introduction of the guarantee. We've had evidence from a number of witnesses at this stage that there was lobbying of various natures as to a political guarantee or, you know, ultimately, the blanket guarantee that was introduced. Would you have had any interaction along those lines in that period?

Mr. Pat Farrell

Not that I can recall. And I have looked at the evidence that has been submitted so far and I think it calls out different individuals, different interactions, talks about banks being ... interactions, or whatever. But, you know, again, these kind of matters - and I did refer to it in my statement - would be highly sensitive, market sensitive issues, and, you know, banks, as I said before, were extremely coy, and understandably so, in the realm of the banking federation, about discussing issues that were relevant to their own specific businesses, or that might give any, kind of, insight into their specific businesses or business models. So, it's not unusual that we wouldn't have been involved in any of this discussion. Like, I would have woken up to the newspaper announcement of the guarantee the same way as everybody else in this ... the vast majority of people in this country.

You were unaware of the nature of the meeting that took place, then, on the night of the 20-----?

Mr. Pat Farrell

No, I had ... I hadn't ... I wasn't aware of it.

Okay. Can I ask, actually, you, kind of, touched on it there, how many members would you have had, say, at that period in 2008? How many banks or banking institutions would have been members of the federation?

Mr. Pat Farrell

We had approximately 70 members, and, maybe I should put context on that, because immediately, I'm sure, minds will race to, "Where were the 70 banks?" But, there were 70 banks, of which about 13 or 14 of them were operating in the retail-domestic market, and the rest of them were banks ... sorry, were financial institutions with banking licences, operating, in the main, out of the IFSC. Some of them were located regionally as well, but, in the main, they were located in the International Financial Services Centre.

So, would there have been banks operating in Ireland that weren't members of the federation?

Mr. Pat Farrell

No, I think, well, open to contradiction ... I suspect we had a pretty well 100% coverage of all banks that were licensed. And we did have it as a requirement that to be a member, you had to be a licensed bank.

Okay, and, what was the nature of the fees paid, we'll say, by different institutions? Was it a standard fee across the board, or-----

Mr. Pat Farrell

Again, that's, that's confidential to myself and the-----

Yes. I mean, I'm not looking for figures, I'm just seeing is it a blanket figure or was it ...did it vary?

Mr. Pat Farrell

No, no ... no, I'm very ... I would be anxious to be helpful. I mean, they, they ... obviously with a busy programme, we employed 16 people that were fairly specialised individuals and the fees varied according to the size of the bank's balance sheet, if they were a domestic bank, and then we had a fee arrangement for IFSC banks, which was related to whether they had over or under 40 employees, which was just an arbitrary number that we picked at the time.

Okay. I just want to rewind a little bit then and go back to the guarantee itself. You are saying that there was no lobbying by the IBF prior to the guarantee announcement for any sort of Government action in respect of a guarantee?

Mr. Pat Farrell

Not that I can recall.

You also said that ... well in your explanation that because of the nature of the banking sector and different banks didn't want to tell competitors what their own issues were at the time, that you wouldn't have been privy to information.

Mr. Pat Farrell

If I may, if you can imagine, bank A B or C and these are even, if you think about it in the context of evidence you have had from the Central Bank, they make references, they use alphabet to identify banks, so scrupulous are they are about identifying particular banks. The same kind of issues were at play for us. So therefore it wasn't likely, it was impossible that any bank was going to come to me, either bilaterally or certainly not in a forum of other banks, to say we have an issue with X or we have an issue with Y. Our job was to represent the banks where they had common positions and at a reasonably high level where they could co-operate around a particular issue. Remember, and I think I might have adverted to it, I mean, banks would have sometimes made their own individual submissions and issues because they might have a particular specific point of view that was not accommodatible within the broad-church view that we would be advocating on behalf of the collective of banks, if that makes sense.

Yes, okay, it does make sense. I want to turn, or actually perhaps before I turn just to finish on the guarantee area, the IBF hosted - we have discussed this particular function that took place in Dublin on 26 November 2008 with several witnesses who came before the inquiry, a retirement function for the chairman of the regulator, Mr. Patterson.

Mr. Pat Farrell

Yes.

In light of any of the evidence that you have heard or indeed subsequent events, what are your feelings with regard to the hosting of that particular function on that particular night?

Mr. Pat Farrell

Well it probably wasn't the best decision I ever made and that's with the benefit of hindsight because... I think it's important though to give context. Mr. Patterson retired as chairman of the regulator, I think it was in April of that year. He had been ill, I think that's common knowledge. As a common, as a courtesy, I suggested to him that we would have a dinner at some stage. His illness obviously meant that time elapsed and it was eventually November by the time it happened. In the meantime the guarantee had happened but you know in those circumstances - damned if you do and damned if you don't. The dinner happened, it was a two-hour affair, it was during the working week. It was a pretty sober affair because it was during the working week. There were no speeches, there was certainly no business transacted at it. It was a social occasion and understandably, the way it was reported subsequently, the optics of it were far from good. But that was the background to it, it was as straightforward as that.

So do you accept that from the point of view of the general public that the idea that a lobby group hosting a retirement party - albeit maybe well deserved for the man who had been ill, who had been chairman of the regulator, really wasn't appropriate.

Mr. Pat Farrell

In the times that were in it, with the benefit of hindsight, of course I can understand that but I also again reiterate that it was not inappropriate in the sense that it was a social event. It was not anything other than that.

Okay. Did you on behalf of the IBF, or the IBF other staff members, lobby on behalf of banks on the issue of bondholders? And we have had a lot of discussion with several witnesses on particularly junior bondholders in different institutions. Was there any lobbying done to ensure that the guarantee or subsequent Government decisions would have ensured that those bondholders would not have been asked to burden-share?

Mr. Pat Farrell

Not to my recollection.

Can I now ask you to turn to page 83 of Vol. 1, the Pat Farrell booklet. It's an e-mail from you from 15 October 2008.

Mr. Pat Farrell

This is the one to Dermot McCarthy, yes?

Yes. It is where you wrote to the Secretary General, the Department of the Taoiseach requesting his personal support for the inclusion of Depfa Bank in the bank guarantee. Can you outline the circumstances that led you to write that e-mail?

Mr. Pat Farrell

Well first of all, when the guarantee was announced, it was apparent obviously that only the domestic Irish banks were included in the guarantee. The joys of representing a broad church of membership, obviously I had a number of quite irate members. First of all, you had the banks who were operating in the retail domestic market here but had a foreign parent. They were naturally, as you can imagine, they were quite annoyed. They felt that they were being placed at a disadvantage so they ventilated their concerns to me quite robustly. Then there were the two banks, Depfa and WestLB I think, if I recall them correctly, in the IFSC who had been availing of and using the covered bonds programme that I mentioned, which had its origins in the 2001 Act. They had been using that programme to issue bonds, finance and public sector assets, for quite some time and they were outside of it. Then there was the added complication that Depfa, and this is well chronicled in the public realm, was for a short period of time seen as an orphan in regulatory terms because it wasn't clear whether it fell within the ambit of the regulatory authorities here or Germany, although I think with the benefit of hindsight it was very clear that it fell within the German responsibility because it had been acquired by a German bank some time previously. So they were also concerned and that was the context for the note to Dermot McCarthy.

Depfa were a member of the federation?

Mr. Pat Farrell

Absolutely, sorry I should have said that, they were indeed.

Why did you put the request or send the e-mail to the Department of the Taoiseach as well as through to the Department of Finance?

Mr. Pat Farrell

Well, for a very good reason. The Clearing House Group operated under the aegis of the Department of the Taoiseach. The Clearing House Group was a multi-stakeholder group. It had financial services representation, public sector representation on it. It was chaired by the Secretary General of the Department of the Taoiseach, Dermot McCarthy, and it was charged with the promotion of the IFSC among other things, that was its broad mission. I felt, given that role and given that he was the chairman of it, that it was also important to convey the representation that I had received from what was an IFSC bank to him as well.

Can I ask then in relation to that particular lobby, it did not succeed obviously but if it had to have succeeded, it would have opened up a potential leak, hugely more extensive liability on the taxpayer. Do you have a view now, were you purely acting in your role as chief executive or what is your view now as to that request?

Mr. Pat Farrell

That is a very good question. I mean, here's the reality of it, I come back again to the fact we are a representative body, we have an absolute obligation to represent our members' interests. When they raise a matter of concern with us, we have an obligation to advocate that to the relevant authorities. Depfa were themselves directly advocating their position to all of the various authorities as well. I am sure WestLB did likewise and I am sure the other banks that were operating in the retail market did so too. But our job is to convey that view. I mean, I think it is quite hypothetical as I said, if for a very brief period Depfa's status was unclear but it was quite quickly resolved and in any event their liability ... the German regulator took over responsibility in that situation.

Can I ask was there other lobbying for other institutions other than those two named ones here that took place?

Mr. Pat Farrell

Not that I can recall and as I said there was a very specific reason for it, this particular situation, because of the fact that they had been, or they had felt as I said, left out. They asked me to convey that view to the authorities, which I did.

Okay. My final question Chairman, again, it goes back, I suppose, to where I was at the start. In your time, particularly in the time that you were chief executive of the IBF in the run-up to the guarantee, when Mr. Neary was the chief executive of the regulator, Mr. Hurley was the Governor of the Central Bank, can you briefly outline the nature of the relationship that you would have had, the level of contact that you would have had with either or both gentlemen, the level of even social contact outside of your lobbying activity as chief executive of the IBF?

Mr. Pat Farrell

I can't recall any specific social contact.

There would have been industry events, such as the FSAI annual dinner, the Institute of Bankers annual dinner, which, you know, is a cast of thousands and ... would have met them in ... if you want to call that a social setting. Then ... I hear references in some of the transcripts to golf but I'm not a golfer, I've never been one, so that ruled me out on that point. And I would have met the regulator as a courtesy call for a cup of coffee maybe once every couple of months.

Mr. Pat Farrell

I don't think I met the Governor that often; in fact, very little. Because I think I adverted earlier on in my witness statement that, you know, I was quite methodical about the idea that I should identify all my stakeholders and try and build a relationship with them. That's what you do as a good advocacy body. In the case of the Central Bank, though, I found that there was constantly, kind of, getting the, sort of, impression that the point of contact was to be the regulator and that's what I did.

Okay, thank you very much.

Thank you very much. Next questioner now is Deputy Pearse Doherty. Deputy Doherty.

Go raibh maith agat agus fáilte romhat chuig an coiste. I want to go back to just the issue in terms of your lobbying of the general secretary of the Department of the Taoiseach in relation to Depfa Bank being included in the guarantee and if we'll ... we'll pull up Vol. 1, page 83, of the core booklets. Mr. Farrell, did I understand that you're informing the committee that the IBF were not aware who regulated Depfa Bank?

Mr. Pat Farrell

Sorry, can you repeat that question?

Is my understanding of the evidence that you've provided to this committee that the IBF, the Irish Banking Federation, were unaware of who was the regulator of Depfa Bank?

Mr. Pat Farrell

Well, I'm not saying that I was unaware. I mean, there was ... there seemed to be a confusion as reported in the public-----

Who did you ... who did you believe was the regulator?

Mr. Pat Farrell

Well, it became clear subsequently and it ... I think it only became clear, I think, in the week after it that the actual regulator was the German regulator.

So, for four years prior to that, were you unaware who the regulator was?

Mr. Pat Farrell

No. I mean, there was an actual transition, as I think I explained earlier on.

So, when was that transition?

Mr. Pat Farrell

I can't be exact about it but I know that, sometime earlier - it may have been a couple of months - a bank called Hypo Real Estate-----

Mr. Pat Farrell

-----had acquired Depfa.

Mr. Pat Farrell

I think it was, yes-----

Mr. Pat Farrell

-----in 2007.

So, after 2007, you would have been aware that it would be the German regulator that was regulating Hypo Real Estate and, through its unit in Dublin, Depfa Bank; would that be correct or incorrect?

Mr. Pat Farrell

To be ... to be honest, I mean, there were banks in the IFSC and they were, in the main, regulated by their home regulators for prudential purposes, but then if there was a conduct of business dimension to it, they were obviously regulated by the home regulator. I can't recall, to be honest, being, you know, specifically aware of, well, "Who regulates Depfa? Is it the Irish regulator or is it the German regulator?, or at what point the baton passed.

When you ... when you were lobbying the Irish Government or the Department of the Taoiseach for Depfa to be included in the bank guarantee, were you aware that it was the German regulator who regulated that bank at the time?

Mr. Pat Farrell

I ... that wasn't a consideration for me. I mean, Depfa came to me-----

Mr. Pat Farrell

-----and they obviously ... they had an impression, okay, and they were the regulated entity - IBF wasn't regulated - they had the impression that, in some way, they had a claim on or a legitimate right to advocate a position to be included in the guarantee and I simply represented that position to the authorities.

And would your role in the ... IBF mean that you would carry out the instructions of the bankers despite that it would have potentially devastating consequences on the Irish State?

Mr. Pat Farrell

Well, first of all, there would have been an assessment, obviously, by the State of that because there would have been a clear line of sight on what exactly was involved and, secondly, I was merely representing their concerns. No more or no less.

But the question is, would you represent their concerns despite the fact that the ... if they agreed to do what you asked them to do, that it could have a potentially devastating consequences to the State?

Mr. Pat Farrell

Well, as I said, Deputy, and I said it before, it was a hypothetical situation in any event, No. 1, and, No. 2, the authorities would have been fully aware of the extent of what might be involved if they were to do so. I think the reality of it is that it ...there was no question it was going to happen, but, in fact - and, again, to my mandate - they were asking me to pass on a concern, a representation they had, and I did so. I think, you know, representatives, that's what they do.

Mr. Pat Farrell

Public representatives all the time represent their constituents without fear or favour and sometimes they may not ... you know, they don't pass value judgments on the representations they receive, they pass them on. They represent-----

Mr. Farrell-----

Mr. Pat Farrell

-----their mandate.

-----how is this a hypothetical situation? The IBF lobbied the Department of Finance for Depfa to be included in the guarantee - not hypothetical, looked for them to be included as a section in the guarantee. And you went then to the Department of the Taoiseach asking "We need your support in this." How was this hypothetical? Was this not a very concentrated effort on behalf of the IBF to have a German bank included in the guarantee and were you knowledgeable that the German Government and authorities had increased its exposure, its bailout, up to €50 billion just a week before for Hypo Real Estate because of the problems that Depfa Bank-----

Mr. Pat Farrell

But I didn't-----

-----were going through at the time?

Mr. Pat Farrell

I didn't have the knowledge of that, for a start, and ... No. 1, and, No. 2, it was hypothetical because, in the event, it did not happen.

Sorry, you didn't have knowledge of what?

Mr. Pat Farrell

Of the ... the thing you mentioned to me about Hypo and-----

So, you weren't aware that the Germans had created a bailout fund for Hypo Real Estate because of the liquidity problems of Depfa Bank?

Mr. Pat Farrell

Not particularly.

What do you mean "not particularly"? Like, this was-----

Mr. Pat Farrell

I actually don't recall that at the particular point in time but what I did do was I got a representation from Depfa which I passed on to the relevant authorities, no more or no less.

Can I ... well, can I put it to you that you did do more? You actually passed on the representation ... well, you actually passed on a representation, from the evidence that we have, which came from the IBF, looking for Depfa to be included in the guarantee, which was drafted by the IBF themselves, but you went further and you went to the Secretary General of the Department of the Taoiseach and asked for his support in this ... in a two-line statement to Dermot McCarthy. Like, you lobbied for it; would that not be correct? You lobbied for Depfa Bank-----

Mr. Pat Farrell

You say I-----

-----which was ... which becomes-----

Mr. Pat Farrell

You say I-----

-----which became a bust bank at the cost of billions of euro to the German taxpayer. You lobbied for that burden to be placed on the Irish taxpayer.

Mr. Pat Farrell

You say that I lobbied; I passed on a representation.

Okay. See the representation that we're looking at on the screen, where it says, "We need your support in this - IFSC banking has been completely overlooked. [This] issue is as relevant to retail banks as to the covered ... banks of IFSC." Is that passing on representation or are they your words ... looking for the general secretary of the Department of the Taoiseach to include what is ... later on in the attachment, which is looking for Depfa Bank to be included in the guarantee?

Mr. Pat Farrell

Well, I saw it as passing on a representation that we had from the bank concerned.

How can your request for the Department of the Taoiseach for support be seen as just passing on a representation? Didn't you not make a call to the Department of the Taoiseach, based on this evidence, for Depfa Bank to be included in the guarantee?

Mr. Pat Farrell

We'll have to differ in our interpretations of it because what I did was I passed on a representation that I had from a bank.

Okay. The first two lines - just let's look at the screen - where you've asked the Department of the Taoiseach's general secretary for the support of this issue, is that passing on representation or is that calling for the Department of the Taoiseach to act on a matter?

Mr. Pat Farrell

I saw it as passing on a representation.

Okay. So, I pass on representations on behalf of my constituents and I usually say, "I've received this representation; I'm passing it on for your attention." I would feel that, if I call on somebody to support the representation, that I'm lobbying on behalf of my constituent or whatever sector has come to me. Do you share that view?

Mr. Pat Farrell

Well, if you take ... this representation was passed on. As far as my recollection is, nothing further was done from our side and subsequently the German regulator assumed responsibility for those liabilities.

Okay. Were you aware that Depfa Bank had ... had approached the Department that weekend? Indeed, in Honohan's report, it talked about that the concern at the weekend of the bank guarantee was in relation to Depfa Bank's liquidity problems. Would you have been aware of-----

Mr. Pat Farrell

I have read something in correspondence. It may be at the ... all the correspondence that's been included or something in transcripts, that they had made their own representations. I think it's covered in some newspaper report.

Yes. But just from your position, as the CEO of the IBF, were you aware that one of the banks - one of your banks, that were under your ... you know, that paid fees into your body - was in serious problems in relation to liquidity and it was actually the focus of attention that weekend, the weekend of the bank guarantee, was on Depfa Bank, not on Anglo Irish Bank?

Mr. Pat Farrell

Not particularly, because, I mean, the primary focus on that weekend was obviously around domestic banks and the guarantee for the domestic banks, guaranteeing the stability of the system and ensuring that banking could function, and continue to function, in the aftermath of it.

That was what I think was dominating everybody's minds. I think that's what was dominating the minds of the man in street. And I think it was hardly a primary source of focus for anybody, what was actually happening in relation to IFSC banks.

Did you ever find out how much Depfa Bank cost the German taxpayer?

Mr. Pat Farrell

I didn't.

Would it been in excess of €20 billion, €30 billion?

Mr. Pat Farrell

I said I didn't so I can't actually-----

Mr. Pat Farrell

-----speculate on the range.

Okay. And in relation to Depfa Bank, one of its board of directors was the former Governor of the Central Bank, Maurice O'Connell. Did you have any interaction with the former Governor, Maurice O'Connell, in relation to your representations of Depfa Bank being included in the guarantee?

Mr. Pat Farrell

Not that I'm aware; I can't recall any interaction with him on it.

Okay. In 2007, the IBF brought together the chief risk officers of the banks in Ireland to discuss the systemic risk. At any point, was the issue of solvency of an Irish financial institution, and the systemic impact on the banking sector, discussed or considered? And what was the eventual outcome of this meeting? And were officials of the Financial Regulator or the Central Bank or the Department of Finances updated on the discussions and outcomes?

Mr. Pat Farrell

Can you bring up the document for me?

I don't have a document to bring up to you. Are you aware that, in 2007, the IBF brought together chief risk officers of the banks to discuss systemic risks?

Mr. Pat Farrell

I have a recollection that there was a convening of risk officers at that time. And there was a background to it - bird flu.

So bird flu was what was concerning-----

Mr. Pat Farrell

Yes

-----the IBF in 2007?

Mr. Pat Farrell

Well, it ... I'll tell you what the background to it was. We were asked to convene on that basis by the authorities, because at that time, there was a purported pandemic because of avian bird flu, and, at one stage, it was estimated that if it got the grip that was being speculated upon by the World Health Organization, which is an authoritative body, that 25% of critical services and banking infrastructure and payments could be paralysed. And we were asked by the authorities to convene a group to examine this issue and it became a standing group then after that because it looked at things like cyber-crime risk and other such issues.

Mr. Pat Farrell

But that was, as far as I recall it, the genesis of why it came together and what was the actual background to it.

So, when you had these chief risk officers in the room from, I presume, some banks that went bust - Anglo, Nationwide, AIB, Bank of Ireland, other banks, EBS - to discuss bird flu, did you discuss ... and cyber-crime at a later stage ... did you discuss at any time issues of solvency of the banks, given that they're the chief risk officers that were sitting at the table?

Mr. Pat Farrell

Well, first of all, I actually don't recall that I would've been at those meetings because they would have been convened by our prudential director. But in so far as ... they were ... I have any recollection of what the content would have been it would have been around, as I said, things like the original one which was pandemics and the potential impact of them. And it was very real at the time. It may seem funny at this vantage point but it was very real issue at the time. And cyber-crime risk was also another very real issue. But going back again to the mandate that I had and to the position of the banks when it came to issues that were directly relevant to their own business models and their own operations, banks were not in the business of sharing that kind of information around the table.

So is that a "No" to the question that solvency ... bird flu and other-----

Mr. Pat Farrell

As far as ... to the best of my recollection-----

-----systemic risks such as cyber-crime was discussed but-----

Mr. Pat Farrell

As best of my recollection-----

-----in terms of solvency or-----

Mr. Pat Farrell

-----best of my recollection.

Okay. Right. When ... you mentioned that the IBF weren't aware of the bank guarantee and you woke up that morning like everybody else. So, we have uncovered in this inquiry that discussions in terms of guarantees and, indeed, legislation were being drafted as early as April 2008. So, is it the IBF's position that they were unaware of any of that process of consideration of legislation or anything to do with that until after the announcement of the guarantee?

Mr. Pat Farrell

We had no line of sight on anything specific because we know that from, I think 2007, internationally, there was a challenged liquidity environment and, through 2007 and 2008, that, obviously, became aggravated. So, naturally, there was an international backdrop and it did come to wash on our shores of issues around liquidity, tightening up of wholesale funding access to it, all of that kind of thing. But, we weren't involved in any specific discussions, or even general discussions, about guarantees or the like.

No, but the question is when did you become aware? It's not about whether-----

Mr. Pat Farrell

But I ... But I said to you already when ... I said I think already, sorry, Deputy, that, you know, I woke up to the bank guarantee the same as everybody else.

Yes. That's the bank guarantee decision; we all woke up that morning and we knew that the ... we found out that the Government announced it, well, most of us in the country anyway, that weren't in the loop. But, the question I'm putting to you specifically is: was the IBF aware that the Department or agencies were considering a guarantee at any stage prior to the morning that you woke up to hear that the guarantee was announced?

Mr. Pat Farrell

I have no recollection of having been involved in any discussions around a potential guarantee or options around a guarantee.

Okay. Okay. Was the IBF ... I presume you weren't aware that one of the ... it's suggested that one of the main banks drafted its own bank guarantee. Was the IBF aware of this? Was it consulted on the draft? Did the IBF ever receive a copy, before or after, of the bank's own version of the guarantee?

Mr. Pat Farrell

No. I mean, I know this is ... it bears repetition though. Our job was to represent the banks collectively on issues that we could establish a collective and common position. And you can deduce from that that a lot of issues then, particularly when they're referred to individual banks or referred to individual banks' business models and the like, fell outside of our ambit. And that's not unusual. That would be the same in any other representative body. Members will come together when it's in their interests to advocate a particular postilion, but when it comes to their own individual business and the way they operate their businesses, they will play their cards very close to their chest because, that's business intelligence, and they're not going to share that information with somebody else.

Okay, so just the question again in terms of the drafting of the bank guarantee by one of the banks. Did the IBF become aware before or after that that occurred?

Mr. Pat Farrell

I wasn't aware of it before.

Mr. Pat Farrell

Well, I'm aware of it ... sorry, I'm aware of transcripts here where there's this debate and discussion about whether there was papers tabled or not, that's my state of awareness.

But ... okay, that's your only state of awareness?

Mr. Pat Farrell

Yes.

Okay, I appreciate that.

If you don't you mind Deputy, it's just you mentioned earlier there, Mr. Farrell, that you brought together chief risk officers-----

Mr. Pat Farrell

Yes.

-----of the banks in 2007. Which authority brought that together or what authority was it?

Mr. Pat Farrell

The IBF.

It was the IBF, was it? Okay.

Mr. Pat Farrell

And again, you know, like me ... it was ... again, to bring people's minds back there was a very real ... I mean, it dominated the news flow for about a month. There was a pandemic in Asia and the projections by the WHO at the time was that it was likely to spread worldwide and there was a very real and visceral discussion across media about the potential impact to this on critical services, particular ... including banking. And we were asked at the time by the authorities to convene and consider what kind of contingency planning could we put in place to combat a potential threat associated with that.

Back to yourself, Deputy.

Mr. Farrell, you were appointed to the Seanad for the sum total of one sitting day by the previous Taoiseach, Albert Reynolds, which happened between the general election and the Seanad election. Being a former Senator for that one sitting day gives you privileges in terms of access to the Houses of the Oireachtas. How important or not was that access, that unfettered access to the Houses of the Oireachtas as a former Senator in your role as a ... in the IBF?

Mr. Pat Farrell

Well, it wasn't unfettered because I think all of you, the Deputies, will know me here and they will know I wasn't in the business of wandering around the corridors of Leinster House. I came to Leinster House by appointment, or when I had a reason to be here, where I had been summoned by an Oireachtas committee or where I had official business. So, I'm not sure if that answers your question.

Okay. Mr. Farrell if we can go to the ... just picking up what Deputy Phelan was talking about. If we can go to page 64, again of the core documents, this is the amendment to the Asset Covered Securities Act. And I want to go the point where you say that, despite the fact that the Government, this is a Government recommendation, or a memo to Government, a memo to Cabinet. Despite the fact that you said that you didn't draft the legislation, although it stated in this report that you did ask for McCann Fitzgerald, I think ... yes, McCann Fitzgerald to draft the legislation. You say that something was drafted, but it would have been just points.

The final Bill would have been drafted, as you said, by the draftspeople of the Houses of the Oireachtas, but the job that McCann FitzGerald did on behalf of the IBF in terms of what's said here is the draft legislation, did it look like draft legislation?

Mr. Pat Farrell

Well, I cannot recall at this point, you know, what it looked like in ... at this recall, because we're going back seven or eight years. But, you know, being familiar with where we would retain advisers before to look at particular things, they would have come up with a list effectively of, you know, this item would need amendment to comply with this, this would cross-reference to that, that kind of thing. That was the kind of thing that I would have been familiar with and I would have felt, again ... and I cannot recall sight of the actual document and what would be in it but that that would be the kind of document it would be and the direction of travel of it.

And it was the IBF who instigated the amendment of this legislation. Do you concur with that?

Mr. Pat Farrell

The trigger for the amendment to the legislation was the pending introduction of the capital requirements directive which was an EU-driven initiative to bring the EU financial services framework into line with and to give effect to Basel II, which was the new method for calculating capital for banks.

It says here that ... on, again, the memo to Cabinet, "The Irish Bankers Federation approached the Department ... in April regarding changes to the Investment Intermediaries Act". So were you the trigger ... was your organisation the trigger for this in terms of the legislation?

Mr. Pat Farrell

I won't dispute the words that are there. All I'm saying is that the legislation had to be changed regardless of ... if IBF disappeared off the map in the morning and didn't exist, the legislation would have had to be changed to comply with the capital requirements directive, absolutely, unequivocally, no-----

It's reported in The Irish Times that you wrote to the Finance Minister at the time, Mr. Brian Cowen, on 6 October 2006 about the benefits of building an Irish covered bond market, that it would allow lenders to fund the demand for mortgages. Do you recall that?

Mr. Pat Farrell

Yes.

Do you ... what's your view in relation to the fact that these instruments which you lobbied for, allowed for banks such as Anglo Irish Bank to access more wholesale markets that allowed for it to lend into what many people believe was a property bubble at that time in 2007 when the legislation took effect?

Mr. Pat Farrell

And, Deputy, where did Anglo Irish Bank use that legislation for to access the markets? I'm not familiar with that.

Did Anglo Irish Bank not issue €5 billion of ... did Anglo Irish Bank not ... €4 billion on a covered bond backed by €6.4 billion of commercial property loans?

Mr. Pat Farrell

I'd need to see the detail of that. That's the first-----

Did Bank of Ireland use the-----

Let the witness answer the question, Deputy.

Mr. Pat Farrell

Yes, well, I need to see the detail on that. This is my understanding, open to correction: there was an amendment in the updated legislation which included the ability for commercial mortgage to be collateralised and then be issued on the back of a covered bond. First of all, a covered bond is a very highly rated instrument. It has huge legal protections in it and it's retained on balance sheet, unlike a securitisation which is off balance sheet. So a covered bond is a very good instrument. There's nothing wrong with it. It's a very, very good instrument for funding. Let that be on the record.

They asked for the inclusion of commercial mortgages and I think there might have been a general interest more broadly than that. The fact was, across all competing jurisdictions, peer jurisdictions, the ability to include commercial mortgages in covered bonds, where there were covered bonds legislation was already the norm, so we were just, literally, coming into line. That was legislation of 2007.

The statutory instrument which gave effect to the element that allowed commercial mortgages to be collateralised was placed before this House, I understand, and I'm subject to correction, in mid-2008. At that stage, as we know, events had overtaken us and, again subject to correction, but my understanding is that Anglo - you named the institution - didn't do a transaction under that particular mechanism. I'd also like it to be recorded that, using the covered bonds legislation, it became a vitally important instrument for all of the banks operating here, because it became an acceptable method of collateral to post at the ECB window for liquidity purposes. And we all know how important that actually became because the ECB had certain criteria for liquidity and one of the types of the liquidity they were prepared to accepted ... or collateral they're prepared to accept at their window for liquidity purposes were covered bonds.

Mr. Pat Farrell

So covered bonds were critically important.

But, Mr. Farrell, at the core of the covered bond and the amendment, was it to allow financial institutions to access more wholesale market funding than would be previously available to them? And Bank of Ireland, Depfa Bank, others, have used this Act in the past.

Mr. Pat Farrell

No, I mean, covered bonds were available in the marketplace from 2001.

Mr. Pat Farrell

And what happened in 2007 was to align the legislation of 2001 so that it remained compliant with the new dispensation that was part of the landscape of regulation occasioned by the introduction of the capital requirements directive, which was an EU legislative initiative.

Can I ask you, Mr. Farrell, in October 2009 you spoke at the Kenmare economic conference where you said in relation to the banks and the crisis, "We built opacity and complexity into the banking model, which truth be told, defied understanding." That was the quote that you had. One of the objectives of the inquiry is to arrive at the understanding at the logic and rationale that underpinned the Irish banking business model. The people who designed the system, who regulated the system and who lobbied for changes to the system were all intelligent and rational people. Can you explain to the committee, what was the rationale for making an Irish banking model, in your own words, complex and opaque? Who benefitted from such a complex and opaque system that was created?

Mr. Pat Farrell

Well, at its core, like, banking is a fairly simple proposition. You just ... you intermediate money. People give you the loan of their money and then you lend it to other people. But it's also a highly regulated sector, so that brings its own levels of complexity and opacity. It's also heavily legislated for and then there's all the governances that flow from the fact that it's an internationally-traded service. I'm not best placed to determine how banking got to the level of opacity and complexity that it did. The fact is, it did. I made that statement in Kenmare. I acknowledge it and, you know, since then the changes that have been undertaken in regulatory frameworks have, to some degree, tried to reduce some of that opacity and simplify it like, for example, the ring-fencing of investment banks from retail banks. And actually that is probably one that speaks to your question which is that investment banking ... banks developed into situations where they became conglomerates, where they were investment banks and retail banks and, of course, investment banks are notoriously complicated instruments and they are quite a degree of opacity as we learnt through the crisis. I think that spread across banking groups as well.

Okay, yes, can I ask you finally-----

You can ask a supplementary.

Yes. Can I ask you finally, you told the finance committee on 2 July 2008 that the banks ... the sector was well capitalised, profitable and had strong shock absorption capacity. This was within a couple of months of many of those same banks going bust. Were you aware, as head of the IBF at that time, of issues such as that Nationwide were frozen out from the wholesale market, ECB funding not available to them? Were you aware at that time in relation to the contracts for difference issue and Seán Quinn? Were you aware of the funding difficulties that other members of your organisation had, such as Anglo Irish Bank and Irish Nationwide? Were you aware of their exposure to the commercial property loan book? You know, how does ... how do you feel about that statement and were you aware of those issues at that time?

Mr. Pat Farrell

Well, that's ... that's about ten things you've asked me. If I had ... what my level of awareness was-----

We will allow you time to respond, Mr. Farrell.

Mr. Pat Farrell

Yes, I mean, look I said to you before and it bears repeating, that we were responsible for reflecting ... representing the collective interests of the banks. We weren't knowledgeable on or we didn't have access to the details of what was happening in individual banks. Now you cited specifically the Oireachtas committee meeting that I was at. I think an interrogation of that transcript will show that I caveated my statements by drawing on what was acknowledged at the time as good authority and I referenced as my source for my statements, the IMF, the OECD, the ESRI, the Central Bank and the regulator. And you had the Governor of the Central Bank and the regulator at the committee both before my appearance and subsequent, as far as I can best remember, to my appearance.

In the 2008 period you're referring to there?

Mr. Pat Farrell

Yes and they made the same statements.

Yes, but I am asking you a direct question and I understand that you are relying on other agencies to back up your-----

Mr. Pat Farrell

Yes, I relied on other agencies for the statements that were made-----

But the question I've asked you - when you made that statement about the banks being well capitalised, profitable and strong absorption capacity, were you aware of the difficulties in relation to INBS in terms of the capital markets? Were you aware in relation to Anglo Irish Bank and Nationwide's over-exposure to commercial property? Were you aware in relation to the contracts for difference issues by Seán Quinn?

Mr. Pat Farrell

If there was anything in the public realm, I would have been aware of it but anything outside of that, I would not have been aware of it.

Thank you very much. If I can just deal with one matter before we move on there, it just comes back to my earlier question to Mr. Farrell about the coming together of the chief risk officers and you said that that was structured by the Irish banking authority.

Mr. Pat Farrell

Yes.

But was there an authority that gave a direction or an instruction or an advice for you to have that mechanism engaged? Did it come from an official Department or-----

Mr. Pat Farrell

As I recall it, and again, you know, it's quite a number of years back but I would guess that we got a call from the Department of Finance, probably at the level of, you know, assistant secretary, principal officer, saying, "Listen, there's this issue. It's getting a lot of air time. Authorities generally around the world are mobilising to think about what they can do in terms of contingency planning around critical systems, banking being one of them. I think it would be appropriate to gather the banks together and to discuss this issue and try and find a mechanism to deal with it." And they may well have ... as I said, I don't have a particular recollection of being at the meeting but they would probably have attended it. I wouldn't be surprised because, from time to time, the Central Bank or the Department would attend a meeting because they might brief on a particular piece of legislation or an initiative that was under way and it would be an opportunity to brief members on the detail of it.

Who got the call? Was it you or a different official in the Irish Banking Federation?

Mr. Pat Farrell

It would be somebody in the Irish Banking Federation. It could have been me. I don't have a particular recollection of it as me. It might have been myself or it could have been our head of prudential regulation.

Okay, and was the call-----

Mr. Pat Farrell

Or, head of prudential.

Was the call and this request ... was it very, very prescriptive in terms of, forensically you need to look at this, or was it general?

Mr. Pat Farrell

The issue of the moment was the pandemic issue and the need to be able to build contingency plans for essential public services, banking and payments being one of them.

Okay, thank you. Sentaor Sean Barrett.

Thank you, Chairman. And welcome, Mr. Farrell. Can I go back to your answers to Deputies Doherty and Phelan about your e-mail to Mr. Dermot McCarthy? Do you not feel at this stage it was irresponsible to send that kind of request without knowing what it would cost the Irish taxpayer?

Mr. Pat Farrell

Well, I didn't ... I mean, I got a request from Depfa and they asked me to pass on their representation, which I did. I didn't actually have a detailed understanding of what the potential liabilities were that they were asking to be guaranteed but that state of knowledge would have been there within the system that I was representing myself to, which would have been the regulator and the actual Department itself.

Because, I have a quote from Germany: "Depfa is said to have been responsible for at least two thirds of the HRE losses, well over €200 billion." So, in fact, we would be investigating today €197 billion instead of the €64 billion which ... I mean, aren't you lucky that the secretary of the Department of the Taoiseach didn't accept your representation?

Mr. Pat Farrell

Well, I know that you're going to have the secretary of the Department of the Taoiseach in following me, but I ... and, obviously, he'll speak for himself but I would doubt that there was any intention at any stage by the authorities here in Ireland, for a moment, to actually contemplate extending the guarantee to those liabilities.

Well then, the downside is that the episode seriously damaged Irish credibility in Germany.

Mr. Pat Farrell

That's not an area that I can take accountability for.

That's fair enough. Senator.

Right, thank you. The ... You were on the financial services consultative industry panel. What work did that do?

Mr. Pat Farrell

The panel was set up by, I think it was by statute, as part of the legislation that underpinned the Central Bank structure and I think in my witness statement, I mean I ... We were advisory. We could only advise; that was our role. We were, particularly I think, mandated to comment on the budget of the regulator, to ... from time to time, we were asked to comment on maybe particular initiatives that they were planning, regulatory initiatives or otherwise. And I think I outlined ... I don't want to use up the time by repeating but I think I gave a list there in the witness statement of the, kind of, things that we commented on during the time. It was, kind of, a synopsis of the kind of issues that were occupying our attention during the time that I served on the panel.

And did you know that there were so few people engaged in bank prudential regulation in the country?

Mr. Pat Farrell

I had a consciousness to a certain number of things. I mean, I adverted already to the fact that I noted from very early ... from the time I was appointed CEO that the consumer director sat on the board of the authority, the prudential director didn't. Now, I accept that was corrected.

No, the question was about the number of people engaged in prudential regulation.

Mr. Pat Farrell

Oh, sorry. I had a consciousness that there was quite a large team of people working on consumer protection.

No, prudential regulation is the question.

Mr. Pat Farrell

No, you ... Sorry, I'm endeavouring to give some context to my answer. I was also conscious that there was a smaller number of people working on prudential regulation. But can I say to you, Senator, that I mean, the whole backdrop, the whole policy context, the whole focus was on consumer regulation. And I made this point in Kenmare and I got some criticism for it at the time because what I said was that, ultimately, when the public woke up to the reality of what happened, they weren't interested in knowing, "I don't know what a tracker mortgage is", they wanted to know, "Is my money safe?" And what I'm saying is and I think you .. everyone will appreciate and understand this, the ultimate guarantor of the consumer's protections is strong prudential regulation. And my belief was that the starting point for the focus was too skewed towards consumer and conduct of business and I think the evidence that has been given thus far by Mr. Brian Patterson, by the expert reports have all validated that as well and have remarked upon it.

The industry paid half the cost of this prudential regulation, isn't that-----

Mr. Pat Farrell

Yes.

Was there push back in the industry again the, kind of, stronger regulation?

Mr. Pat Farrell

We pushed back about cost and value for money.

Mr. Pat Farrell

But push back on value for money is, in my opinion, credible and legitimate. It's not to be confused with, "Are you prepared to support more resources?" We called out a whole number of initiatives that we thought the regulator should do. Every one of them would cost money. And the chairman at one stage - I can't remember which chairman; there were two - I know was on the public record, I think it's in the public realm as saying that if resources were the issue, the industry would not be found wanting. That was on the basis that we were paying 50% of the fees. Now, by the way, just in relation to 50% of the fees, just to be clear, the 50% of the fees paid by the industry was not the industry's idea; that was what was decided by the authorities at the establishment of the regulator. And there's a whole debate about regulatory capture and whether that can happen as a result of the fees. Other jurisdictions, they chose to fund it from the exchequer.

You mentioned the ESRI as one of the sources. Did the banks or your federation ever approach the ESRI when they had reports on the Irish economy?

Mr. Pat Farrell

We would be generally aware of those reports when they were published, I don't think we had any significant engagement. Again when I go back to the mandate of the IBF, we did not have an in-house economist, economic analysis was not on our remit and the banks had their own in-house economic units, economic research units and they may well have engaged with the ESRI and other bodies in the economic forecasting arena. Again, I wouldn't have any direct knowledge of that engagement.

You mentioned Kenmare. I think it's fair to say that the bank economists hardly distinguished themselves in their reaction to Professor Morgan Kelly.

Mr. Pat Farrell

For the record, Senator, and you were there, I was a spectator-----

Mr. Pat Farrell

-----in the debate that happened between a number of economists and Morgan Kelly; I didn't participate in it.

But those are the bank economists you mentioned. I mean-----

Mr. Pat Farrell

Well, we all learn, Senator and I mean, you know, one of the debates out of this whole saga is, you know, the need to be more alert and alive to contrarian voices and, you know, that's, obviously, learning that I would take from all of this and I'm sure others would too.

The ESRI dropped the articles by independent economists after the Morgan Kelly articles were published; they were dropped from the quarterly economic review. Did banks make any representation in your knowledge to have that series of articles dropped?

Mr. Pat Farrell

I don't know-----

If that's guessing information, Mr. Farrell, I'd rather you didn't unless you have an informed that

Mr. Pat Farrell

I don't have any ... I don't ... I'm not in a position to comment on that.

You did shut down the Irish Banking Review, where ... it was a forum where economists and bankers used to meet.

Mr. Pat Farrell

I was thinking you might get to that. The reality of it, Senator, was that the Irish Banking Review, we did provide a small support for it and when I came chief executive of the Banking Federation, my mandate was to represent my members unashamedly to the mandate they gave me and I was also required to do it within the envelope of resources available to me.

And so I had to look at areas where I didn't feel I fell within my mandate and also the review had been in place for quite a long time. My view was that it had run its course, that's my view. You may well debate it. And we had to reallocate resources and unfortunately that's what chief executives have to do.

So you didn't have a problem with contrarian views in that journal?

Mr. Pat Farrell

None.

That's subjective.

All right ... thank you, Chairman.

Okay is that completed? Okay, I'm just proposing that we will just take a very short comfort break for about three minutes and resume immediately afterwards. So just to suspend the session temporarily for a couple of minutes. Mr. Farrell, to remind you that you're still under oath and also that any engagement that is there ... is, you're still under direction and you can take any legal advice you wish under that period. Thank you.

Sitting suspended at 2.31 p.m. and resumed at 2.37 p.m.

I propose we go back into public session immediately. We continue our engagement with Mr. Farrell, is that agreed? Agreed. Okay, I just want to deal with one question there Mr. Farrell and I'll come back to you in the wrap up there. It's in your witness statement and it's in relation of your witness statement which the IBF to prepare a note for issues raised and circulate to attendees. It's just one, it's a minute of a ... it's a minute of a meeting, if I can get it up on the screen there just for assistance purposes. And I just want to ask you ... I'll just refer to a particular quote on that and then if I can move on from it. You said prior to 29 September 2008, the IBF had no mandate from the IBF council to discuss specific Government liquidity solvency support initiatives for this sector with the authorities, and was not a party to considerations by the authorities on such matters. Now, the note here ... I just want to refer to that, so in that regard ...however in July 2007 the IBF did participate in a liquidity funding workshop, this was attended by the IBF representatives of the major banks, and a representative of CBFSAI Central Bank Financial Services Authority of Ireland. The summary note of which was sent to Department of Finance, which I think we have here. And can you recall the note of issues that the IBF was committed to producing from this meeting and was this circulated to the attendees? And what were the key issues being discussed at that time?

Mr. Pat Farrell

Okay, Chairman. Well, my ... The outline of what I said still stands obviously, that we didn't get involved in the individual banks ... in relation to liquidity solvency, business models, all that kind of thing. Again, this was a collective discussion. And I haven't seen this before, but to the best of my recollection ... first of all I'm not ... to the best of my recollection I don't think I was at the meeting. I'm, I may ... again I think it would have probably been handled by our prudential director because it would have fallen into that area.

I think the background to it was that at that time, and I did advert to it earlier, there was continuing tensions in liquidity terms across global markets. And at that stage I think some time in 2007 ... around that time ... the Central Bank introduced a new liquidity regime for all the banks. And they required a whole new reporting arrangement with the banks for liquidity. They asked them effectively to put their liquidity requirements as they matured out into different time buckets on a cash flow basis, so that they would have a much clearer line of sight as to what the liquidity requirements of each of the banks were going forward. And that was understandable, given the heightened situation that existed in liquidity markets generally. And, my understanding, that meeting would have been one where the banks would have come together collectively to understand ... or to use that form to understand what exactly the nature of the requirements would be and report in terms, tease out any questions they might have, the detail of it, and such like. And that is ... to the best of my recollection it would be my understanding of the context for the actual meeting.

Thank you very much. The next questioner is Deputy Kieran O'Donnell. Deputy, ten minutes.

Thank you, Chairman. Welcome, Mr. Farrell. Mr. Farrell ... this is reference, Chairman, to Mr. Farrell's book of evidence, page 27. You might put that up on the screen, please. And it relates to the Regling and Watson report and more particularly it relates around that the Regling and Watson, that:

[The] setting of macro-economic ease in growing financial integration, bank managements in Ireland faced new major opportunities. However this environment also entailed challenges for [banks, particularly around the area of] governance.

And Regling and Watson report goes on to say that the challenges weren't met by the banks and "Errors of judgement in bank management and governance contributed centrally to Ireland's financial crisis." The questions for Mr. Farrell are: was the Irish Banking Federation aware of these challenges its members faced? And if not, did they feel that the IBF was fulfilling its mandate and was representing the sector's interests accurately? And before you departed from the IBF in June 2013, what had you put in place to ensure that the IBF could accurately represent the sector's interests and ensure banks met future challenges regarding banks' governance? So it's really around the whole area of the day-to-day governance and the challenges that brought.

Mr. Pat Farrell

Well, first of all ... I go back again to the fact that IBF is the representative body; it is not a regulator; it doesn't have a legislative mandate to be a regulator; it doesn't have the resources to operate in the sphere of governance and to provide challenge or direction to banks around governance. That's absolutely not its mandate. That is the mandate of the regulatory bodies that are charged with actually regulating the sector and all of the other authorities around corporate compliance-----

And what was your annual budget?

Mr. Pat Farrell

Our annual budget was about circa €3.5 million.

And did that come from all the banks?

Mr. Pat Farrell

Yes.

Mr. Pat Farrell

Yes.

Mr. Pat Farrell

And that allowed us, as I said, to retain some professional services, as we needed from time to time, and to pay the team of people that we had. What changes did I make? I go back again to the situation that from the very outset the whole environment, the discourse, the context for everything that happened in regulation was heavily weighted towards consumer conduct of business rules. In fact, when I think about all of my engagements with Oireachtas committees, I'd say 90% - up to the crisis - were all about consumer conduct of business-related rules. There was very little, if any, discussion about prudential matters. So there was a consensus around that the area that the focus was going to be, from a public interest point of view and from the regulator's point of view was consumer, consumer, consumer. That, kind of, led. So, as us ... as a representative body having to face off against regulatory authorities and so on in terms of representing members' interests, the majority of our skill sets and the people that we employed were in that space of consumer conduct of business. And even some of the things we did which we're, you know, probably associated with - like the switching codes, consumer protection codes, the debt relief protocol with the Money Advice and Budgeting Service - they are all testament to the fact that a lot of our output was in that whole space.

Post the crisis I was challenged, my team were challenged, to adopt to the change in environment, so we had to re-skill the team that we had. We brought more people in with more knowledge of prudential matters. We hadn't a head of prudential per se, I don't think initially, when I was appointed. We had a head of wholesale, which is something different-----

Well, in the limited time I have-----

Mr. Pat Farrell

Yes, yes.

-----what would you say were the two key things, differences that you brought in and their impact?

Mr. Pat Farrell

I think their impact was that we ... changed the skill sets with people to make sure that we had a proper diversification of the resources that we needed to cover all the bases that were important from a banking regulation point of view. That was one big thing. And I think the second big thing that we did post the crisis is that as ... in my own right and on behalf of the sector, I took a much more active public role in terms of trying to provide reassurance and communicate more strongly what banks were doing as a consequence of the crisis to try and support people who were in financial distress.

Can I go back to just your role pre the crisis with the banks?

Mr. Pat Farrell

Yes.

Would you describe yourself as very much a hands-on type of CEO?

Mr. Pat Farrell

I had a team of people that looked after various areas and I tended to delegate for them, so I would say that I was hands-on where I needed to be but, in the main, I would've delegated the work agenda to the appropriate people. I believe in letting people get on with their work.

And were you representing the collective interest of the banks?

Mr. Pat Farrell

Yes, I believe so.

Okay. Was there ... did you appear before an Oireachtas finance committee in July '08 - and I remember it because I was on the committee at the time - about the issue of the drying up of credit for the SME sector? That was the specific issue. Did you pre the night of the bank guarantee, consult with your member in terms of how they were doing, in terms of their liquidity requirements? Was there any contact with bankers with you prior to the guarantee saying that they had difficulties? Did you have any contact with either the Department of Finance, regulators or Ministers or Government officials pre the guarantee?

Mr. Pat Farrell

Sorry, did I have any-----

Contact. The question of ... you're saying that you had no knowledge on the night of the guarantee. You were in in July '08. You were fully aware there was a problem with liquidity. You were representing the collective interests of the banks. Did you have any meetings or consultations with your members prior to the guarantee about the difficulties they were having? And did that lead, in any way, for you to have discussions with Department of Finance officials, regulator officials, Ministers, regarding the requirements of the banks and difficulties they were undergoing?

Mr. Pat Farrell

Yes, I want to be very specific now in answering this question because I mean it's important. I mean, there's a number of dimensions to that. We were all aware of the fact that there was a liquidity challenge globally and it impacted here. It was in the public realm; it was being reported on a regular basis. Wholesale markets were drying up. So, of course, I was conscious of that. As regards the situation closer to home, we had that liquidity meeting with the Central Bank where they were, obviously, showing concern and they were actually asking for a more regularised format of reports, so I was conscious of that. Was I having meetings with individual banks about their individual liquidity positions and how they were fixed? No.

Was there any meeting where the banks would have come to you pre the guarantee and said, "We've a problem here, Mr. Farrell; we need you to represent to Government the difficulties we're undergoing", in your representation role?

Mr. Pat Farrell

Not to my recollection. I mean, there would have been a general consciousness among banks, and it would have been in the discourse at meetings, that liquidity was a challenge per se for the sector, but not at the level of an individual bank.

Would you have been making the Minister for Finance known, or the Taoiseach known, about the difficulties the banks were undergoing, pre the guarantee?

Mr. Pat Farrell

Not that I can recall.

Do you think you should have in your representational role?

Mr. Pat Farrell

Well, you see, we have to go back here to what speaks to good authority and good authority is a regulator, the Department of Finance and those that have significantly more resources than I would have, and have a specific mandate to oversight banks, to-----

So you, your represent-----

Mr. Pat Farrell

No, no, sorry, to oversight banks and to actually ... to oversight banks and to examine their liquidity policies on a bank-by-bank basis, having the legislative mandate and the capability to do it which I-----

But in your representational role as CEO of the Irish Banking Federation, you would have not had any meetings with Government, in any shape or form or effort, pre the guarantee about difficulties the banks were under?

Mr. Pat Farrell

I'm not saying that I didn't have, in the course of meetings, that we didn't touch on the subject of liquidity because liquidity was all around us, so, you know, I mean, it's not black and white here. But the bottom line is I don't recall having any specific meetings with the people that you call out around the specific liquidity issue and this bank, this bank, this bank or this bank, other than that there was a general challenge across the system in terms of liquidity.

Can I ask you just a very quick question and going back to your time in EBS and the SSIA accounts - EBS were the forerunners of those. Were you involved in any way in terms of putting forward a case to Minister McCreevy as to EBS, the type of policy, SSIA products they put in place?

Mr. Pat Farrell

I do recall at the time that there was general discussion about products that would be attractive in terms of fostering the whole savings habit. I think there was internal discussion in EBS at the time about the concept of some, kind of a, saving scheme - not to the detail I don't think of what emerged as the SSIA scheme.

And I do recall having engaged with both the Minister and, indeed, the Department about the proposition, broadly, of there being some kind of a savings scheme that would be incentivised in some way.

And you, in your role in the banking federation and so forth, do you in any way see did the SSIA accounts gave rise to a situation where the banks got increased deposits, and were effectively subsidised by the Irish taxpayer to the tune of 25% interest on top, sorry, 25% of the capital sum on top by way of a payment, and that allowed the banks to increase their loan-to-deposit ratios, and that, what was money... which was savings by people that were probably not investing in property, ended up fuelling property lending?

Mr. Pat Farrell

Well, as far as I recall it, it was the actual savers that benefitted from the State element of it.

They gave the banks the deposits to be able to-----

Mr. Pat Farrell

No, but it was the savers that benefitted, Deputy.

No, did it boost the deposit base on the balance sheets of the banks?

Mr. Pat Farrell

It certainly allowed the banks to have a better ratio in terms of the reliance on retail savings, which is a good thing, because we all know, and we know particularly since the crisis, that the higher the ratio of retail sales-----

The loans-to-deposit ratios went higher ... sorry.

I need you to wrap up now. I think the summary question is that because there's more cash being on deposit, does that facilitate further credit in the market?

And property lending.

Mr. Pat Farrell

I don't think anybody has particularly cited that out on good authority, that the SSIA scheme created any, kind of, boom in lending or fuelled further the property market. I'm open to ... if that has been chronicled in evidence, but I haven't seen it.

Okay. Thank you very much, Deputy. I'm going to just deal with a couple of questions myself, Mr. Farrell, and then I'll invite both Deputy Doherty and Deputy Phelan to wrap up. Mr. Farrell, you represented both banks operating domestically and international banks, and those operating in the Irish financial services centre. In your opinion, was Irish financial regulation policy geared towards the development of the Irish financial services centre? And I'd like, maybe, how you would comment on how this impacted on the level of intrusiveness of regulation which might be targeted upon domestic banks as a result of a growing financial centre on the quays.

Mr. Pat Farrell

That's a good question, Chairman. I know that that has been a topic here, and it has been explored with some of the previous witnesses. I think the conclusion of Nyberg, the conclusion of Honohan, and, indeed, of Patterson and others, has been that while there was a clause, if we'll call it that, in the mandate of the Financial Regulator, that said it should promote financial services, that the overriding mission statement was to promote and secure financial stability. I think that, without misrepresenting them, I think they all pretty well said that that did not become a barrier to good regulation. They also ... I think again, it has been said here that we work within an EU-wide framework of regulation so it had to be applied without fear or favour regardless whether it was international or domestic bank. So, to the net point, I don't believe it did; I think there's a, kind of, narrative out there that says otherwise, but I don't think the evidence supports it.

Okay. And maybe just to test that proposition further, in earlier testimony, I think it was Mr. Roux from the Central Bank who was here, and, a line of questioning developed with him that the principles-based regulation, which is the formal term for what later became colloquially known as light-touch regulation, was an international rule; it wasn't just specific to Ireland. But the interpretation of principles-based regulation may or may not have been applied in the appropriate way that they may have been in other jurisdictions, given the level of indebtedness and the impact of the financial crash in this country. In any way, was the establishment of the Irish financial services centre a vehicle by which the interpretation of principles-rules regulation was applied differently in this country to other jurisdictions?

Mr. Pat Farrell

Again I think I defer to the experts, but I think in their evidence here, none of them, I think, concluded that. I mean, there was lots of evidence ... there's a debate about how much power the Financial Regulator had, and the Financial Regulator - and again I think it speaks to the evidence that's been here before - had quite a range of powers which were never utilised. It had sectoral concentration limits which were, in their own words, "in abeyance"; it had the ability to raise capital limits for certain types of lending; it had the ability to rely on a compliance statement under company law, which was never actually called in; it had the ability to apply sanctions to the administrative sanctions regime for prudential matters, but it only ever applied them in the case of consumer. So, I don't know what that speaks to, but I do know that, as I said, there were powers there but, as to ... what was the context for their application, non-application, I am not sure. I don't believe it was because of the fact that there was a financial services centre here. I mean, London has a major financial services centre; other centres, Luxembourg, they had issues during the crisis. It didn't lead to the kind of level of crisis that we experienced in this country.

Okay, thank you very much. I'm going to move to wrapping things up, so if I can invite Deputy John Paul Phelan, just for three minutes, then Deputy Doherty for three minutes. Thank you.

Just a couple of issues, Chairman. Referring to your opening statement, Mr. Farrell again, it may have been slightly touched on earlier, but I want to quote from it. You say that you "noted early on that the Consumer Director sat on IFSRA's board whilst the prudential director did not". When did you notice that, as a matter of interest, and why did you specifically reference this in your opening statement?

Mr. Pat Farrell

It's, kind of, hiding in plain sight, because, I mean, it's been referenced by almost every expert that's conducted an investigation into these events. I think it has been referenced by a number of the witnesses who were directly involved in regulation that, with the benefit of hindsight perhaps, there might have been more emphasis on the consumer conduct of the business side. That is the direction that was set. The people involved were merely working according to the mandate they were given, but that was the mandate, and I suppose, the old adage, we have to constantly remind ourselves about like, that the ultimate guarantor for the consumer is sound prudential regulation.

Did you raise any concerns about that at the time, that the prudential director wasn't on the board?

Mr. Pat Farrell

I did attempt ... I always tried to keep our focus on prudential, but then, you know, we were ... to a degree, we were a creature, in a sense, of the system that we worked with so, you know, our focus, ultimately, moved more towards consumer protection-type matters because that's where the direction of travel was in regulatory terms.

Okay, and was there any discussion with members of the federation?

Mr. Pat Farrell

We did call it out ... sorry, we did call it out and I refer to it in my statement, actually, and it also is redolent through all of the financial services consultative industry panel reports, where we did on a number of occasions call for a review of the allocation of resources between prudential and consumer. We also called out the fact that there was feedback from firms, particularly more complex firms, that they would have a desire that there would be more a focus put on ensuring that the people who were regulating them would have a deeper and more detailed understanding of their actual particular business models. So there were some comments and observations made in that space.

Briefly, you said prior to the guarantee there was up to 70 institutions members of the federation. Post-guarantee ... the time you left in 2013, how many, roughly?

Mr. Pat Farrell

Well, a lot of - and I referred to it in my statement - I think, a lot of the foreign banks who had established a retail presence in Ireland had at that stage exited, or were in the course of exit. Exact number, I suppose, in essence we were probably down to the indigenous banks, and, in the IFSC, there was some retrenchment as well, because what happened internationally was that as all banks came under pressure, there was a political desire ... I'm sorry there was political momentum and there was momentum within the banks themselves to retrench to their home markets. In other words, let's stick to the knitting, let's look after the core markets and the customers of those core markets, which meant that a lot of subsidiary activity, IFSC, tended to run down or be closed. I would say, and I think it's important to say it, like, the IFSC is not an abstract, kind of, concept. As we speak, like, the IFSC employs about 35,000 people, generates about €2 billion in corporate and payroll taxes, and, just by way of putting that in context, it's the equivalent of the vote for 2015 for the Department of Agriculture, Marine and Food, and for the Department of Children and Youth Affairs. So it is a substantial contributor to the Irish economy.

It is, indeed. Finally, we've heard evidence from other witnesses in relation to potential change in Government policy with regard to directors' compliance statements, and lobbying that was undertaken by the banking federation with regard to those changes. Can you briefly, in a minute or so, outline the extent of the contact that you would have had with the Minister at the time, I think Mr. Cowen, and maybe with officials in the Department?

Mr. Pat Farrell

I think the record shows by correspondence, I'm not sure, if it's the same one we're talking about, was in relation ... was with Mr. McCreevy, was it?

There's reference in the letter of 2004 where we comment on the Central Bank and Financial Services Authority Bill, we talk about the compliance statements there. Is that the-----

Mr. Pat Farrell

Probably is the reference.

It may have overlapped between the two of them, I think.

Mr. Pat Farrell

Yes. Well, just briefly, the compliance statements were being brought forward as a specific provision specifically for banks and there was already an existing compliance statement capability in the Companies Act and our view at the time, which I think was a legitimate view, was that there was potential for duplication. I think where the thing ... I think where it finished up was and I think there is correspondence to this effect and I think it may have been referred to as well in the evidence that's been given thus far by some of the Finance people, was that the Department decided not to proceed with the compliance statements specifically to financial institutions because it was forming the view that there was adequate reliance could be placed on the provision of the compliance statement of the Companies Act and it also directly and pointedly, I think, communicated at the time to the Financial Regulator, that they did have this power, they did have this provision and they could rely on it if they required a compliance statement. Let the record show that, as again, it's open to correction, but as from my limited investigation of it, I don't think that particular provision, i.e., seeking a compliance statement from a financial institution under the provisions that were there, was ever activated during the period.

Thank you. Deputy Doherty.

Go raibh maith agat. Mr. Farrell, was the IBF involved in corporate hospitality to anybody in the Central Bank or-----

Mr. Pat Farrell

Corporate hospitality? I mean-----

-----outside of the dinner that you organised for the bankers?

Mr. Pat Farrell

No. I mean, the Institute of Bankers, which would be, if I call it a sister organisation, but it's involved in training and education, had an annual dinner which was a fixed event ... a fixture ... an annual fixture, I should call it, where they would invariably ask for the Minister of the day to attend and to speak ... or somebody like that, it could be the regulator or whatever and, you know, that it would be a situation where nearly ... a lot of financial service people would be in attendance and then there would be other ... there were seven representative bodies associated with financial services and they would have similar type events.

But that's your annual dinner yourselves. In terms of like, for example, the dinner for Mr. Patterson, is that, was that the only event where-----

Mr. Pat Farrell

We had an annual lunch for the Federation of International Banks in Ireland, which again would be attended by a couple of hundred people, and would be focused on the banks in the International Financial Services Centre.

But what about the people within the Central Bank? Did you ever extend corporate hospitality or pay for lunches or dinners or outings?

Mr. Pat Farrell

No, not that I can recall. I mean, we might ... you know, you might some time have a lunch with somebody and pay for it or they might pay for the next time, but nothing more than that.

You had no set piece events where you could invite others-----

Mr. Pat Farrell

No, not that I can recall.

Can I go back to questions I was asking in relation to your statement about the banks being well capitalised, profitable, strong and able to withstand the shocks that were coming? You mentioned that you weren't aware of anything that wasn't in the public domain. So, I want to go back to some of these positions. So, for example, in relation to Anglo and the contracts for difference and we know that in March of that year, three months before you made this statement, that it was already seeping out to sectors that there may be an issue and that some people suggest that was the reason for the St. Patrick's Day massacre. Was the IBF aware of this or not?

Mr. Pat Farrell

Honestly, I have no recollection of that and I'd be testing the assumption that it was seeping out in particular sectors. I mean, maybe as a public representative, you were aware of it. Public representatives have exceptional and very good listening posts. They enjoy that privilege by virtue of the mandate they have. That isn't to say that I would have it. I don't have any recollection of any particular knowledge of that particular subject, other than it would have been in general discourse or in the public domain.

Okay. So when did you first learn of the issue of the contracts for difference?

Mr. Pat Farrell

I honestly ... I honestly don't know. I mean, I would presume the first I knew of it is when it became a reported item in general discourse.

Okay and in relation to the overexposure of the property market, when did you become aware of that in terms of ...?

Mr. Pat Farrell

Again, you know, when it would have been reported in general discourse.

But you do your own reports. Like, you do own-----

Mr. Pat Farrell

No, we don't do our own reports, Deputy, and-----

And you've not done any reports in terms of lending or anything in relation to that?

Mr. Pat Farrell

We did regular quarterly reports on the level of mortgage lending into the economy. We reported it factually. We said "Last month, this number of mortgages were written to this amount" and then next quarter, we did the same. We were not the regulator, Deputy.

I'm not suggesting you were.

Mr. Pat Farrell

We didn't ... no, but I mean, the only reason I ask that is because it's sort of to me speaks to the fact that we had some kind of deep tentacles into individual banks where we were able to have oversight and drill down into their balance sheets, their business models ... there is no mystery here. I mean, we were a representative body, just like the IFA represents the farming community but do they have deep knowledge of individual farm enterprises and what's happening within those individual enterprises?

Okay. That's fine. I just want to know your level of awareness in terms of the sector that you're representing. The final question is, again I want to go back to this issue that was ... that I discussed in my opening remarks and it's page 83. You mentioned that you were just passing on, this in terms of what could be suggested as lobbying in relation to Depfa Bank, you said you were passing on representations received from Depfa Bank and I would ask you just to, if we can pull it up on the screen, it's page 83 of the core booklet. Can you point to me in that e-mail to Dermot McCarthy where the representation from Depfa Bank is that you passed on?

Mr. Pat Farrell

Sorry, I'm not clear on the question, Deputy. What-----

Okay. Is it your contention that this representation to Dermot McCarthy of the Department of the Taoiseach was passing on representations that you received from Depfa Bank? That's my understanding of the evidence that you provided here before.

Mr. Pat Farrell

No, there was obviously a note which we sent to our ... the head of our wholesale banking ... was sent to people within the Department of Finance setting out the background, the issues and I passed that on to Dermot and asked for his support on it.

But you passed on a lobby from the IBF to Dermot McCarthy, not something from ... you weren't acting ... you suggested that you were representing the industry and you were passing on a lobby from the industry to the Department of the Taoiseach.

Mr. Pat Farrell

I was-----

But there is no ... there is no lobby here from the actual individual bank. It's an e-mail from yourself looking for support for an e-mail from the IBF looking for Depfa Bank.

Mr. Pat Farrell

I may be conflating two things but I thought that I did see in some of the evidence thus far or something recollection to the fact that Depfa Bank itself was making its own representation directly at the same time too.

Yes, but can we just stick to the e-mail and the lobbying that you may have been involved in? Do you acknowledge that there is no representation in this e-mail from Depfa Bank or, indeed, any other institution in this e-mail and the stream of e-mails?

Mr. Pat Farrell

I'm not clear on what the question-----

Well, the question-----

Mr. Pat Farrell

-----I mean, Depfa were making representations.

I'm aware of that. But the point I'm ... and the point I'm getting at, Mr. Farrell-----

Mr. Pat Farrell

And Depfa made representations to me.

Mr. Pat Farrell

So then I passed on those representations to-----

But there is ... where ... point to me where you passed on those representations. This is an e-mail, which shows that you're looking for support from the Department of the Taoiseach to support a representation from the IBF to include Depfa and another bank under the guarantee. The question I'm asking: how are you saying that you're passing on representations? There is no ... it doesn't ... there is no representation here from Depfa Bank in this e-mail.

Mr. Pat Farrell

We'll have to disagree. I mean, I was conscious that Depfa were making ... had representations to us.

Yes. But ... how did you pass them on, is my question?

Mr. Pat Farrell

Through the detail that's in the e-mail.

And that detail to ... the e-mail is from the IBF not from Depfa? It's signed by-----

Mr. Pat Farrell

Yes, but it would have been informed, obviously I'm sure, by discussions with Depfa and the other affected banks, yes.

Let me just clarify this. I suppose, it's a very simple ... I see where Deputy Doherty is coming on this. Are you stating a position that this is Depfa's position or are you advocating Depfa's position? Because in the statement to Mr. Farrell it says, it's the third line down, there under the word "Kevin", "We believe that support for ACS is now of significant importance and urgently request some statement of political support as per the German example."

Mr. Pat Farrell

Yes.

So, like that would ... could be construed as an advocating position, rather than just a statement of fact that somebody has a difficulty here, can you make a position on it?

Mr. Pat Farrell

Well, my belief is we were ... they had a difficulty and we were making the ... we were making the people who were communicating aware of it and I think, you've hit on a good point in terms of political support because what happened in the German situation was that there was a statement of political support which was simply that: political support.

It didn't carry any consequences and it didn't imply a legal guarantee. And that's what had happened in Germany.

Deputy Doherty, and we will wrap up then.

Can I ask you, the original representation to the Department of Finance was on 14 October looking for Depfa to be included in the guarantee. You then issue a two-liner looking for the Department of Taoiseach's general secretary to support the request that was made the day before. What was ... what instigated ... what happened between half past three on 14 October and the time, the following morning, when you sent the subsequent e-mail? Was there a rejection or ... of the original e-mail? Was there a negative response that you felt you may needed to raise this with the general secretary of the Department of Taoiseach or what was the ... what instigated a further communication at, what may be seen as a ... more higher level, more senior level, from yourself?

Mr. Pat Farrell

At this stage - and as I say it's seven years later - I would not be able to recall what the detail of it was, whether we had had any communication back from the Department or not, and I'd be only speculating to do otherwise.

Do you ... did you not, then ... can I ask you, finally, the original e-mail, which spells out why Depfa Bank and WestLB should be covered under the guarantee, did you not feel that that fulfilled the obligations of the Irish Banking Federation to represent, to represent the interests of the bankers which you represent?

Mr. Pat Farrell

Well, I, I already ... I already explained the context for making Mr. McCarthy aware of it, which was because of the fact that he had a particular position, which was chairman of the Clearing House Group, and this was an IFSC bank.

I'll need to end this there, Deputy. With that said, is there anything you'd like to say by means of a closing comment, Mr. Farrell?

Mr. Pat Farrell

I'm fine, thank you very much. Thank you for the-----

So, with that said, I'd like to thank Mr. Farrell for his participation today and for his engagement with the inquiry, and to now formally excuse the witness. In doing so I propose that we suspend until 4 p.m. I propose that we suspend until 4 p.m., to return in private session until 4.30 p.m. and then we'll deal with the engagement with Mr. McCarthy subsequent to that. Okay, is that agreed? Agreed. Okay.

Sitting suspended at 3.12 p.m. and resumed in private session at 4.10 p.m. Sitting suspended at 5.28 p.m. and resumed in public session at 5.46 p.m.

Department of the Taoiseach - Mr. Dermot McCarthy

So we now commence our next public hearing with Mr. Dermot McCarthy, former general ... Secretary General, Department of the Taoiseach, and Secretary General to the Government. The Committee of Inquiry into the Banking Crisis is now resuming in public session. And can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? The ... as ... at our session now this evening, we will commence ... or hear from Mr. Dermot McCarthy, former Secretary General at the Department of the Taoiseach and Secretary General to the Government. Dermot McCarthy served in the Department of Industry and Commerce and at the Department of Health, where he rose to the level of assistant secretary general. He was appointed as Secretary to the Government in January 2000 and combined that role with Secretary General at the Department of the Taoiseach in July 2001. He retired in June 2011. Mr. McCarthy, you are very welcome before the committee today.

Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect to their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. And I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. The utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. And members of the public and journalists are reminded that these are documents and that they are confidential and should not publish any of the documents so displayed.

The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So if I can now ask the clerk to administer the oath to Mr. McCarthy please.

The following witness was sworn in by the Clerk to the Committee:
Mr. Dermot McCarthy, former Secretary General, Department of the Taoiseach, and former Secretary General to the Government.

Okay, once again, thank you, Mr. McCarthy, and if I can invite you to make your opening statement please.

Mr. Dermot McCarthy

Thank you, Chairman. The scale and impact of events which are the subject of this inquiry are such that the work of this committee constitutes an important public service. I wish to support fully the committee in its work by answering your questions and by furnishing, as I have, a statement regarding 15 lines of inquiry before the committee. I will seek in my answers this evening to assist the committee as much as I can, as I sought to do in my statement, by setting out matters within my direct knowledge as Secretary General to the Government within the constraints of Cabinet confidentiality and acknowledging that many were matters in respect of which I didn't have expertise or responsibility. I will summarise my statement under six headings. In my statement, I indicated that I believed the conclusions of the Nyberg commission of investigation provided a broadly convincing account of the circumstances that led to the crisis. Nyberg describes serious failings by a wide range of actors, including a number of key elements of the public service. He notes that, ''Each one is [...] responsible for their own actions and inactions contributing to the accumulation and realisation of risks in financial markets''.

Everyone who was in a senior position in the public service over the relevant period, including myself, is burdened by these failings, and the deep awareness of their human consequences. With the knowledge and analysis of that period which is now available, like others I am challenged by the question of whether I could have done more to avert the damaging outcomes from the crisis. My regret is tempered only by the belief that I have performed my duties to the best of my ability.

On the regulatory regime, following consideration of the report of an implementation group, the Government approved a proposal to establish a single Financial Regulator within a restructured Central Bank. The proposed arrangements were altered following consultation with the ECB. The Government reviewed the provision for a separate board structure for the Financial Regulator as an important focus for accountability and responsiveness to public and consumer concerns. Following publication of the proposed legislation in 2002, further comments were received from the ECB, as a result of which the Governor's role in relation to the budget and staffing of the regulator was strengthened. The ECB also welcomed the fact that the Financial Regulator would remain a constituent part of the Central Bank.

The annual reports of the Central Bank and the Financial Regulator were submitted for information to the Government. These recorded the significant number of inspections of financial institutions carried out, and regulatory returns examined. The report in respect of 2006 highlighted that international independent reviews of the Financial Regulator's performance contain positive assessments of the regulatory system in Ireland. In its report of 2007, the IMF supported as appropriate the risk-based framework operated by the Financial Regulator in prioritising supervisory resources. The Government decided in 2009 to create a new, integrated regulatory system under the direction of the Governor. The Government was advised that, pending the enactment of new legislation, the boards of the Central Bank and the Financial Regulator had made changes to the operation of the existing legislative framework through improved linkages between banking supervision and financial stability.

On fiscal policy, the budgetary cycle involved the Minister for Finance setting out the broad economic framework within which budgetary decisions should be shaped. This provided a context for the engagement by the Department of Finance with individual Departments to settle their spending Estimates. The Department of Finance's proposals were based on securing financial stability and the productive capacity of the economy, while avoiding inflationary pressures and addressing priority needs. The Department pointed out the potential for reverses, both domestic and international, associated with declining competitiveness, exchange rate movements, increases in commodity prices and the possibility of a downturn in construction activity. The Department recommended the maintenance of a cyclically-adjusted positive general Government balance and containing the growth in current expenditure to the nominal rate of economic growth. From 2003 to 2006, the stability programme reports presented to the Government identified a gradual and orderly reduction in housing output to a more sustainable level as a significant factor likely to impact on economic performance, partially offset by growth in other components of investment expenditure. In the report for 2006, the potential for economy-wide consequences of construction-specific developments, such as rising interest rates, was noted. The moderation in prices and activity in the property market in 2007 was highlighted. The absence of a sense of impending crisis was reflected by an assessment by the IMF in 2007, which noted that the banking system was well-capitalised and profitable and that stress tests by the Central Bank indicated that even in an extreme scenario, the major lenders had adequate buffers to cover a range of shocks. Economic policy was not formulated by Government in the belief that there was a serious risk to financial sector stability.

The framing of budgetary proposals in Government discussions had regard to the terms of the relevant programme for Government and specific objectives adopted by the Government. The substantial reduction in the debt-to-GNP ratio, substantial budget surpluses, significant annual transfers to the National Pensions Reserve Fund and an ambitious programme of investment in infrastructure to increase productive capacity, with little or no recourse to borrowing, created a sense of confidence with regard to fiscal matters. There wasn't a single view about the conduct of policy or the outlook for the economy. There was of course awareness of contrarian views occasionally expressed in the media regarding the risks of an economic collapse. It was widely considered that this was improbable, while vulnerabilities were nonetheless acknowledged to exist.

Most decision-making requires judging the probabilities of events occurring while striking a balance between competing objectives in the context of Government policy.

Collective responsibility requires members of the Government to support decisions once taken. The legitimate exercise of its democratic authority by the Government must be respected by officials. For example, the Department of Finance in its budgetary submissions signalled a preference for a lower rate of expenditure increase than occurred in a number of years. In the years leading up to the crisis the direction of Government policy was not significantly altered in the light of parliamentary scrutiny.

On banking matters, the primary relationship between the banking sector and the Government was through the Minister for Finance and the Department. The banking industry was represented by the Irish Bankers Federation and Financial Services Ireland on general policy matters such as the development of the national payment system. From the establishment of the IFSC, the Department of the Taoiseach chaired the Clearing House Group whose members included representatives from the Departments of Finance and Enterprise and Employment, the Revenue Commissioners, the Financial Regulator, the IDA and, later, Enterprise Ireland.

The Clearing House Group and a range of associated working groups provided a forum for exchange of information and suggestions between different categories of participant in the sector. As its name implies, the group was primarily a vehicle for commercial intelligence gathering in the context of the competition between jurisdictions for investment. The focus of the group was the identification of opportunities and a variety of specialist activities, the marketing of Ireland and the tackling of barriers to growth, such as availability of skilled personnel. The operation of a credible regulatory system was seen as critically important in securing the reputation of the industry and attracting appropriate new entrants. Discussion at the Clearing House Group covered a broad range of public policy. Concerns voiced at times about proposals which were seen as disproportionate, by reference to international practice, were pursued bilaterally with the relevant agency. In published strategies for the future of the sector, industry representatives expressed their support for a regulatory system which was effective, consistent and efficient.

Turning to the bank guarantee, in the period leading up to 29 September 2008 the Government was briefed on liquidity difficulties in the Irish banking system by the Minister for Finance and increased the deposit guarantee to €100,000 on 20 September. On the evening of Monday, 29 September a meeting attended by the Taoiseach, Minister for Finance and the Attorney General was advised that, unless measures were taken before the financial markets opened on Tuesday morning, irreversible damage could be done to the economy through a banking collapse. The expectation that no Government would allow a bank to fail, especially in the aftermath of the Lehmans example, was reinforced by the potential consequences outlined to the meeting. It was made clear that no European or ECB initiative was in prospect which would address the immediate crisis faced by Ireland. The advice was that the Government had one opportunity to make a decisive intervention, to stabilise liquidity and secure the Irish banking system. It would have no certainty of success but the alternative was certain disaster.

A request to meet from the chairs and chief executives of AIB and Bank of Ireland was agreed. The banks' representatives confirmed the gravity of the funding situation for the Irish banks, with difficulty in getting even short-term funding from the money markets. The negative sentiment towards Ireland was focused on particular institutions, but all were now impacted. They argued that effective action was necessary to reassure the markets. The Taoiseach and the Minister resolved that a broad guarantee would be recommended to the Government. The option of nationalisation of Anglo was considered, but it was concluded that such action could have more negative than positive effects on market confidence. It was also understood that a decision to nationalise Anglo could be taken at a later date, should it be appropriate.

The guarantee would be offered on commercial terms and would provide a framework for any measures required to build market confidence in the Irish banking system. The approval of the Government was given by an incorporeal meeting which was conducted in the early hours of Tuesday, 30 September. A particular concern was that the guarantee might be challenged on European state aid grounds. It was agreed that a formal notification to the European Commission would be made immediately. A full supporting case, including all of the material considered in the discussion, would be detailed in a submission at the earliest opportunity. The European Commission subsequently approved the decision as an appropriate means to remedy a serious disturbance in the Irish economy.

On the programme of assistance, in response to international concerns by mid-2010 about the State's financial position, the Government began the preparation of a medium-term expenditure framework in tandem with the fiscal responsibility framework.

It was considered that public confirmations for a recovery plan of the adoption of a comprehensive programme of fiscal reforms and specific measures to achieve the necessary deficit reduction by 2014 would improve market sentiment towards Ireland. The continuing dependence of the Irish banks on ECB liquidity support was evident, as was a market view that further recapitalisation would be necessary. The ECB Council conveyed to the Minister for Finance that the Government should apply for European financial support. Department of Finance officials travelled to Brussels for exploratory discussions on the parameters of a possible programme of assistance if the Government were to decide to apply. The tentative nature of these discussions reflected the Government's concern that the conditionality of any such programme could include unacceptable terms such as changes to the Irish corporation tax regime. On 19 November the President of the ECB wrote to the Taoiseach and to the Minister for Finance stating that ELA could only be continued if Ireland applied to the Eurogroup for financial support and proceeded with a decisive restructuring and adequate recapitalisation of the Irish banks. The Minister, in consultation with the Governor and the CEO of the NTMA, sought the approval of the Government for a formal request for external assistance, given that the Government could not borrow in the market at current rates and the serious liquidity problems in the Irish banks. Some days later, the national recovery plan was published by the Government - the programme of external assistance was formally announced on 28 November. Imposing haircuts on unguaranteed senior bondholders was raised with the international institutions during discussions on the programme of assistance. The concept was strongly resisted because of their concern about its potential impact on wider financial stability. In March 2011 the agreement of the ECB was sought but declined for the announcement by the Government of a statement of intent to impose burden-sharing on unguaranteed senior bondholders in Irish banking institutions in wind-down.

On changes since the crisis, with regard to the conduct of economic policy the establishment of the Fiscal Advisory Council and the oversight by the European institutions as part of the European semester have brought a greater transparency to Irish fiscal policy. Policy analysis is supported by greater economic expertise within the public service. The national risk assessment framework is a positive development and the legislation to provide for the registration of lobbyists and lobbying activity should also assist in the monitoring of efforts to influence public policy. It is clear, however, that irrespective of any structural or capacity developments that may be implemented, Governments will still be faced with a need to exercise judgment in setting fiscal policy and in assessing the risk to be taken into account in framing budgetary decisions. That concludes my opening statement Chairman and I am happy to answer the committee's questions.

Thank you very much Mr. McCarthy. If we can begin our questions this afternoon and I will invite Deputy Eoghan Murphy to commence them. Deputy, you have 25 minutes.

Thank you Chairman and thank you Mr. McCarthy, you are very welcome. In your opening statement on page 11, you state that:

Collective responsibility requires members of the Government to support decisions once taken. The legitimate exercise of its democratic authority by the Government must be respected by officials.

You were Secretary to the Government and Secretary General of the Department of the Taoiseach from 2000 to 2011, so you were at the top of the Civil Service for three different Governments and three different Taoisigh. So in that role, if you could just clarify, can you overrule a Taoiseach or Government or act against a Government's wishes?

Mr. Dermot McCarthy

In short, no Deputy. I think there are certain circumstances when one would, like any public official, be required to decline to comply with a direction if it was perceived to be unlawful and there are certain circumstances in relation to the expenditure of resources when one would be entitled to seek a written direction to be copied to the C and AG. But in general terms, overruling Taoiseach or Minister would not arise, I think.

Did you ever seek such a written direction in relation to the use of financial resources?

Mr. Dermot McCarthy

I never had that requirement.

Okay. And you provide the Taoiseach and the Government with advice. Is it safe to assume that you are across the same information as the Taoiseach is across?

Mr. Dermot McCarthy

Not necessarily Deputy. I think in the formulation of policy and the furnishing of advice, the Department of the Taoiseach, through myself, would have provided a core element of information and advice, primarily in relation to the conduct of Government business, in other words, preparation for Cabinet and the management of Cabinet committees and then the particular responsibilities that the Taoiseach would discharge personally. But the Taoiseach would also be in possession of advice from other sources, including his political advisers, his ministerial colleagues outside the Cabinet framework and obviously from other, more direct personal engagements.

The information coming to the Taoiseach through the apparatus of the Civil Service or the Departments, you would be across the same information coming through that stream?

Mr. Dermot McCarthy

In general, but not always.

Okay. And do you have any role in the formulation of policy?

Mr. Dermot McCarthy

Well, there's some aspects of policy where the Taoiseach has a direct personal role, in addition to being the chair of Government, and in those areas, for example. in relation to the conduct of international relations at head of Government level, or the conduct of the social partnership process, when that was under his aegis, then one would be making a direct contribution and giving direct advice. In other areas, it would be largely a matter of co-ordinating material coming from other sources. The Department of the Taoiseach isn't an analytical Department. It doesn't have an extensive policy analysis function. It primarily acts to ensure that information from other Departments and agencies is available and presented in the appropriate way.

And do you advise on matters of judgment?

Mr. Dermot McCarthy

One ... at times. More in relation to process; in other words, where an item is ripe for decision or where further engagement would be desirable.

And your ultimate responsibility is to whom? As the head of the Civil Service, who's your ultimate responsibility to?

Mr. Dermot McCarthy

I wasn't the head of the Civil Service.

Sorry, well, as Secretary to the Government and Secretary General to the Department of the Taoiseach, who were you responsible to?

Mr. Dermot McCarthy

To the Taoiseach.

To the Taoiseach?

Mr. Dermot McCarthy

Yes.

Okay. And when we talk about the responsibility of Government, can we distinguish between the permanent government and the elected Government?

Mr. Dermot McCarthy

Well, the permanent government in the sense of officials in the Civil Service-----

Mr. Dermot McCarthy

-----then there's a very clear distinction. They are there to serve the Government of the day, which has the democratic mandate to make decisions. The role of the Civil Service is to advise, support and implement. I think it is very conscious that is its subordinate role in terms of governance.

So, when we talk about the responsibility of Government, we're talking about the responsibility of the elected Government?

Mr. Dermot McCarthy

Yes.

Okay. On the first page of your opening statement, you say and you stated again, "The conclusions of the Nyberg [report] give a broadly convincing account of the circumstances which led to the crisis." And, on page 7 of the Nyberg report, it says, "The Government actively supported the market over an extended period against the apparently fairly weak but clear opposition of the Department of Finance." Do you agree with this statement from Nyberg?

Mr. Dermot McCarthy

I think that's true, particularly in respect of the end of the '90s and the early years of the 2000s.

Were you aware of this opposition at the time?

Mr. Dermot McCarthy

It was expressed, both in terms of formal submissions to the Government from the Department of Finance and the informal discussions that would take place.

Mr. Dermot McCarthy

Yes.

Okay. In every year, bar one, from 2000 to 2008, the budget package agreed by Government was greater than what the Department of Finance was recommending, and were you satisfied with this outcome to the budgetary process in each of those years?

Mr. Dermot McCarthy

It wasn't a matter for me, Deputy, to be satisfied. I was there to ensure that the decisions were properly taken and recorded and implemented. In terms of the reasons for that outcome, I think, in terms of the analysis in the Wright report, the factors are well set out as to why that would be, including the belief that the opening position from the Department was that: an opening position.

Well, did you ever advise or caution against the increases that were being decided upon by Government versus what the Department of Finance was recommending?

Mr. Dermot McCarthy

I will certainly have advised about the issues that they felt strongly should be taken into account.

Advising in support of those, of taking into account those issues, or-----

Mr. Dermot McCarthy

That they should be certainly taken into account.

Okay. But then they weren't taken into account, is that correct?

Mr. Dermot McCarthy

Well, I think, Deputy, one would have to say they were taken into account but a judgment was made in the round as to what the appropriate outcome should be-----

Mr. Dermot McCarthy

-----and that was the prerogative of the Government.

Okay. Were you ever concerned that irresponsible budgetary decisions were being taken because of a looming election?

Mr. Dermot McCarthy

I think one would have to be conscious that the timing of an election was in the minds of members of the Government. I don't believe that one would necessarily conclude that the decisions specifically were irresponsible.

Okay. How do you explain the reversal in spending in 2002, following the general election? So, at the beginning of the year, for the first six months, spending was 22% higher, year-on-year, but, by the end of the year, it was only 14% higher and, after the election, a memo was sent by the then Minister for Finance to the Departments requesting that they cut back on expenditure.

Mr. Dermot McCarthy

From memory, Deputy, I believe there was also a change in broad economic conditions at that time, including, if I recall, exchange rate movements, which would have had a bearing on the performance of the economy, so I'm not sure it would be safe to conclude that any change was purely a function of the electoral outcome.

Okay. How do you explain the increase in spending in the budget for 2008, given that tax receipts in 2007 were short by €2 billion?

Mr. Dermot McCarthy

Well, as I recall, the advice that came in respect of the outlook for economic growth was that it would still be significant, somewhat below full potential because of the expected decline in construction sector, but it was still, if I remember correctly, targeting a modest outcome in terms of the government balance.

Okay. I think revenues contracted another 14% in 2008, and all of the spending increases for 2008 were reversed in the budget for 2009.

Mr. Dermot McCarthy

That's certainly true, but through the course of 2008, the pace of decline in tax revenue, in particular, was very rapid and striking and the forecast in, as I recall, May, was less than half of the assessment provided to the Government in September.

So given the €2 billion shortfall in 2007, this continuing shortfall in tax revenues wasn't anticipated into 2008 in drafting the budget?

Mr. Dermot McCarthy

I don't believe it was.

Okay. Were you ever concerned that the Government was not using fiscal policy appropriately to manage the economy following the adoption of the euro?

Mr. Dermot McCarthy

I think that there was a concern about the need to ensure that the fiscal policy was appropriate, given the impact of the adoption of the euro, and that there should be, on a cyclically adjusted basis, a degree of headroom to provide for any reversal that might arise. The amount of that headroom as recommended in the June or July annual submissions by the Department of Finance was pretty modest and in most years was, in fact, achieved. So one would, perhaps, assess, in retrospect, that the degree of countervailing force, if you like, to be provided by fiscal policy wasn't sufficiently understood.

Okay. What was your response to the European Council censure in February 2001 which said that they had "repeatedly urged the Irish authorities to ensure economic stability by means of fiscal policy, and it regretted that this advice was not reflected in the budget for 2001 despite developments in 2000 indicating an increasing extent of overheating"?

Mr. Dermot McCarthy

I think there were two strands of reaction to that Deputy. On the one hand there was, I think, acceptance that there was a case to be made in respect of the performance of fiscal policy, but there was also a sense of dissatisfaction that the terms of the censure was not either proportionate or equitable having regard to the performance of other member states.

Let's leave that part of it aside for a moment. But the actual concern it was expressing about the management of fiscal policy. Brian Cowen said in his appearance before the committee - and this is using fiscal policy to counter for economic stability given that we didn't have monetary policy in our control anymore: "Such conditions do not appear to have received adequate attention over the period 2000 to 2006." Do you agree with that?

Mr. Dermot McCarthy

I think in the light of circumstances as they evolved, yes. But I think it's important to say that, as I understand it, the estimate or calculation of the cyclically adjusted balance, certainly in advance, in respect of the Irish economy, is not an easy task. And in the core documents provided, there's reference to the extent of the recalculation by the IMF over the period of the seven months as to what the actual cyclical balance had been, in retrospect, never mind in prospect.

But if we accept what Brian Cowen said to the inquiry, does that mean that the European Council censure in February 2001 was not given sufficient attention?

Mr. Dermot McCarthy

I think it was given attention in the sense that the formulation of budgetary strategy as recommended to Government by Finance did emphasise the importance of securing fiscal sustainability, having regard to the risk that were in prospect, so I think it was acknowledged but, perhaps, not sufficiently.

And yet, despite this, Mr. Wright concluded that Ireland failed the test of prudent fiscal management. Do you agree with that?

Mr. Dermot McCarthy

Yes.

Did you ever feel that the budgetary process was overwhelmed by the programme for Government or the social partnership process?

Mr. Dermot McCarthy

Mr. Wright made that observation or reached that conclusion in a particular context which was that the process was overwhelmed.

In other words, that the way in which the budget was formulated, progressed, debated and adopted didn't allow sufficient time for all of the relevant factors to be taken into account and the pressure for expenditure arising from the programme for Government and the pay terms which were established in the public service through social partnership weren't sufficiently tested. And, in that respect, I think he's probably right.

Okay. You were a member of the McDowell group on the establishment of a single regulatory authority for the financial services sector. Why was your proposal for the new structure, the one that was favoured by Government ... Charlie McCreevy called it the McCarthy compromise?

Mr. Dermot McCarthy

So I noticed. I can't say why it was favoured by Government but I suspect it might have been for the reasons that it seemed to me to be a possible way forward, as a member of the committee. I should say that I was representing the Department nominally because the Department had an IFSC responsibility. At that time, I had no involvement with the IFSC, so mine was a watching brief. And in the discussion, it seemed to me that the desire to have a focus for accountability and engagement through a board, a statutory board, which would be accountable to the Oireachtas, was important but the ... equally, it was important to have a clear, direct oversight from a financial stability point of view from the Central Bank functions. And, therefore, it seemed to me that a process which had a focus for accountability and operational autonomy but overseen by a stability framework made sense, and I suspect it did to the members of the Government as well.

Did the alterations requested by the ECB, did they have a material impact on the quality of our regulation?

Mr. Dermot McCarthy

Arguably, they improved it from the point of view of ensuring that there was, at least, the potential for financial stability to provide the guiding framework for the operation of supervision and regulation.

Okay. In October 2009, in an interview in the Financial Times, Bertie Ahern was reported as stating that the decision to create a new Financial Regulator was one of the main reasons for the collapse of the Irish banking sector. Do you agree with this?

Mr. Dermot McCarthy

No.

Do you take responsibility for the regulation ... the model of regulation that was adopted?

Mr. Dermot McCarthy

No.

Okay. If we could move forward then, please, to 2008, into the crisis period and, actually, if we can go to the evidence book, Vol. 2, page 15. This is ... it'll appear on your screen if you don't have the book in front of you. This is bullet points for Cabinet on 28 September 2008. You see it in front of you there on the screen.

Mr. Dermot McCarthy

Yes.

Yes, it's fine. Here we go.

Thank you. Were the Cabinet aware that a blanket guarantee was a possible option following the meeting of the Cabinet on the Sunday?

That's a more inclusive blanket guarantee, Deputy, yes?

That's right, yes.

Mr. Dermot McCarthy

In answering, Deputy, I have to be conscious of the requirements of Cabinet confidentiality. But I can say very emphatically that there was no decision in respect of any banking matter taken at that meeting.

We know the decision wasn't made until the Tuesday evening or the Monday evening, but it's the formula or the shape in which the guarantee was taken on, Mr. McCarthy.

Just to clarify, at no point in those bullet points, while it does use the word "guarantee" ... it's "Legislate to guarantee/take control of more troubled institution(s)." But there's no reference to a system-wide guarantee.

Mr. Dermot McCarthy

It's difficult to answer your question adequately, Deputy, without indicating what the Minister said, which I'm not in a position to do.

Mr. Dermot McCarthy

But what I can say is that the meeting which was, obviously, about another matter, budgetary preparation, was briefed at ... towards its conclusion, by the Minister on the general situation in relation to banking difficulties and the general state of preparations to engage with them.

Can I just ask what was ... maybe to assist you in answering that, Mr. McCarthy ... is that we completely understand the confines of Cabinet confidentiality and so forth. But in the interim period between the one Cabinet meeting and the other Cabinet meeting, discussions, correspondence, other modalities may have been in play. And in respect of Deputy Murphy's question with regard to the overall shape of an overall inclusive guarantee, was that in that space at that time?

Mr. Dermot McCarthy

To help the committee as much as I can, Chairman, there was no decision and there was no orientation or mandate in respect of an approach arising from that Government meeting.

Okay. Thank you. Back to yourself.

Thank you, Chair. Did the Cabinet Ministers know, upon leaving that Sunday Cabinet meeting, that something would be happening the next day?

Mr. Dermot McCarthy

Again, stretching helpfulness, I think, to the very limit, no.

Mr. Dermot McCarthy

But equally, Deputy, I think it would be fair to say that they wouldn't have been surprised that something did arise.

Okay. Thank you for that. Let's go then to the meeting on the 29th. Did you know prior to going to the meeting that a decision on Anglo would be taken that night?

Mr. Dermot McCarthy

No.

At what time did you reach the meeting and at what point in the discussions?

Mr. Dermot McCarthy

I think I was notified that there would be such a meeting earlier in the afternoon and I arrived at it, I think, some short time before 7 p.m. So I can't say for sure when the meeting started but I suspect 6.15 p.m., 6.30 p.m., something like that.

At this point had the possibility of a system-wide guarantee been put on the table by anyone?

Mr. Dermot McCarthy

Well, obviously I can't say what was said before I entered the room but the discussion was, at that point, certainly dealing with the nature of the problem; in other words, what had happened during the day, the outflow of funds and so on.

Okay. Brian Cowen was chairing the meeting, we've heard in evidence. What was your role at the meeting?

Mr. Dermot McCarthy

Well, my expectation in joining the meeting was that this was a briefing meeting. In other words, in the same spirit as a meeting which I had accompanied the Taoiseach to on the previous Friday, I think, in the Department of Finance. So my expectation was that this was a briefing in anticipation of the scheduled Government meeting the following morning. So my demeanour, if you like, my expectation in arriving was that this would be a matter of hearing a briefing and to prepare what might be put to Government.

Do you have an official minute or note of the meeting?

Mr. Dermot McCarthy

No, other than, obviously, the record of the decision which was my primary responsibility, as it emerged.

We know that bankers who were in the building on the night drafted contemporaneous notes of their ... what they recall had happened either the next day or in the following days. Did you draft any such note?

Mr. Dermot McCarthy

I didn't, Deputy. Perhaps ... just to explain, my primary responsibility as Secretary to the Government was what was the Government's action and what was required of it and, therefore, the conduct of the incorporeal meeting, which ... the minutes of that, obviously, were presented subsequently to Government for signing an adaption as usual. What transpired the following day, of course, was that there was a series of parliamentary engagements where the reasons for the decision were outlined by the Taoiseach and the Minister for Finance and there was extensive briefing and speech material prepared in ... mainly in the Department of Finance for that. It had already been decided the previous night that the notification and submission to the European Commission on the state aid issue would be done immediately and that all of the material which was considered during the course of the night would be reflected in that. And I saw, within hours, material which suggested to me that that process was, indeed, under way and would be comprehensive. So I didn't make a record of my own in regard to the night.

The meeting happened in the Department of the Taoiseach. Who's responsible for the meeting room, the papers left over on the table, drafts of press statements, drafts of guarantees that might have been present in the room?

Mr. Dermot McCarthy

In general, Deputy, where a meeting takes place in that context it's part of the Taoiseach's private office, so his private office staff, as a matter of routine, would take up and generally destroy any documents that would be left behind by those who were at the meeting.

Did you see any documents being destroyed after the meeting?

Mr. Dermot McCarthy

No.

Do you feel, as the Secretary General to the Taoiseach and the Secretary to the Government, that the Taoiseach was lacking in advice from any quarter during the course of the evening?

Mr. Dermot McCarthy

Not lacking in advice, Deputy, he was presented I think with a very stark picture which built on briefings which had been provided over previous days. He had assessments which were based on judgment, in the context of a very fevered international environment, and presented with the necessity to make a rapid decision, which could only be a judgment call, there was no analytical route to the right answer.

Did you know that officials from the NTMA were outside of the meeting room?

Mr. Dermot McCarthy

Not until late in the, in the evening when I learned they were consulted by Kevin Cardiff in relation to some specific aspects of the text of the guarantee.

You said you thought you were attending a briefing ahead of a Cabinet meeting the next day, and Dr. Michael Somers, when he was before us ... gave the following evidence:

I don't know why, if its true, that the two main Irish banks were prepared to pony up €5 billion each, for whatever period, provided they got a State guarantee, I don't know why that wasn't followed. If that is ... and that ... I've been told that that's what the scene was. Now, how that changed from five or six in the evening to guaranteeing everything that moved by three or four o'clock in the morning, I don't know. And, as I say, I think its a bad idea taking important decisions in the middle of the night.

So, how do we go from the possibility or from possibly guaranteeing €10 million, €10 billion to keep Anglo open until the weekend, to guaranteeing absolutely everything in the Irish banking system?

Mr. Dermot McCarthy

Well, in, in terms of the options which were considered, the idea of providing liquidity support for Anglo for a short period, was certainly considered. And it was considered also in the, in the context of the formulation of the guarantee strategy itself, that in other words, there mightn't be an immediate beneficial impact of sufficient scale such that they would still need liquidity support. But it was in the context of the scale of the outflows, which was reported, and very much on the explicit advice of the Governor and the Financial Regulator that in, in taking a step which mightn't be effective, there was a real risk that one would be removing the possibility of taking a second step that would be effective. In other words, there was one shot.

You, you, you believe that there was only one shot, that you couldn't have just guaranteed the liquidity of Anglo to at least get you through to the next day?

Mr. Dermot McCarthy

In, in the light of the advices and the discussion ... I hope that's not me, it is me, my apologies Chairman. I was sure I had ... I will ... indeed, apologies, Chair. I think in light of the advices which were presented and the discussion, there would have been strong concern that if one moved to buy a day or two, that that was money that would be burnt, in the context of the immediate issue but also that the prospect then of taking effective, decisive action would be diminished. So it wasn't seen as a viable alternative.

At any point did you advise against an incorporeal Cabinet meeting, and push for a full Cabinet decision in person?

Mr. Dermot McCarthy

No.

Okay. At any point did you advise against the decision itself?

Mr. Dermot McCarthy

No, I don't think my advice was actually sought in the final run because, in a sense, this was a situation where the expert opinion of the key statutory authorities was what was relevant. But it seemed to me to be a reasonable decision.

Okay. Are you satisfied now in hindsight that the expert opinion of the different State authorities was in the room at the time, given that we know that the NTMA was not present?

Final question now, Deputy.

Mr. Dermot McCarthy

Well, I think in, in all of the circumstances, it would have been preferable if the senior personnel from the NTMA were available and present but their views were known and, indeed, voiced in terms of the discussion by Kevin Cardiff in particular.

But, then from your recollection-----

Final question now, Deputy.

From your recollection, what were those views, as expressed by Mr. Cardiff, as to the view of the NTMA on the solvency of Anglo Irish Bank and on the knowledge of the Financial Regulator as to what was happening in the various financial institutions?

Mr. Dermot McCarthy

I'm not sure that there was any view conveyed in respect of the solvency of Anglo Irish, but there was certainly an NTMA view that nationalisation would be desirable.

And in relation to the knowledge of the Financial Regulator and whether or not you could trust the information that they had, if they had all the information that was needed to make that decision?

Mr. Dermot McCarthy

I think that the ... I'm not sure that I recall any view in respect of the regulator being expressed either vicariously or directly by NTMA.

Okay, thank you and just-----

Okay, right we are moving on. Senator Marc MacSharry.

Thanks very much. And thanks very much, Mr. McCarthy, and sorry to have you here so late. Can I ask you, in the lead-up to the decision on the guarantee did you consult with any parties outside your Department such as the Central Bank, the NTMA, members of the IFSC clearing house, on the options that might be available to Government?

Mr. Dermot McCarthy

No.

In terms of Mr. Trichet, did Minister Lenihan advise you of any telephone conversations he ever had with Mr. Trichet, in particular regarding the burning of bondholders or burden-sharing? And, if so, can you advise on the contents of any discussions around that?

Mr. Dermot McCarthy

So ... not just in respect of the period of the guarantee?

Well ... anything that you might think is pertinent, but certainly that.

Mr. Dermot McCarthy

Okay, well, I don't recall the Minister saying anything in respect of communication directly from president Trichet on the night of the guarantee, put it that way, but there was a report from the Governor on his conversations with the ECB. Subsequently, particularly in the evolution of the banking strategy and then later again in the run-up to the bailout decision, certainly the Minister would have had a number of conversations with president Trichet, obviously, routinely in the ECOFIN context, and he would frequently have reported those, both formally to Government and more informally.

We might talk about the bailout period later but in terms of the guarantee itself, is it your understanding that there were clear communications perhaps, rather than phone calls as you've said? And did they always manifest themselves through the Governor? And thirdly, when the Governor spoke about such issues was it always understood to be the case that if the Governor spoke this was Jean-Claude Trichet's position?

Mr. Dermot McCarthy

Well, I think if the Governor was purporting to reflect the view of the ECB, then, clearly, that would have been the case and, certainly, in the course of the meeting on 29 September, he was very explicitly reflecting what he had heard from President Trichet. The Governor, obviously, is a member of the ECB council so would normally be expected to reflect the position of the ECB in any event in terms of ECB functions. But I think the Governor would always have made it clear if he was purporting to represent the view of the president, as such.

Kevin Cardiff, in his witness statement, said that the National Recovery Plan 2011-2014 was finalised in time to be the main influence on major parts of the programme of assistance, and that the troika partners were happy to accept the four-year plan that had been developed in Ireland and to build on it. Can you elaborate on the substantive differences, if any, between the troika's position in the negotiations and the provisions within the national recovery plan?

Mr. Dermot McCarthy

Well, I suppose the primary difference between the two is that the recovery plan, as published, didn't deal with banking matters in detail. It was primarily a fiscal framework for achieving the 3% deficit by 2014 with a strong set of commitments and messages about growth and jobs strategy, which, of course, were critically important in terms of debt sustainability. So that was the primary difference.

On the fiscal adjustments and the pace of the adjustment to achieve the required deficit, I don't think there were any significant differences, Senator. Obviously, in the memorandum of understanding, some of the content of the national recovery plan was expressed in a more granular way in terms of timescales and deadlines and so on.

In your statement, you said that the European Commission and the ECB, excuse me, favoured a front-loading of adjustment within an overall adjustment of at least €15 billion by 2014. Were they specific ... to where, you know, on the fiscal plan - you said the fiscal plan was the difference, rather, that didn't include the banking side - and were they specific on where there needed to be cuts? Mr. Cowen, when in, in his own evidence in questioning, we asked him and he said that there was flexibility. Was there flexibility or was there... were they prescribing measures or were they just interested in the bottom line?

Mr. Dermot McCarthy

Their primary focus, I think, was on the bottom line. In other words, the pace of the adjustment. And there was certainly a view that the initial phase of this multi-annual plan should be as ambitious as possible and there was discussion about figures of €7 billion, €8 billion, €9 billion, as opposed to the €6 billion which was ultimately adopted. On the specific measures, in the course of consultation ... and I think Kevin Cardiff's evidence was correctly specific about this, that the text of the plan wasn't shared with the international institutions, to my knowledge, but there was certainly discussion about issues which might be addressed, some of a general structural kind, obviously the broadening of the tax base as part of the adjustment. They were also, I think, very emphatic about the need for labour market adjustments and, in particular, the reduction in the national minimum wage.

Just ... when you said there that the text of the plan wasn't shared with the international institutions, who was it shared with, if it wasn't shared with them? Was that not-----

Mr. Dermot McCarthy

Sorry, Senator, just to be clear, the text was in draft being worked on by officials from a number of Departments. Elements of it had been submitted to Government. In fact, I think, perhaps in three instalments, the text was considered formally by the Government. So while that process was under way within the Irish system, the text wasn't shared with the international parties. That happened, I think, in the couple of days coming up to publication, which, from memory, was, I think, 24 November.

So as yourselves, in conjunction with the line Ministers, prepared a plan independently, you weren't liaising with anybody of the three institutions who ultimately were the troika, is that the case?

Mr. Dermot McCarthy

In parallel with the internal preparations, obviously there were discussions going on which started, I think, in October, as I recall, when the normal consultation with the Commission would be happening as part of the general, I suppose, liaison and oversight arrangements at that time. And that developed then into the precautionary discussions that Kevin referred to on foot of the pressure to engage in a programme of assistance. So during that process, things which would appear ultimately in the recovery plan were certainly being discussed in substance with the Commission and IMF people but they weren't party to the drafting, shall we say.

Okay, so just to summarise it - you correct me now if I'm wrong, because I don't want in any way to be seen as being judgmental - you were, kind of, making suggestions through the back channels, that, you know, "Would this work or would that work?", and they were giving their reaction to that. Is that-----

Mr. Dermot McCarthy

Well, I think the substantive issues had been flagged in discussion for some time, so I don't think it was a matter of seeing would an item run. It was ... and I have to say, I wasn't party to and the Department of the Taoiseach wasn't party to those engagements-----

Mr. Dermot McCarthy

-----but, as I understand it, if you like, the substantive policy issues were the subject of discussion before they were finalised by Government.

And, again - sorry to make you repeat yourself now - you said earlier that the partnership was an issue that they did want to, kind of, visit. And did you say the minimum wage or what was the second one?

Mr. Dermot McCarthy

I don't think I mentioned partnership-----

Mr. Dermot McCarthy

-----but the national minimum wage was certainly an issue that they felt would be an important structural adjustment that would facilitate jobs growth. That was also a view shared in parts of the Irish system, so it wasn't an imposition.

Was it a red line issue? Not for the Irish side now, I'm talking about the institutional side - the three institutions.

Mr. Dermot McCarthy

I'm not in a position to say, Senator; I rather doubt it.

Would you know was it the IMF or the Commission or the ECB that raised this issue? Or were they all three at one on this issue?

Mr. Dermot McCarthy

From memory, I think the reporting by colleagues suggested that it was the Commission who were most convinced of the merits of this approach.

And was it their position that the minimum wage should be reduced or increased?

Mr. Dermot McCarthy

They weren't for increasing it, Senator, no.

They were for reducing it then.

Mr. Dermot McCarthy

Reducing it, yes.

Okay. And did they prescribe how much or do you know?

Mr. Dermot McCarthy

I don't believe so but I couldn't say for sure.

Okay. Was there a discussion in the Department that may be we could do 50 cent or €1 or €2 or ... what way did that work? Do you know?

Mr. Dermot McCarthy

There was a discussion ... there was a cross-departmental/ministerial discussion about, obviously, the emerging text of the national recovery plan, and the pros and cons of that issue were certainly discussed.

Okay. Did you feel that the approach by the Commission to reduce the minimum wage was accepted by our side or the Government's side of the day as opposed to our side? Or was it something that was a bone of contention for the negotiators and ultimately the Minister?

Mr. Dermot McCarthy

No, I think it was accepted by our side as an appropriate adjustment.

Any other issue? I think you mentioned two when you mentioned the minimum wage. Was there another issue that was ... that there was?

Mr. Dermot McCarthy

Well, there was a related issue which was the system of employment regulation orders and sectoral wage regulation which-----

Just explain to people that might be watching. Is that, for example, if electricians worked that they get so much an hour or bakers or ... and so on like that?

Mr. Dermot McCarthy

Yes, the system applied to some designated industries or occupations. In the end, what was provided in the recovery plan was that this system would be reviewed as indeed it was subsequently.

Okay. And were they prescribing in any way that these should be reduced or-----

Mr. Dermot McCarthy

No, I think they were unenthusiastic about such systems of wage regulation. But there was a strong view in the Irish system that that process, generally-----

Could be visited?

Mr. Dermot McCarthy

-----should be revisited.

Okay. Were there any other issues, just to move off this point then, that you felt through colleagues, I know that you weren't directly involved, were being prescribed in some way as "must be included" issues?

Mr. Dermot McCarthy

I don't believe so, Senator. I think there was a strong measure of endorsement, indeed, of the broad approach.

So, would you agree then that ... would you agree with Mr. Cowen that there was flexibility on the side of the Irish Government as to how, to use my quote from earlier, "the bottom line" was arrived at?

Mr. Dermot McCarthy

Well, I think there was ... the overriding priority, Senator, was to have specificity - what was actually going to be done. That was required initially in the drafting to improve market sentiment that Ireland would be able, in fact, to achieve the targeted deficit reduction. As things evolved, it was also necessary to be specific so that the terms of the programme of assistance would be equally clear. So that was the overriding concern. So there was flexibility within that framework but there was also a strong analytical base for choosing the things which were specified in terms of structural change, both on the revenue raising and the expenditure reduction side.

Were the ECB active in these negotiations ... this portion of the negotiations or were they more focused on the banking side of things?

Mr. Dermot McCarthy

Again, because I wasn't directly involved, Senator, I wouldn't like to mislead you with a guess but I know that they were particularly concerned, obviously, about the banking issues.

Okay. In Mr. Trichet's letter of 19 November 2010, he said and I quote, "If you don't do this, your banks will lose access to ECB and even national central bank support with disastrous consequences for your country." Do you have any insights, perhaps, from the Department of Foreign Affairs' colleagues or bank contacts on why this letter was sent, given that it would appear from evidence, the bailout process had at least formally commenced in the months leading up to November 2010?

Mr. Dermot McCarthy

Just to say, Senator, I don't recall the text of the letter being quite in that form but that was certainly the message.

I think it's ... it is a puzzle. As you say, the process of, at least, preparatory engagement was well under way and I can only assume that it reflected the sense of anxiety on the part of the ECB about both the extent of their exposure to the Irish banking system, but also the broader euro situation where the fragility, the spreads vis-à-vis peripheral member states and so on were creating a very worrying outlook. And I think the need to, in a sense, close off this particular source of instability was probably a very high issue of concern. I've no greater insight than that.

Just for the record, Chair, I have quoted verbatim from the committee document as opposed to ... I haven't paraphrased in any way. So if it's incorrect, it's incorrect here from me. So, then when we got the banking side of the bailout or of the agreement, was there ... whereas the Commission had been prescriptive only in part on two issues and suggested that you could usefully look at the minimum wage issue and the service agreements issue, did the ECB take a similar benign approach to the banking side and allow you to make the suggestions or was it a case that as, "We had the use of a quarter of their loan book'', as another witness put it, they were going to call the tune?

Mr. Dermot McCarthy

I think they, but not just the ECB, had concerns that this programme should provide a clear basis for rectifying, once and for all, the Irish banking problem, both through the availability of capital and through the restructuring of the system itself. There was, obviously, concern in the Irish side, the Government side, that the cost of taking on capital commitments should be kept to the minimum, and that the degree of capitalisation should provide only enough, and not more than enough, to meet all the, if you like, prudential and objective requirements. Obviously, there was a concern that the degree of capitalisation shouldn't produce negative outcomes, such as, for example, the desire to have a rapid deleveraging of the assets of the Irish banking system, which could produce significant losses and further capital requirements. So, there was certainly tension in the process around that issue and the outcome, as you know, was a combination of a direct and immediate or almost immediate, draw-down and capitalisation. And a contingency provision which would be brought into play following the prudential capital assessment.

Ann Nolan testified: " A number of lMF officials were strongly in favour of burning any unguaranteed and unsecured bonds in Anglo." Against that background, are you aware of any preparations for burden-sharing being made, even on a contingency basis, prior to entering negotiations with the troika?

Mr. Dermot McCarthy

I believe that those issues were being addressed in the Department of Finance. I can't say that I'm aware of this particular arrangements or preparations that were put in place. But I ... from the ... my recollection of the conversations, there wasn't a suggestion that this mightn't be feasible to do. So I assume whatever issues that were there were being addressed.

But would it have been looking at, kind of, legislation or whatever was needed to do this or-----

Mr. Dermot McCarthy

I imagine so but, I'm not privy to the-----

Okay, so you're not really aware of that?

Mr. Dermot McCarthy

No.

Okay. You mentioned in your statement that external advice tended to be - I don't know whether "limited" was the word - but it tended to be the Governor of the Central Bank and the CEO of the NTMA'. Isn't that correct?

Mr. Dermot McCarthy

Yes.

When we had Mr. Somers, the then CEO of the NTMA in here, he painted a scenario where ... I must paraphrase slightly that he spoke of, ''We were the ones with the money and that's what they wanted us for."

He also spoke of - on the night of the guarantee in question, and Deputy Murphy may have mentioned this - sitting in a room endlessly, for hours, but that this was the norm. And I think he recalled anecdotally an occasion where he was there waiting to be consulted on some issue of the day, as often was the case, and the people came in and said, "Oh, you're here? We're going to lunch, we'll see you after." In your experience should the NTMA have been consulted a lot more on the basis of their market, practical knowledge, on all of these issues?

Mr. Dermot McCarthy

Well, maybe to draw a distinction between the period leading up to the guarantee and perhaps immediately around that, I can't but believe, Senator, that the sense of an absence from the process was, was largely a function of the fact that they were abroad on the particular night, so I don't think there was-----

But they'd hardly all be abroad, I mean?

Mr. Dermot McCarthy

Well, I think the key ... sorry, I don't want to-----

Wasn't there about 160 staff or thereabouts?

Mr. Dermot McCarthy

But from the point of view of the interface with Government, I suppose the key figures were the chief executive and his deputy.

Mr. Dermot McCarthy

Not to diminish the worth of everyone else.

No, no, absolutely not, indeed. But was the practice in your term of office that of the 100 to 160, or whatever number of employees it is, that only two liaised with-----

Mr. Dermot McCarthy

No, I'm sure-----

As in the CEO and ... I don't know what Mr. McDonagh's role was. There was ... there's kind of three main positions there, isn't there?

Mr. Dermot McCarthy

Well, clearly Mr. McDonagh was in-----

Mr. Dermot McCarthy

-----fairly regular contact with, and engagement with, the Department of Finance and I think there's evidence before the committee about the extent of that. The point I'm making is that in terms of formal engagements with the Taoiseach and members of the Government, it would have been the CEO or the deputy.

Was there an attitude around Government Departments generally that, "Look, we don't need those guys, don't ring them"?

Mr. Dermot McCarthy

I don't believe so. I mean, I think it's not a secret that there were issues about the ... in the relationship between the Department of Finance and the NTMA, as there always are between-----

Mr. Dermot McCarthy

-----distinct organisations in the same sort of field.

But, with the benefit of hindsight, in practice, would this have meant that, to our detriment perhaps, we didn't consult some of the other 157 staff if the main three were outside of the country?

Mr. Dermot McCarthy

No, I don't believe that's the case, Senator. The, the CEO and others were present at briefings with the Taoiseach in the days before the guarantee. There was a very good relationship between Dr. Somers and Taoisigh directly. The NTMA was regarded across the system, and I believe in the Department of Finance in particular, as a very expert body, and its views were both sought and respected. So I wouldn't draw any inference from the particular conjunction, no.

So would you not agree with Mr. Somers's evidence that they were, kind of left, in rooms more than consulted? And I'm paraphrasing somewhat, I don't wish to lead.

Mr. Dermot McCarthy

I, obviously, accept that that's what Dr. Somers said, but being left waiting, dare I say, is not entirely unknown in public service, so I wouldn't regard it as-----

As you can testify this afternoon, Mr. McCarthy.

Mr. Dermot McCarthy

Quite so.

Absolutely, and can I say it's largely because of me, so I apologise. Just two other questions and I'll finish up, if I can. I've asked this to a lot of the secretaries of Departments that were in: can you outline if there were any requests from political outside bodies or otherwise, for reductions in expenditure or increases in taxation between 2000 and 2011? Other than from people like the IMF. I mean, I'm talking civil society, politicians, interest groups, unions.

Mr. Dermot McCarthy

I can't recall too many requests to have budgets cut, though there were cases where people sought independent sources of revenue through charging of one kind or another, with a ring fencing attached.

Give us an example of that, if you would, because you are the first to answer in the affirmative, of all your colleagues.

Mr. Dermot McCarthy

Well, I find it hard to recall specifics, but things like the introduction, or the increasing in charges for services, passports-----

Like plastic bag charge, for example, is that what you mean?

Mr. Dermot McCarthy

Not particularly, but charges for passports, that sort of thing-----

Who would have been looking for an increased charge for that, for example?

Mr. Dermot McCarthy

The agencies that would expect to keep the proceeds of the increased charge.

Mr. Dermot McCarthy

Well, a Department or an agency-----

Oh, but sure, they're State, like. I'm mean I ... I mean I'm talking about inside ... outside the State.

Mr. Dermot McCarthy

Oh outside, no.

All right, okay. Very finally then, there was some allegations made by the senior economist of the Central Bank that he had difficulty in getting his points across from time to time, on the basis that he felt that there were political and property interests on the board of the Central Bank. In your entire career, can you outline for us if, at any time, you felt there was an undue political property or business interest with the leg of the Governor of the Central Bank, the regulator or, indeed, Government?

Mr. Dermot McCarthy

I have absolutely no basis for, for believing that, Senator, from anything that I observed.

Okay. Thank you. Mr. McCarthy, I'll just deal with one or two issues and propose we might take a little bit of a break then. Mr. McCarthy, on ... Kevin Cardiff stated in testimony that a one-page draft guarantee document was produced on the night, this is the night of the guarantee, and it was copied and was circulated. So, I'll just bring up ... it's coming up there, Mr. Cardiff's statement, you'll see it there as the paragraph ... at the lower side of the page, it says, "In fact, the decision/press release went through, probably, a dozen drafts, each one mostly only a little different to the previous, before it was finalised." When this was discussed further with Mr. Cardiff, when he was before the inquiry, there was an engagement between Deputy Doherty and Mr. Cardiff which ... the transcript would read, Deputy Doherty speaking says, "Okay and the 12 drafts of the statement that you mentioned in your opening statement that were created, were any of them circulated or were they saved on your computer, or were they just ... was it an open file that kept continued to be edited?" and so on, to which Mr. Cardiff replied:

It was probably an open file. I was sitting at the computer of a guy called Joe Lennon who was one of the Taoiseach's advisers simply because his room happened to be next door. I think Joe or someone else was going in and out. I might have been in and out myself but that it was an iterative process.

Deputy Doherty then said "So none of those documents were ... none of those drafts were circulated at any time to the meeting ... any of [those] drafts?" To which Mr. Cardiff says: "Oh, no, they were all circulated at the meeting." So the 12 drafts found themselves in the room at every given stage. Do you know who produced this draft document right from the get-go and did you receive a copy and what eventually was done with the copy circulated?

Mr. Dermot McCarthy

Yes, Chairman, I think the origin of that was ... has to have been the draft which William Beausang referred to in his evidence, which he had received, I think via David Doyle, from an original draft in the Central Bank, and I ... I've seen that in material which was sent to me yesterday. I wasn't aware, until the evidence of William Beausang, that there was a draft generated in the Central Bank. There was a draft on, on the night, which was produced. But, it was produced, as I understood, from within the room, so to speak, or from Kevin, Kevin Cardiff's drafting. It did go through a number of iterations in discussion-----

But who put the first draft of the 12 manifestations of that draft onto the table, Mr. McCarthy?

Mr. Dermot McCarthy

I believe, for, like, to the best of my recollection, it would have been presented on the table by, by Kevin Cardiff, I think-----

Mr. Dermot McCarthy

-----who also made the subsequent adjustments.

Mr. Dermot McCarthy

The various iterations of them - and they did go through ... it did go through a number of iterations - I believe are still available on ... or, at least I would be surprised if they are not still available on the Department of the Taoiseach system.

Well, that's going to be my final question now, 'cause I'll come around to that, okay? So, can I ask you, can you outline the content of the original version? Was the first version an all-inclusive guarantee?

Mr. Dermot McCarthy

I can't recall, Chairman, the detail of the first version, but it did go through a number of iterations and the two, I suppose, substantive changes that arose and persisted. One was in terms of the giving of six months notice for the termination of the guarantee; that was removed. There was another, which I can't immediately recall, but in terms of the spread ... Sorry, the second change was the reference to all institutions being solvent, that warranty by the regulator.

They are technical aspects of the guarantee or maybe difficulties might arise, it would have to be clarified out and they would be worked back and forth as the draft is evolving over the course of the night. But the substantive part of the statement is whether the banks were going to be included in it or totally included or as not, which I would imagine would be a very significant moment in that draft at whatever stage. So at what stage do you recall that actually being in there?

Mr. Dermot McCarthy

My recollection, it was quite late in the meeting before a text of that kind came on the table, much later than ... I think William Beausang referred to 9.20 p.m. or 9.30 p.m. as being when he received this draft. My recollection is that it would have been considerably later than that before there was a text on the table.

Okay. Coming back to my final question on this - can you explain why it would appear that a copy of this document does not appear to have survived a meeting?

Mr. Dermot McCarthy

Well, I may be wrong in this, Chairman, but my recollection is that the various stages of the drafting - certainly the later ones from the time it appeared on the table - would still or should still be in the system because, apart from their drafting, my recollection is that they were e-mailed to the Department of Finance press officer, who would, ultimately, have been the person issuing it. And I recall, vaguely, seeing documentation which, I think, might have been being put together for the Nyberg commission, which had that material so unless I am misremembering, I think there should be the possibility of recovering at least some of them.

Have you seen a draft of that document or one of the 12 variations of it since that night?

Mr. Dermot McCarthy

Since the night, yes. As I say, before I retired...

As to how recent have you seen one of those drafts?

Mr. Dermot McCarthy

I would say I saw them before I retired.

Which was when?

Mr. Dermot McCarthy

2011.

Okay. Was it one draft or a number of drafts that you saw?

Mr. Dermot McCarthy

From memory, Chairman, I think there were a number and I think it was in the context of the Department putting together material for Nyberg.

And on the basis of - bearing in mind it is recollection - where did you see those documents?

Mr. Dermot McCarthy

Well, within the Department of the Taoiseach but------

The Department of the Taoiseach.

Mr. Dermot McCarthy

Yes.

Okay, right. Thank you.

Excuse me, Chairman, can I ask for a clarification?

You can, indeed.

Mr. McCarthy raised a point about the solvency in the draft and I wonder if you could just seek a further clarification because it was raised as one of the drafts.

Just put it in there and I'll take it.

Thank you. Mr. Sheehy said in his evidence that the expression about solvency, about the banks being all solvent, that that would be in the final draft and it was taken out. I am just wondering what your recollection of that particular part of the draft was?

Mr. Dermot McCarthy

In an early... I cannot say how early, but in an earlier version of the text, certainly it did refer to the Financial Regulator confirming that all of the institutions were solvent. But I do recall in the discussion that the regulator was uncomfortable with that, not because he didn't believe it but because in effect a public assertion of that in a Government statement would carry market implications. Now, I saw Mr. Sheehy's evidence to the committee and I have no doubt there was also a parallel, perhaps, conversation, but I do recall the regulator being unhappy that that would be expressed in that way.

Okay. I just want to deal with one issue with regard to the guarantee on a more macro level with you, Mr. McCarthy, before we break. And that's to put the question to you: in your opinion did the duration of the guarantee, which was a two-year duration, create the conditions for the funding cliff that precipitated the bailout?

Mr. Dermot McCarthy

It may have done, Chairman, in this sense: that clearly a time-limited guarantee was always going to create an exit issue. Now, that was anticipated quite early on and my recollection is that, in early 2009, the Minister sought the approval of the Government to seek agreement for a variant on the guarantee scheme to allow the issue of longer-term bonds and there was then a new scheme, the eligible liabilities guarantee scheme, which was approved by the Commission much later in 2009. Then there was the question of extending the period from September 2010 and, from recollection, I think it was June, or mid-year, that that approval was received. So, there were attempts to avert that cliff situation emerging but, I think, in practice, it did contribute to the timing, the build-up of those liquidity pressures in the latter part of 2010.

So, on that basis, just, and just to clarify and summarise it, so what you ... are you proposing that there was some consideration or concern with regard to the appropriateness of the duration and was that being reviewed during that time, prior to its point of expiry - like, for instance, one year in or 18 months in or whatever - that's what you're saying this evening, yes?

Mr. Dermot McCarthy

Yes, well it wasn't that the original two-year period was inappropriate but that there would be steps taken to ensure that the exit process would be well planned. But that wasn't, obviously, the sole motivation because the ongoing liquidity challenges and, indeed, the recapitalisation programme-----

Mr. Dermot McCarthy

-----required clarity about the funding supports that would be available.

And also, one year into the process or towards the end of year 1, or on ... coming into the transition then of the first tranche of loans to NAMA were happening at that time, so did the Government consider a review at any point prior to that and then, particularly, prior to the bailout?

Mr. Dermot McCarthy

Well, I think the decision to seek a further extension of the period was certainly contributed to by the consequences of the NAMA transfers and the market reaction to them. In particular, the level of the haircut and the period that it took to make the transfer.

Okay. All right. Thank you, Mr. McCarthy. It's just coming up to about 7.10 p.m. I'm proposing that we break for 20 minutes or just in about that. The other thing, if I can maybe just ask members' permission just to come back maybe about two or three minutes before that, as I just want to review one document, then make a decision on it, and we'll see where we're going from there, okay? Mr. McCarthy, you're excused ... or suspended. So, the witness is reminded that once he begins giving evidence, he should not confer with any person other than his legal team in relation to his evidence or matters that are being discussed before the committee. With that in mind, I now propose to suspend the meeting until 19.30. Is that agreed? And to remind the witness that he's still under oath until we resume. Thank you.

Sitting suspended at 7.09 p.m. The joint committee resumed in private session at 7.30 p.m. and went into public session at 7.55 p.m.

We will resume in public session and, in doing so, I'll invite Deputy Pearse Doherty for ten minutes of questions, please.

Go raibh maith agat, a Chathaoirligh, agus fáilte. Can I ask you what contacts, if any, did you have with the ECB, the IMF or the EU Commission on the design of the national recovery plan? And, if there were such contacts, what were the key actions sought by them?

Mr. Dermot McCarthy

I actually didn't have any direct contact, Deputy, in the ... those discussions, but I was aware of how they were proceeding from the cross-departmental discussions led by the Department of Finance, who were the main interlocutors.

Okay, and, Mr. Trichet would have been in correspondence with the Minister for Finance and the Taoiseach ... cc'd into the Taoiseach, so you would have received that correspondence, would that be-----

Mr. Dermot McCarthy

Yes, I would have been aware of, specifically, the letter of 19 November in 2010.

Okay. You were mentioning to Senator MacSharry in relation to issues that the Commission may have had in relation to the recovery plan. How were you aware of them if you weren't in any discussions with contacts?

Mr. Dermot McCarthy

From the reporting by the officials in Finance.

Okay. Ms Kathy Herbert gave evidence to the committee saying that the corporation tax - on foot of a question from Deputy McGrath - was it a red line issue for the Minister and she answered that it was, not just for the Minister but for the Government. Is that your understanding?

Mr. Dermot McCarthy

Absolutely. It was the-----

Mr. Dermot McCarthy

Initially, it was the dominant concern when the question of a possible programme of assistance was mooted-----

And so, when you talk about a red line issue, basically, if there was a push on the corporation tax, was it the position of the Government that they wouldn't have entered into a bailout?

Mr. Dermot McCarthy

I can't really speculate on that, Deputy, as to what might have happened in that eventuality, but, the whole purpose of resisting, if you like, the pressure to apply, was designed to prevent a loss of bargaining position in the event that that would be put on the table as a condition. There were grounds for believing that it might, as there were for other issues, like collateralisation, and I think the Government, in my view, rightly, decided that it wouldn't be pressed to confirm that it was applying until it was satisfied that such unacceptable conditions were not going to arise.

But doesn't a red line issue, by definition, mean that you won't go beyond that point, so, therefore there would be no deal if there was a push on corporation tax? Was that an active consideration, to your knowledge?

Mr. Dermot McCarthy

I can't recall that it was ever discussed in those terms, but it was certainly, if you like, the priority in the engagements to ensure that it wouldn't come to that point.

Okay. So, it would be more a priority than a red line issue. Is that what you're telling us?

Mr. Dermot McCarthy

It was a priority that could, perhaps, have become a red line.

Okay. And, in relation to cuts to the minimum wage or cuts to those with disabilities that took part in the pension ... or, in the four-year recovery plan, were they red line issues or priorities for the Government, or were the Government eager to pursue those areas?

Mr. Dermot McCarthy

I think it's fair to say, Deputy, the Government weren't eager to do any of the expenditure adjustments, or, indeed, the tax raising ones. The question was what would be effective in achieving the outcome which stability required. In the particular case about the national minimum wage, which I mentioned, I do recall that as being referenced as a matter of particular interest from the Commission. It coincided with a view, developing in the Irish system, that, perhaps, this was, indeed, a timely way of stimulating employment growth in, in effect, the low wage, low productivity areas of the economy.

Do you believe now, in hindsight, that that was an appropriate move, to cut the minimum wage by €1?

Mr. Dermot McCarthy

I think the Government believed it was the right thing to do.

Personally I was not convinced.

Were you convinced at the time?

Mr. Dermot McCarthy

No.

Did you argue against it?

Mr. Dermot McCarthy

I pointed out some downsides.

Was that a view of just yourself, or was it the Taoiseach's view? Was there support for your view?

Mr. Dermot McCarthy

I think there was a period of quite free ranging discussion about pros and cons of different structural adjustments. I would have contributed my point of view as others did theirs and the Government decided.

Okay. Can I ask you just to refer to Vol. 2 of the core booklets on page 18 actually, if we go to that one first. Page 17 and 18 have minutes of the meeting on 30 September 2008 which you were present at, and it talks about different options - nationalisation, guarantee - the minutes are vague, they are Kevin Cardiff's notes. At the end of it on page 18 it says "DMcC [which is yourself I presume] want [very] clear statement of pros and cons of each." Which I presume is the two options that were on the table - nationalisation of Anglo and maybe Nationwide or a system-wide guarantee. Did you ever receive the pros and cons of each?

Mr. Dermot McCarthy

I didn't and my recollection sparked from that reference is what was I think contributing to there was that in the ... if you like in the explanation of what was decided and in the formulation of the case to the Commission for state aid approval, that we would want to be very clear that the options had been considered and the reasons why this was the appropriate one. So I think that was the context in which I would have made that observation. It sounds like the sort of contribution I would have made in other contexts too.

But you never received the pros and cons.

Mr. Dermot McCarthy

I was satisfied that the comprehensive case, if you like, was prepared.

Which side were you on on the debate on the night? We have evidence that certain people in the room argued for a nationalisation. Which side were you on?

Mr. Dermot McCarthy

In that discussion and, indeed, in many discussions on banking matters, I had no particular expertise to bring to the table. So I was listening to the debate to, I suppose, assist the Taoiseach in trying to refine what were the net issues. And it seemed to me on the particular issue of nationalisation that the case that this was something which could have a negative as opposed to a positive outcome, was credible. And it was enhanced by the fact that you could move on and nationalise later. But if you made an announcement about nationalisation that wasn't well received, you couldn't undo it. So from a purely prudential practice point of view, it seemed a logical approach to take and in that sense I was happy.

For those that were arguing for the nationalisation, which we understand includes the Finance Minister, what was the rationale behind the arguments for nationalisation? The committee has heard evidence that the issue of solvency was, and this is paraphrasing, but was part of that argument or the loan book of the banks was part of that argument. From your understanding of being present on the night, what was the rationale to nationalise one of the banks instead of guaranteeing it?

Mr. Dermot McCarthy

I think the core point was that the business model was not one in which the market had confidence and this was separate from solvency. In fact, there were, as the committee has heard, strong assertions from the regulator that the bank was solvent. But the question was was the negative sentiment towards it creating a negative overspill across the rest of the system. So being seen to engage with that, address it and, in a sense, send a message that restructuring of some kind would occur was, I think, the attraction.

Was there anybody on the night of the guarantee that night, that were raising concerns in relation to losses in the loan book of Nationwide or Anglo Irish Bank or raised issues around potential future solvency of these institutions?

Mr. Dermot McCarthy

There was certainly discussion of the potential for losses on their loan books and that this would be in a sense a function of the duration of the environment ... the negative environment. But I don't recall that anyone was of the view that this was inevitably or surely going to lead to insolvency.

Did anybody raise the issue of any banks potentially needing additional capital?

Mr. Dermot McCarthy

Not explicitly, but I think there was a strong sense that this measure - this, if you like, pre-emptive measure, as it's been described - would stabilise a situation which wouldn't necessarily be solved as a result; that there was more work to be done.

Okay. And in relation to that night, did you arrange to have minutes taken, as Secretary General of the Department of the Taoiseach, of the meeting?

Mr. Dermot McCarthy

Not specifically, Deputy, no. The ... and, I suppose, as others have said, it wasn't a matter of one meeting which-----

Mr. Dermot McCarthy

-----continued, but in terms of the ... if you like, the main points of the discussion, they were repeated, if you like, from different perspectives and different angles over the course of the evening, so the net points under discussion were actually quite specific and-----

Mr. Dermot McCarthy

No.

Okay. And can you enlighten the committee - without, obviously, breaching Cabinet confidentiality - of the difficulties, or otherwise, of having the Cabinet meeting convened by telephone? And how long did it take? When did it start? How long was the process before all Cabinet members signed off? Were there difficulties or not? Was there a consideration of having a Cabinet meeting, summonsing people to Dublin and so on? Can you enlighten us as to how that transpired?

Mr. Dermot McCarthy

Well, I think at a certain point when it was clear that a Government decision would be required, and would be taken, it was probably, I would say, approaching 11 o'clock when that was, if you like, unambiguously clear and I think the Taoiseach made the judgment that it wasn't going to be feasible to convene a meeting.

Final supplementary now, Deputy.

Well, he's not finished.

Okay. No, when you come in after this, sorry.

Mr. McCarthy, continue and then Deputy Doherty in.

This Cabinet meeting I think may have lasted all night.

Mr. Dermot McCarthy

So, my recollection is that I asked a colleague from the Government secretariat to make contact with the private secretaries of the members of the Government, which would be the normal pattern, to put them on notice that they would be called about an incorporeal later in the night and the actual incorporeal was conducted, from memory, between about 1.20 a.m. and 1.50 a.m.

And when did it finish?

Mr. Dermot McCarthy

At 1.50 a.m.

At 1.50 a.m. Can I ask you finally, in relation to an e-mail that we see from William Beausang to Brendan McDonagh - we can pull it up on the screen, if you wish, it's DOF03309-001 - this is where it says:

Brendan

We met with [...] SG [which I presume is yourself, Secretary General] this morning and he raised the following issue for us to follow-up with the NTMA.

He said he want [to analyse] from the NTMA to crystallize the issues that might be expected to arise for our sovereign rating in the event that the State provides a guarantee for all the deposits / credits of the domestic banking system or would have to provide substantial funding (e.g. M[errill]L[ynch] analysis suggests this could run up to €100bn?) for institutions [...] into the protection regime and for the banking system [...] generally

First of all, was ... is SG yourself?

Mr. Dermot McCarthy

No, I ... I believe it was David Doyle,-----

Mr. Dermot McCarthy

-----Secretary General of Finance.

Okay, that's fine.

Thank you very much. The next questioner is Senator Susan O'Keeffe. Senator.

Thank you, Chair. Mr. McCarthy, on page ... sorry, page 4 of your own statement, you say, "The European Commission and the ECB favoured a front loading of adjustment within an overall adjustment of at least €15bn by 2014." Do you recall what rationale they provided for that kind of adjustment in such a short period of time? Do you also recall what the Irish view was and what the IMF view was?

Mr. Dermot McCarthy

Well, the rationale was that the ... the need to, if you like, address and correct market concerns about the ... the fiscal situation and to, in a sense, improve the credibility of the sovereign required a bold move, so to speak, in terms of a firm shift in the trajectory to a sustainable balance. So, I think that was their ... their concern. On the Irish side, there was a view that there certainly needed to be credibility about the achievement of the required reduction in the deficit but that that pace of adjustment would cause economic and social dislocation beyond the benefits which it would create.

So ... and in the end, there was agreement on a figure of €6 billion, which seemed to be a balanced assessment.

Okay. If I could take you to 2007, its a document DOF01962. Now, I appreciate this would have been a Department of Finance document, I'm just wondering whether you would have been briefed at that point. This is November 2007, Mr. Ahern would have been Taoiseach, about the funding availability for Irish banks being tight and if the present market conditions persist in 2008, there's an increased risk of liquidity issues arising for Irish banks. So would that information have passed on to you from the Department of Finance in some from or other or?

Mr. Dermot McCarthy

Not formally or specifically, but in terms of the, if you like, the normal interchange with Finance, I would certainly have been aware that there was growing concern about these issues and that Finance, with the Central Bank and the Regulator and indeed the NTMA, were engaging with it.

Okay. And then again in January, the scoping paper that we've heard about, the examining the legal framework for any crisis management operations taking place. Again, this was a Department of Finance document but would you have been notified that that sort of work was in preparation and that a scoping document had been drawn up? When I say you, now, I mean you and the Taoiseach.

Mr. Dermot McCarthy

I suspect that the ... certainly the Taoiseach would have been aware of it, I'm not sure that I was ever briefed on it as an exercise, but the fact that there was a domestic standing group functioning was certainly known, well, certainly known to me. But I certainly didn't see that document at the time or, indeed, until it became available to the committee.

Okay, but it wasn't something ... you weren't unaware, you weren't in the dark, the Taoiseach wasn't in the dark about that progress?

Mr. Dermot McCarthy

No.

Okay. So DOF03372, this was part of the briefing document that was given to Mr. Lenihan as he came in as Minister for Finance, this was the document which was marked highly confidential and relates to Seán Quinn and the Quinn Group. Now again, I'm asking whether or not this information here, relating to the Quinn Group, would have been known by the Taoiseach? I appreciate now that he was on the way out as Taoiseach and there was a new Taoiseach coming in but, I'm talking here about Mr. Ahern, whether or not you in your role would have been aware of this information relating to Seán Quinn and the contracts for difference?

Mr. Dermot McCarthy

I wasn't, Senator, at that time and I can't say whether the Taoiseach was, he never discussed it with me so I ... well, I don't want to draw any inference from that.

Okay. So, in ... Mr. Cowen has given evidence that he would have been notified some time in March about the contracts for difference. So, you're saying you were not aware? You, as Mr. McCarthy, were not aware and you're not aware whether Mr. Ahern was aware?

Mr. Dermot McCarthy

Quite.

Okay. So when Mr. Cowen then came in as Taoiseach, in May, would you then have become aware or do you recall when you did become aware if, indeed, you did at all, become aware?

Mr. Dermot McCarthy

I certainly became aware at some point but I can't recall specifically, Senator, in it. I'm not sure it was any earlier than when it became a matter of public knowledge.

Mr. Dermot McCarthy

Whenever that was.

Okay. So the whole question surrounding the Financial Regulator and what he knew in relation to what was going on in the Quinn Group, you knew nothing about that? Okay. Did it come up, the whole issue raised, as you say it became public knowledge at a later point, did it form part of any of the discussions the night of the guarantee?

Mr. Dermot McCarthy

I don't recall, Senator, that it did. It might have been mentioned in the context of discussions about the market sentiment towards Anglo, but I can't say that I recall it specifically.

Okay. You will be aware I think of DOF03290, this would be the Indecon information that Mr. Alan Gray sent to Mr. Cardiff and again I know he ... I think he sent it to a couple of other people, I'm wondering whether you'd had sight of it before it ... at that time, and whether the Taoiseach might have had ... the Taoiseach, Mr. Cowen, might have had sight of it at the time?

Mr. Dermot McCarthy

I recall seeing the attachment, the tabular statement, which the Taoiseach certainly did have at some point, because it was from him that I saw it. And it would have been ... I can't recall was it the Friday or the Monday but it was in close proximity to the ... to the decision on the guarantee.

Would Mr. Gray ever have consulted with you directly, for example, as Secretary General, when he was preparing that document?

Mr. Dermot McCarthy

No.

No. On the night of the guarantee, when Mr. Cowen has given in evidence that he spoke with Mr. Gray on the telephone that night, were you present when that call took place?

Mr. Dermot McCarthy

No.

Were you present when Mr. Lenihan and Mr. Cowen withdrew to have a conversation? They withdrew from the meeting. Were you part of that conversation?

Mr. Dermot McCarthy

No.

You weren't. Okay. On your ... in your own book of documentation, that's DOT 00454, this is a note that was given by Joe Lennon to the Taoiseach, and this refers to, "AIB and Bank of Ireland are requesting an urgent meeting with yourself [meaning the Taoiseach] and the Minister for Finance this evening." First of all, this is hand dated 13/09/08. Is that, in your view, simply an error? You can see it there before you. Because it does look as if it's the night of the guarantee, but I'm just-----

Mr. Dermot McCarthy

I'm sure it must be the 30th, Senator, yes.

Okay. Now, you see that in the note it says, "BOI say they lost €2 billion in wholesale deposits today. AIB are having difficulty in getting cash in the overnight money market." Now, on page 11 of his testimony, Mr. Goggin said ... of Bank of Ireland, "The primary reason we were there was because of the impending Anglo default." So, in this note here, taken by Mr. Lennon and passed-----

There's phone interference coming from yourself.

I'm sorry, I just had that reference there.

-----passed to the Taoiseach, obviously they were saying this. So did this matter of the Bank of Ireland and its wholesale deposits and AIB having difficulty, would that form part of the meeting then?

Mr. Dermot McCarthy

When the bank representatives came in, they certainly did reference the extreme difficulty in securing funding on other than very short-term bases. My ... I'm not sure that I recall that they referenced the outflow of deposits but, certainly, the difficulties which they were experiencing as well as, if you like, the implications of the difficulties of others was certainly raised in the discussion.

And did ... can you recall, did the bankers ... there were four - I think two from each of the main banks. Can you recall whether or not they informed the meeting that they had met and been in touch by phone with Anglo Irish that day and-----

Mr. Dermot McCarthy

They did not, no.

Mr. Dermot McCarthy

They didn't, no.

They didn't make that information available, okay. And did they ... was there a conversation that took place between them or did they simply come in and lay out their stall and then leave, if you-----

Mr. Dermot McCarthy

There was discussion. In fact, there were two and I think possibly three legs, if you like, to the encounter. In the first, they certainly did make, if you like, prepared presentations, if you like, of the situation as they saw it. And they were asked to develop various points, mainly by the Governor, who was engaging, and I think the Taoiseach had asked him to, in a sense, lead the reaction from the official side. And the Taoiseach and Minister, as I recall, said very little in that first phase. There was a second phase in relation to their capacity to provide liquidity support if that was required. In fact, that second phase was the asking of them to consider whether they could and I think the third phase was the response to that as a proposition.

All right, Senator, I need you to wrap up, now, shortly.

Okay. Mr. Cardiff has given evidence that it was his view that the Taoiseach, if you like, seemed predisposed at the start of the meeting pretty much to ... towards a guarantee. Now, I know that you missed ... I think you missed the beginning ... the very beginning of the meeting, but I think you did say in evidence here today that you had thought it was a briefing meeting for the Cabinet meeting that was due the next day. So how did it turn into something else altogether? And do you think that the Taoiseach was so predisposed? Thank you, Chair.

Mr. Dermot McCarthy

Well, I suppose the first point, Senator, is I said that my assumption, my expectation was that it was a briefing session. I don't know what was the particular context that led to the calling of the meeting. So it might have been more than that in the Taoiseach's mind, for example.

You didn't know about Joe Lennon's note.

Mr. Dermot McCarthy

No.

Until you got there.

Mr. Dermot McCarthy

Even then I wasn't aware of it. My recollection is that it was the Minister for Finance indicated that the bank representatives wanted to come in. It may have been already known to the Taoiseach that this was going to happen, but that was the first that I heard of it.

In terms of whether the Taoiseach had a predisposition, that wasn't my sense. I think he was reacting to the strong view from the Governor and the regulator that a firm, decisive intervention was required in the context of something which was now not just system-wide from an Irish point of view, but was rapidly becoming an international financial meltdown. So I think it was in that context that, if you like, his steering of the conversation probably headed in that direction.

Deputy Michael McGrath.

Thank you, Chair. Mr. McCarthy, you're very welcome. Can I start by asking you about some evidence given by Kevin Cardiff when he commented that ... on the decision to enter into bailout negotiations in November 2010, he said the communication at ministerial level over the weekend prior to the announcement of the start of negotiations had not been clear enough to prevent them walking into trouble, referring to Ministers Dempsey and Ahern, in particular. So can you please set out what steps, if any, were communicated to you to ensure that there was a harmonised message across Government around this time on the entry into negotiations?

Mr. Dermot McCarthy

I don't recall, Deputy, that I received any particular instructions. In a communications situation like that, the Taoiseach would normally engage directly with the Minister for Finance and then with the Government press secretary and the Finance press officer. I think that there was probably some ... I believe the Ministers concerned did indicate that they had made some efforts to get a steer, so to speak, but I wasn't privy to that.

Okay, that's fine. You say on page 2 of your witness statement that it was made clear on the night of the guarantee that no European or ECB initiative was in prospect which would address the immediate crisis faced by Ireland. So did Governor Hurley advise those present that he had spoken to Mr. Trichet on that day?

Mr. Dermot McCarthy

I'm not sure that it was on that day, it may have been over the weekend, but certainly he indicated that he had spoken to him and that, both from what president Trichet had to say and from his knowledge of the situation, that there was no such prospect.

And was a message conveyed that you should stand behind your banks as a country and don't let any bank fail? Was that message conveyed through the same channel?

Mr. Dermot McCarthy

I'm not sure that it was conveyed in as stark a way as that but it was certainly made clear that each member state, each country had to make its own arrangements in respect of their own banking system and that it was the strong view of the ECB that no bank should be allowed fail so-----

That was the backdrop?

Mr. Dermot McCarthy

Yes.

Okay. But was that expressly stated on the night?

Mr. Dermot McCarthy

It was-----

That was the understood position?

Mr. Dermot McCarthy

Absolutely, but I think it may be worth saying, Deputy, that had that not been said, had that not been communicated in such stark terms, it was ... it would have been the view of the Irish authorities themselves that that would not be an advisable or credible risk to take.

Okay. And was any consideration given over the course of the evening to making contact with the ECB and making the point to them, "We're about to make a major decision about our banking system, the scale of which is potentially beyond the capacity of this State and we're putting it to you, finally, are you prepared to make any intervention to assist?" Was any consideration given to making that call to Frankfurt, even on that very evening?

Mr. Dermot McCarthy

I don't believe so, Deputy. I think there was the view that Frankfurt's position had been communicated-----

Was clear. Okay. Can I just clear up one issue with you? Were you present when the banks, Bank of Ireland and AIB, were informed of the Government decision to go down the guarantee route because we've had conflicting evidence from Bank of Ireland and AIB? Bank of Ireland's evidence was that they certainly knew on the night and left Government Buildings on the clear understanding, having been informed that there would be a guarantee whereas Eugene Sheehy of AIB said he woke up to the news the following morning.

Mr. Dermot McCarthy

To the best of my recollection, Deputy, they weren't informed in any formal way in the meeting room that that was the decision of the Government but there is evidence before the committee, as you know, that there were discussions that at least some people had with people on the official side, so I can't say that they weren't to some degree advised or given an intimation, but not, as I recall, in a sense, a formal response to the discussion.

Okay, but is it possible that one bank was given one message in a bilateral with an official and another bank was not given the same message and so they're both correct in what they're saying? Is that possible?

Mr. Dermot McCarthy

I think that's possible but, given normal practice, I would regard it as very unusual.

Okay. You say on page 11 of your witness statement, when you speak about parliamentary scrutiny, that, "As a general observation, it is understandably more likely that parliamentary time and political engagement will arise in respect of specific actions or measures rather than broader policies and options". Is that your experience of what happened in the time that you were Secretary General to the Government - as an observer of parliamentary scrutiny - that the focus was on, you know, specific issues rather than overall policy direction and major systemic issues?

Mr. Dermot McCarthy

I think it would be my, sort of, very broad characterisation of, if you like, the way in which Government was held to account by the Oireachtas that it gathered life, if you like, in terms of specifics, either done or undone, rather than the broader issues. And, for example, given I had a particular association with social partnership, I was always surprised - and maybe at some level disappointed - that there was never much interest in debating social partnership agreements or NESC strategy reports or whatever, even though, for example, at the Taoiseach's request, I did suggest to the committee on Seanad reform at one point that they might take a particular interest in engaging with NESC and the social partnership process. So it's just a general observation.

Okay. So would you say that that represented a failing of Oireachtas scrutiny, that lack of attention maybe on the bigger issues, the bigger questions, as opposed to, you know, maybe local issues or specific Government decisions rather than policy direction. Was it a failing in your view, or not?

Mr. Dermot McCarthy

I wouldn't characterise it as a failing, Deputy, but I think one of the difficulties that the Wright report, for example, refers to is that the ... if you like, the market for analytical approaches to policy development wasn't very well developed. And I think Government, of course, should do the right thing, the public service should prepare the right advice. But I think it would have added to the challenge - which Wright concludes was absent - had the Oireachtas been more systematically focused on the analysis of strategy.

Okay. Can you recall the issue of subordinated debt being included in the guarantee ... that being discussed on the night?

Mr. Dermot McCarthy

Yes ... and-----

And who recommended that it should be included ... that dated subordinated debt should be included? Was it the banks, was it on the official side ... the Central Bank?

Mr. Dermot McCarthy

My recollection is that the ... both the banks and the official side in effect were of the view that it should be included partly because of the structure of the funding of the banks, and indeed, to a lesser extent the State. But also because of the desire to give a clear, unambiguous, definitive message through the guarantee.

Okay. Deputy Doherty questioned you about the issue of corporation tax during the bailout negotiations. Was it specifically put to Ireland, in the lead-up to those negotiations or during those negotiations by a member of the troika, that you should increase our corporation tax rate?

Mr. Dermot McCarthy

No, Deputy, I don't believe so but I think the concern, the anxiety was that part of the ... this process, of course, required the agreement of the member states and that it was in the engagement with member states that the risk of such a condition was ... was feared might arise. And that was based on, if you like, the broad environment rather than specific messaging.

Okay. Just going back to the issue of the incorporeal Cabinet meeting, can you tell us how that works in the sense that once you get through to a majority of Cabinet members and they agree to the proposal from the Taoiseach and the Minister for Finance, is that it or do you contact everyone? Is everyone's view logged, recorded - how does that work?

Mr. Dermot McCarthy

The process, Deputy, is that you try to contact every member of the Government and even if you've got a majority, you keep going to contact everyone-----

Mr. Dermot McCarthy

-----if you can.

But decisions, if there is division, would be made on simple majority basis or ... if it came to it? I know it didn't on this occasion but ... did you ever see a vote at Cabinet?

Mr. Dermot McCarthy

No.

Mr. Dermot McCarthy

No.

I nearly got distracted there myself as well.

Okay, the final one is just on page 3 of Vol. 2. Mr. McCarthy, you were present at this crisis meeting, liquidity crisis meeting, on 25 September as Secretary General to the Government. Do you recall that meeting? Do you recall the reference to what David Doyle said, for example, about potential loss exposures in Anglo and Irish Nationwide, €2 billion after capital in the case of INBS, Anglo could be €8.5 billion and - we're just closing off a line of evidence here; it's been difficult to get to the bottom of this issue - but do you recall it by any chance?

Mr. Dermot McCarthy

I recall the meeting and I have some vague recollection of that question being posed and the answers in terms of losses but I can't be confident that it's not a, sort of, recovered memory prompted by sight of the note.

Yes. I suppose the context of that question is: was there any suggestion then, or right up to the point where the decision was made to guarantee the banks, that we may have to put capital in behind our decision, that the banks may need additional capital because of loan losses that are coming down the track? Was that ever suggested? Was it ever there in the background to the decision?

Mr. Dermot McCarthy

Not specifically, Deputy, but I think there was clearly a realisation that losses on the loan books of, at least, some institutions would probably materialise and that some restructuring and some unwinding of positions would be required and that this would have to be attended to with the stability achieved by the guarantee. I'm not sure that anyone proposed or voiced the view that a specific State recapitalisation would be required but some element of restructuring certainly was envisaged.

Thank you very much. I now invite Senator Michael D'Arcy. Senator.

Mr. McCarthy, you're welcome. Was the guarantee a mistake?

Mr. Dermot McCarthy

I don't believe so, Senator, in two respects. In all of the advice and information that was available on the night, I think it was the appropriate response, given the risk assessments that were offered. With the benefit of hindsight, if the knowledge base was what we now know about the vulnerabilities, I don't think we would have got to the night of the guarantee in that way. So, if you like, both in terms of what was presented and what might be a plausible counter-factual, it probably was the right thing.

Can I put it to you that there was a silver bullet attempt in terms of the bank guarantee? And can I put it to you that the deposit guarantee scheme was an increase from €20,000 to €100,000 - a fivefold increase, we were multiple of what other jurisdictions moved up to, you know? I suppose what I'm asking you was, were you and the Executive trying to do too much with one fell swoop?

Mr. Dermot McCarthy

The problem, Senator, was that the option of a gradual approach, a more incremental approach, wasn't there. In a sense, the increment was from a strong guarantee of retail deposits, which worked in the retail market, into a collapse, or what appeared to be a collapse, of the whole interbank funding system internationally. So, in that sense, the need for, if you like, a decisive game changer appeared to be unarguable.

The theory about liquidity was that it was international markets had frozen. The Morgan Kelly thesis was that the markets knew and understood that the Irish loan books were the problem. Which do you subscribe to?

Mr. Dermot McCarthy

Well, it's possible that both were right, clearly, in that there was a problem in the international wholesale market for interbank lending. They were frozen and small countries generally, small banks in small countries, and Ireland, in particular, was at the sharp end of that, so the availability of normal short-term funding had dried up. So that was one issue. The question of whether separately there was a lack of market confidence in the banks as ongoing institutions, I think it is true that there was concern, more than concern at their property exposure in an environment where property-related exposures across the international system were regarded as deeply problematic. Whether that meant that the market was calling it correctly, in so far as that was a market view at that time, I'm not really in a position to say.

Was the NTMA position clearly outlined the night of the guarantee to everybody in the room? The NTMA were outside the door, their views were stronger than most, in relation to guarantee.

Mr. Dermot McCarthy

I think that the ... their view, both in relation to the desirability of nationalising Anglo and the impact that an extensive guarantee would have on the cost of sovereign funding, were certainly very clearly conveyed and they were already known, of course, by virtue of the previous engagements the previous week.

But were, was the Taoiseach and Minister for Finance, were they fully informed that the NTMA did not view the guarantee?

Mr. Dermot McCarthy

I believe so.

Can I ask, Mr. McCarthy, in terms of the FSR reports from the Central Bank and the Financial Regulator, you quote them on page 7 of your opening statement, section 3.3, or 6.3, did ... were you fully informed, did you read the reports, did you read the appendices, did the Taoiseach read the appendices, and I'm talking about the '04, '05, '06 and '07 reports, which were clearly itemising the vulnerabilities and the threats to the financial stability of the Irish economy?

Mr. Dermot McCarthy

I didn't read them, Senator, I'm not sure that I received them. They certainly weren't submitted to Government directly as I recall. I was aware of their-----

Mr. Dermot McCarthy

-----core message, no, more than existence, that in a sense the ... if you like, the core message, the central conclusion, was-----

Should you have read them?

Mr. Dermot McCarthy

I don't believe so, Senator. Financial stability wasn't my responsibility. Lots of important reports are produced and they're read by the appropriate people, who then formulate policy advice informed by that.

In terms of the financial stability reports, the final report, '07, clearly itemised where the public debt, the household debt, had come from ... that's a line that I pursued, Mr. McCarthy, 71% in 1997, of GDP. In '07 the predicted figure was 248% of the GNP, highest in, in Europe; some of the highest in the world. You should have read those reports.

Mr. Dermot McCarthy

I don't agree, Senator. I think it was a matter for the Department of Finance, as the Government Department responsible for the financial system and for advising the Government on economic strategy, to advise, inform Government, and I suppose myself in that process.

And I ... there are many things that I might regret but I don't feel that was something which it was part of my responsibility to do.

Mr. McCarthy, when you were assistant secretary, you were member of the McDowell group on the establishment of the single regulatory authority for the financial services sector. Were you involved in the establishment of the Financial Regulator?

Mr. Dermot McCarthy

After the report?

Mr. Dermot McCarthy

No, Senator, no. That, as I recall, came to Government as a joint proposal from the then Tánaiste and Minister for Finance so, at that point, I had become Secretary to the Government, I think, so I would have been, if you like, on the receiving end of that.

And who was the Tánaiste at that stage? Who was the Tánaiste?

Mr. Dermot McCarthy

That was Minister Harney.

Harney. Did you have any role in the selection and appointment of people in the executive positions within ... following the-----

Mr. Dermot McCarthy

No.

You didn't. Okay. Chairman.

Thank you very much. Deputy Kieran O'Donnell.

Mr. McCarthy. On 30 April this year in Kilmainham, Jean-Claude Trichet, the former ECB President, said that Ireland had "total expenditure on compensation of employees in the public sector grew by close to 200% between 1998 and 2008 [ten-year period] compared to the [EU] area figure average of ... 45%" over that period. The social partnership agreements, including benchmarking, played a pivotal role in that respect. Thus when determining the pay terms of social partnership agreements, did external benchmarking with other economies feature as part of the process? If you actually might elaborate and if no, did this give rise to economic risk? And it's coming, Chairman, the reference ... it's Vol. 1. pages 21-34.

Mr. Trichet's statement?

Correct. No, no, it's a basic analysis by the IMF-----

Sorry. Okay. It's a different document.

-----on the social partnership.

Okay. Thank you.

Mr. Dermot McCarthy

Well, Deputy, the evolution of public service pay had those two elements which you cite. The social partnership rounds, if you like, and the benchmarking exercise, at least the first one. On the pay determination, the public service pay agreements were, in a sense, a function of the private sector agreement. The process of wage negotiation under social partnership was, while there was a joint employer representation of IBEC, CIF and Department of Finance and Congress on the other side, in fact, the structure of the agreements were somewhat different but the primary mover, so to speak, was the private sector agreement, which tended to be reflected more or less in identical terms but with different phasing and generally a pay pause relative to the private sector one. The actual levels of the increases were broadly shaped by inflation. It was an inflation-based bargaining process, in essence, certainly after the year 2000, when tax relief wasn't factored in as a-----

And did the fact that we went from an economy that was very export-driven to an economy in the ... from around 2003 onwards, which was heavily dependent on property, did it bring about a situation where it gave rise to rapid inflation, consequently had an impact in terms of the wage structure which fed into benchmarking?

Mr. Dermot McCarthy

I think there was some element of the inflation profile which derived from that and there was certainly discussion ... the official side would have been anxious that in so far as inflation was explicitly referenced, that it should be the harmonised index of consumer prices, rather than the CPI because that didn't include mortgage-related expenses. That wasn't acceptable to the union side and the employers had to formulate their offers in that context.

In hindsight, should that have formed a basis because, obviously, with rampant inflation, it gave rise to the cost of living going up for people so wages had to rise. But in hindsight, if you had it back again would you have done it differently?

Mr. Dermot McCarthy

Well, my role in the pay negotiations was to act as a facilitator, rather than a negotiator. And I suspect that the employers tried to achieve the lowest possible outcome in terms of increases and had there been a way of decoupling some of these inflationary pressures from the process, they would certainly have tried it.

Can I look to move to just a couple of quick points to clarify the night of the guarantee? Did the banks bring in their own guarantee? Mr. Cardiff was before us ... when he was effectively doing up the ... drafting the press statement for the ... he basically-----

We will have to keep that general because we don't have the evidence on the screen so-----

The general thing was ... did the banks bring in a guarantee ... their own guarantee on the night?

Mr. Dermot McCarthy

My recollection ... excuse me ... recollection is that there was a formula, a definition, if you like-----

Mr. Dermot McCarthy

In writing.

Okay, did you get sight of that?

Mr. Dermot McCarthy

At the time, I believe I did.

Was that copied and circulated to other people at the meeting?

Mr. Dermot McCarthy

I believe it was.

Which institution brought that?

Which institution brought that?

Which institution actually brought that?

Mr. Dermot McCarthy

That I can't recall, but it ... my recollection is that it had the support of both institutions.

Would ... you spoke earlier about ... would they be ... where would those documents ... where would that document now be? Department of Finance or the Department of the Taoiseach? Have you seen it in recent times?

Mr. Dermot McCarthy

No.

Where would it be?

Mr. Dermot McCarthy

I can't say, Deputy. I believe what happened was that following that discussion in which the text was produced, there was discussion involving more official-side people who came into the room who hadn't been present for the-----

Can I, in the limited time ... what was in that document that was provided by the banks, in your view?

Mr. Dermot McCarthy

My recollection is that it was a definition of what would be covered by a guarantee.

What was the definition ... what did it include?

Mr. Dermot McCarthy

I can't recall with clarity.

What do you think it was?

Mr. Dermot McCarthy

It was, as I recall, it was a definition of types of deposits and instruments which would be covered.

So senior bonds to be included-----

Mr. Dermot McCarthy

I believe so.

And was it a two-year guarantee?

Mr. Dermot McCarthy

Yes.

Okay. When the banks left and the draft you spoke about ... the draft going over and back, were the banks present in the room when that ... when it was being revised?

Mr. Dermot McCarthy

No.

So, Mr. ... I am taking it that Mr. Cardiff did up a draft, he brought it in and out of the room. Did it at the end of the night reflect in substance what the banks had brought in, day one?

Mr. Dermot McCarthy

Well, what ... my recollection is that in so far as I could judge it and I am not an expert in banking issues so it didn't necessarily mean a huge amount to me.

You are a highly experienced public servant, civil servant.

Mr. Dermot McCarthy

But not in banking. But my recollection is that the broad thrust of what they were proposing tallied pretty much with the discussion that had taken place before they came in as to what the scope of a guarantee would be to be effective. I suspect it was more granular and maybe more detailed and as the committee has heard, I think Kevin felt that in that, it went further than-----

And Mr. ... the Central Bank's draft that they brought, which was a six-month guarantee, purely on deposits, no mention of bonds of any form, either senior or other, where did that draft ... did you have sight of that draft in the meeting that took place?

Mr. Dermot McCarthy

No, Deputy. As I said earlier, I wasn't aware that that, if you like was in gestation and that the first text that I recall seeing of a formula was one which I assumed had originated with Kevin Cardiff but the documents would suggest that he was working from an earlier version which was in effect, the one that William Beausang had been engaged in.

Okay, can I Chairman, can I ... is it in order to direct Mr. McCarthy to the e-mail that Pat Farrell would have submitted to him? It was in the book of evidence-----

Okay-----

-----from earlier?

And I'll just give Mr. McCarthy a bit of leverage on it if he is not wholly familiar with it.

Mr. Dermot McCarthy

I'm familiar with it.

Okay that's grand so.

It stated the-----

Can you give a reference for that if you have it, please?

Yes, Chairman, it's D0T00347001.

Okay, just give me the-----

Page 83 of Vol. 1 in Mr. Farrell's.

And effectively it's very simple, it says:

Dermot, we need your support on this - IFSC banking has been completely overlooked. The issue is as relevant to retail banks and has to covered bond banks at IFSC.

From Pat Farrell. That was on 15 October.

I want to direct you to Vol. 1 of your own book of evidence, and it specifically deals with page 95, which is the IFSC Clearing House Group, which was the meeting held exactly the following day, on 16th at 8.30, of which you chaired. And we have a Mr. Deeny, on page 98, speaking about supports for the IFSC. So can you tell me what were the circumstances of Mr. Farrell writing ... sending you that e-mail? What view did the Taoiseach take from that statement? And how did it evolve into the discussion process for the domestic ... for the Clearing House Group discussion meeting the following day?

Mr. McCarthy?

Mr. Dermot McCarthy

Well, the e-mail was received. It was, as you can see, Deputy, it was primarily forwarding to me a copy of, in effect, a submission that the IBF had made to the Department of Finance on this topic. And I did nothing-----

I'd say it was more than forwarding now. It says, "...we need your support on this". It's a little bit stronger now than saying-----

I need you to dial that down a small bit there now, Deputy.

Yes. Sorry, yes. If you read it, I would take "...we need your support on this" as being slightly different from saying, "Please find enclosed the e-mail that has just been forwarded to us."

Mr. Dermot McCarthy

It had the same effect, Deputy.

Right. Just maybe slightly elaborate?

Mr. Dermot McCarthy

Well, clearly it had been received by the Department of Finance. They were the appropriate people to assess it. I took no action on it. And I didn't, to my recollection, inform the Taoiseach about it.

And did you forward it to the Department of Finance?

Last question, Deputy.

Did you forward it to the Department of Finance?

Mr. Dermot McCarthy

I don't believe so. They already had it.

So you took a managerial decision that it wasn't in the Taoiseach's domain?

Mr. Dermot McCarthy

Absolutely.

Okay, thank you very much. Senator Sean Barrett.

Thanks very much, and welcome, Mr. McCarthy, at this late hour. Did you send any reply to that request directly to the centre?

Mr. Dermot McCarthy

I believe I might have mentioned it to Mr. Farrell the following morning at the meeting that Deputy O'Donnell referred to, that I had received his e-mail.

Yes. And did you know what the cost would have been had you accepted it?

Mr. Dermot McCarthy

I was enlightened by you earlier in the afternoon, I think, yes.

Thank you very much. Yes-----

We're coming up now to the 9 o'clock threshold, and on the TV cameras it says you can say whatever you like, but the rules still apply in the inquiry before and after 9 o'clock. Mr. McCarthy.

Thank you very much. Could I look at Vol. 2 of your own book, Mr. McCarthy, on page 89? What it refers to, Chairman, is a reply to Mr. Trichet in two lines, "I wish to acknowledge receipt of your letter and enclosure of 16 October [2008] which will be brought to the Taoiseach's attention as soon as possible." And the date of that non-response, if you like, or just acknowledgement, is 30 October. And when you turn over the page, Mr. Trichet was making suggestions like the ECB opinion notes that, "I am writing to request that the Irish Government arrange that interbank deposits with a maturity of up to three months be excluded from the liabilities covered under the draft scheme." What was happening? There was such a delay in reply. He was our paymaster and he was making a suggestion which would have saved us money. And we said, "Yeah, we got your letter a fortnight ago." When did we actually reply to Mr. Trichet in that correspondence?

Mr. Dermot McCarthy

I believe that the Minister for Finance replied to him. I can't recall the date.

Mr. Dermot McCarthy

It ... and I ... well, I won't speculate, but I wouldn't be surprised if President Trichet wrote in parallel to the Minister at the same time. The particular concern that he had as I recall-----

Mr. Dermot McCarthy

-----was the interbank short-term deposits, and that their exclusion-----

Mr. Dermot McCarthy

-----would have significantly weakened the effectiveness of the guarantee, given the structure of the funding that the Irish banks had. So my recollection is that the Minister replied to him, giving undertakings to monitor the extent to which that form of funding happened, so that the disturbance of the ECB's management, if you like, of interbank transactions wouldn't occur, which I think was his primary concern, that this was potentially going to distort something which the ECB regarded as a particular priority.

So he did have a reply, reasonably approximate to 16 October.

Mr. Dermot McCarthy

That's my recollection.

Okay. Thanks. And, I recall ... I was present when you were chairman of the NESC, did ... the NESC reported, in 2004, on housing. Did it see the bubble happening? And did it see an excess concentration in the total economy on construction?

Mr. Dermot McCarthy

My recollection is that it did refer to the degree of concentration. In fact, I believe it cited the financial stability reports that Senator D'Arcy was referring to earlier. It ... as I recall, it did anticipate, as, indeed, did the Department of Finance, that there would be a reduction in the level of housing output. It looked at issues like the potential impact of land hoarding on the price of land and, thereby, the price of houses. It's broad conclusion was that, if you like, the economic rent that was extracted through the capitalisation of reduced interest rates on the price of housing had largely worked out of the system because the ... by that time there was an easing, at least at that time, there was an easing in house prices, and there ... the analysis suggested that, while there had been this very significant output of housing, that there were still very substantial unmet needs, in the greater Dublin area in particular, and for people on low to modest incomes, and they recommended that over time the level of provision of social housing, and a more effective set of supports to the private rented sector, should support housing output as the private demand attenuated. So, I think that was the broad analysis. It wasn't forecasting a collapse, the hard landing, it-----

Okay, thank you. On the incorporeal Cabinet meeting, you've been with us it says here since 2.30 p.m., but I mean, I ... but, I mean, is ringing people, one after the other, at all a substitute for the, kind of, debate that you get around this table, and shouldn't we be careful about incorporeal Cabinet meetings?

Mr. Dermot McCarthy

Absolutely, Senator, and they are, on matters of substance, as opposed to formalities, sometimes, things like giving permission to the President to lead the State, might have to be done at short notice, that sort of thing is perfectly effectively done in an incorporeal ... it's not desirable, and, in my experience, is only done when it's unavoidable.

In the ... Vol. 2, on page 131, notes prepared for the visit of the aforementioned Mr. Trichet, it's on page 131, and the briefing, I think that that was for the Taoiseach, it says, "The global financial crisis took hold in August 2007." From my reading of the material, wasn't there an amazing failure to respond between August 2007 and the collapse at the end of September 2008? Were our institutions geared up to meeting this crisis, because you were at the core of so many things, including the NESC, and so-----?

Mr. Dermot McCarthy

Well, I think there were a number of failings with ... and, in a sense, a number of people have commented on the unsatisfactory nature of, if you like, the spreading of the blame, so to speak, but, it ... as, as Nyberg, I think, observed, it was of the scale that emerged precisely because there were a set of interlocking failures. On that particular issue, I think there was an orientation to define the problem as a liquidity one, and it was, of course, in origin, a liquidity one, which meant that the concern about the solvency question, the capital adequacy, the potential exposure on loan books, and so on, wasn't engaged with as early as it arguably should have been.

On the night of the guarantee, should we have combined it with some kind of due diligence, even that the banks which we were rescuing should have left the keys of those banks in the Taoiseach's office because Anglo went from, what, €1.5 billion to €30 billion eventually and wasn't nationalised until late January. NAMA found records ... were totally defective? Did some of them disappear in this interval between being bailed out and eventually we got around to seeing what the total bill was? Would we do all that differently again?

Mr. Dermot McCarthy

I think that the reality was that the information which came to light slowly and painfully over some time should have been known to the system well before the guarantee. In the event that ... the scheme of the guarantee, in other words, the particular commitments that covered institutions had to enter into in order to access the guarantee, was quite broad and directive and it gave enhanced powers to the regulator in terms of the conduct of the institution, its funding strategies, as well its loan book ... its management of its loan book. So in a sense the framework for ... not just due diligence but acting on the due diligence was created by the scheme itself. But that was very much a second best to having had that degree of oversight and engagement and knowledge well in advance of the guarantee.

Should we drop the words "constructive ambiguity" and have "quantitative targets" for the efficiency of this sector so we'd know what was going on?

Mr. Dermot McCarthy

I think that there was a neglect of relatively basic indicators of performance.

Thank you very much. Thank you, Chairman.

Thank you very much. Deputy John Paul Phelan. Deputy, ten minutes.

Thank you, Chairman. Good night, Mr. McCarthy. It's nearly a 12-hour session you're-----

We're over the 9 o'clock threshold now. I'll give you a bit of leverage.

I've a few questions. I'll try not to be repetitive, some of them may have been asked already but, firstly, I just ... you wore many hats, I suppose, in your time as Secretary General to the Government and Secretary General to the Department of Taoiseach ... I should say Secretary to the Government and - it's been referred to earlier on - your chairmanship of the NESC and also your role in regard to social partnership. And, therefore, you could be said, I suppose, to have been in a particularly strong position to observe the interconnectedness between different public bodies that led ... or that existed prior to the banking crisis. Against that background, what, if any, follow-up analysis was done internally within the Department of the Taoiseach or, indeed, the NESC on contrarian views on the soft landing theory? We've had different evidence from many witnesses going back to the start of the inquiry, a lot of it outlining that the soft landing rarely if ever materialised in other jurisdictions but there was a belief in this country that it was going to be ... we were going to be a different case, among certain people. Has there ever been any analysis along the lines I'm asking conducted?

Mr. Dermot McCarthy

I believe that the NESC, in relatively recent times, has produced a number of studies of what happened in the housing market including, it has to be said, its own misreading of some aspects of the situation when the housing report was produced in 2004. Why the dots weren't joined up in a sense is, I think, your question, Deputy, and that's something I've tried to reflect on. And part of the answer, I think, lies in issues which were raised before the committee by John FitzGerald and Alan Ahearne, that there was a ... there was a certain segregation of financial stability issues from others and, as Wright observed in his report in the Department of Finance, if you like, a bringing together of the different dimensions of risk weren't ... wasn't effected. It certainly wasn't communicated to the Government. I think we were perhaps distracted by a number of things which were ultimately peripherally important. Like, for example, we had no exposure to the US sub-prime problem, which seemed to be the initial origin of the international financial crisis.

The fact that our fiscal outcomes were so impressive and ... and, I mean, at a particular point in the mid-2000s, one of the tasks of the Taoiseach's Department was to organise the orderly management of the international delegations coming to see how the Irish situation was so successful. So there was, I think, ultimately, if you strip it all away, there was a failure of analytical rigour and I don't think that can be laid at the door of the political system.

Going back to the point you were making about the people coming to observe what was happening in Ireland, in 2000, when you became Secretary General to the Government, the Exchequer pay bill was €8.6 billion. By 2008, it had risen to €18.8 billion, an increase of 120%. Now, I know you weren't Secretary General to the Department of Finance but, obviously, you had a role in relation to social partnership and you had an overall role as the person who would have been regarded as the most senior civil servant. Were there any alarm bells ringing for you at that eight-year, 120% increase in the cost of the public service, if you like, in general? And did you raise any of those concerns, if you had ... if you had them?

Mr. Dermot McCarthy

Yes, there were concerns, Deputy, in terms of that rate of increase, but it had a number of elements. There was the increase in head count and there had been very significant and deliberate increases in the staffing of a whole variety of services which were regarded as underdeveloped. Then there was the question of the rates of pay, which were, in effect, a function of, as I mentioned earlier, the levels agreed in the private sector and, in a sense, that's as it should be, that the public service should follow rather than lead. In aggregate, the affordability of this and the competitiveness dimension of the overall situation were concerns and there was clearly going to be an adjustment required, which was, in fact, explicitly referenced in the text of the social partnership agreement in 2006, "Towards 2016". And I was interested to see, in the documents sent to me, background papers prepared in the Department of Finance, which I hadn't seen before, regarding the desired outcome of those discussions and I was, I suppose, pleasantly surprised to see that the text of what they desired was actually reflected in the text of the outcome, so they were obviously making their contribution. So, an adjustment to a different path, both in terms of the composition of output and the funding of the State, was flagged, was expected but was, I believe - and I did believe - something which would evolve in a ... not in the teeth of a collapse.

Okay. Can I ask, in relation to again your role as Secretary General to the Department of the Taoiseach, in your time in that period you worked with three different holders of the office. Mr. Cowen was here on two separate occasions and he outlined to the inquiry how he placed ... or I suppose I'm paraphrasing him really now, but he felt that there were people who had responsibilities - such as the Central Bank, the Financial Regulator - and that he let them do their job, I suppose, so to speak, and he relied on the evidence and the information that they gave him. Do you think that there was any substantial difference between the three holders of the office in your time period, in terms of how they viewed the information that they were getting from those quarters? And I might have a bit of a follow-up on that, but if you could answer that maybe first.

Please. Thank you very much. Mr. McCarthy.

Mr. Dermot McCarthy

I'm not sure my absolute privilege-----

We might go on the 10 o'clock threshold.

I don't want really specifics, but you ... you-----

Mr. Dermot McCarthy

I ... in fact, I worked under five taoisigh in the Department of the Taoiseach and each had a very distinctive style. I'm not sure that the ... that those differences of approach would ultimately have had any great bearing on the sort of input or impact that the authorities would have had because, unfortunately, it doesn't look as though they had the wherewithal to convey the right message.

Okay. Others, most notably witnesses that we've had from the ... previously maybe working with the NTMA, expressed concern with regards to the capacity of the regulator, in particular, to do the functions that were delegated to that authority. Did you at any point in time share any of those or have any cause to have concerns about the capacity of the regulator to perform their function? And, in particular, I suppose, I'm asking the question in relation to ... or did you ever get involved in a discussion in relation to the number of staff that would have been doing the prudential regulation of financial institutions?

Mr. Dermot McCarthy

I didn't, Deputy; it wasn't something that would have come my way. My main ... in fact, until the period of the crisis, my only engagement with the regulator was in the context of the IFSC, and staff from the regulator would attend meetings with the clearing house group, and I'd have to say my observation in that forum was that they were confident and competent in their interactions. They sometimes came under pressure, which I understand might still be an issue, about things like the timeliness of turnaround of applications for authorisation and clarity about new forms of authorisation and so on, but my observation was that they engaged with those robustly and didn't display anything that would've caused me to doubt their competence at least in those areas that came up for discussion.

Okay. Finally and briefly, we've had evidence particularly, I think, from Mr. Cardiff in relation to not just outside forces, but individuals and groups that came to him and maybe others within government prior in the earlier part of 2008 before the guarantee outlining the possible need for a political guarantee and then maybe a more extensive guarantee. Were you aware of those approaches yourself and did anybody in that time period approach you on those matters?

Mr. Dermot McCarthy

No one approached me, that I recall. And my awareness of, if you like, the discussion of potential guarantees would have been certainly no earlier than the beginning of September; in other words, that it was in the ether of that stage.

Thank you very much, Deputy. I'll just wrap up with a couple of questions, Mr. McCarthy, and then Ill invite the two leads to wrap up as well and any closing comments you may wish to make yourself. I just want to bring a minute up on the screen there just for a moment. It's in your own book of evidence, its DOF01B02. It's a minute of a meeting where there is a discussion with liquidity and insolvency, in particular to Anglo and INBS and so forth. Are ... there is the Attorney General, Taoiseach and the Secretary General to the Government. Were you present at this meeting that this minute relates to?

Mr. Dermot McCarthy

I believe I was, yes. Chairman.

Maybe if you could just briefly outline as to what the agenda of that meeting was discussing.

Mr. Dermot McCarthy

Well, it ... as I recall it was an occasion for the officials who had been engaging with these issues in detail to brief Taoiseach and the Minister for Finance on where, if you like, their analysis was leading. And the short note there, I think, does capture, as I recall, the range of issues that would have been covered in the presentation. It wasn't an occasion when any decision was expected and, certainly as I recall, none was made.

Right. Given the nature and the seriousness of obviously what was being discussed here, could I put the question to you, Mr. McCarthy, when even approximately - I'm not looking for the specific hour or the specific date, but by approximation - did you become aware that the whole, say, borrowings situation presented a systemic risk? And how was this risk relayed to you, and by whom?

Mr. Dermot McCarthy

Well, I would have had an awareness of the liquidity pressures and the fact that there was a degree of mobilisation, if you like, across the financial system by the Central Bank, in particular, to prepare for a further tightening of that.

The point where it became a systemic risk as opposed to a problem to be managed, I ... if it was earlier than the beginning of September, it wasn't much earlier, I think, than that.

You think it was earlier ... approximately, just on a date line, quarter 1, quarter 2, if not even the month.

Mr. Dermot McCarthy

Well, no earlier than quarter 2, certainly.

Mr. Dermot McCarthy

Of 2008.

2008. No later than quarter 2 of 2008, okay.

If I can just deal with one final issue then, Mr. McCarthy. There's a table in your evidence book there, and I just want to bring that up. And the two tables relate ... one is a ... it deals with sectoral lending volumes, in billions, and you can see a, kind of a, significant growth factor there from ... going from '01 into '02 and then a massive escalation ... quite significant escalation where we go from just in about ... I reckon these are millions ... I'm assuming ... in around €50 million in around 2003 up to €250 million in 2007. There's quite a big peak. And there's another table here ... sorry, they're billions actually. I've just been ... they're not millions, they're actually billions. I just wanted to bring up another table there as well for you and that relates to the increases in public services allocations. These are from 2000 to 2008. What we see here is in millions again, but if you remove the commas, I presume ... or go by the commas, they're actually billions. We see, in social welfare, an increase in that period of 160%. That's from €6 billion to over €17 billion; in education, just under €4 billion to €8.5 billion - I'm just giving the approximate figures here now to you; health, of just under €5.5 billion to €15 billion or, actually, over €15 billion; capital investment going from €9 billion up to €9 billion; total expenditure going from just under €26 billion to over €62 billion, an increase of 141%; in terms of GDP, expenditure of plus 71%. Okay, so in regard to that table, what we see here is a huge increase in public expenditure allocations between 2000 and 2008 at 141% in total, which was precisely double the growth in GDP over the same period. As I then say, when combined with the statistics on the parallel major growth in construction-related lending, were these two sets of figures alone not sufficient warning for Government that a bubble was being created?

Mr. Dermot McCarthy

Well, on the expansion in credit, Chairman, clearly, it is a very dramatic increase, but the interpretation of that in terms of risk to financial stability was something which Government would have relied on a Finance assessment to ... to create and they, I suspect, in turn, were taking full account of the financial stability report from the Central Bank, and it ... I think it's a matter of fact from previous reports that the assessment, the tone, and the messaging didn't flag that this was something which threatened financial stability. It created vulnerabilities but not a pending crisis.

On the expenditure increases, they were very significant, but as a result, I suppose, of the strong output, in particular, from the construction sector, their funding was ... appeared to be accommodated in a way which was compatible with a strong fiscal outcome. In reality, the elements of a bubble were building up, but if you like, the distillation of that into a clear analysis and message wasn't received.

Okay. And putting aside concepts like groupthink, herd instinct, and all the rest, if somebody just arrived to these figures coldly, not taking on the, kind of, media environment or influences or anything, just looked at these figures coldly, should they be giving at least amber signals that there is potentially a problem here?

Mr. Dermot McCarthy

I couldn't disagree, Chairman. But the ... in the messaging as received, it was amber and not red.

Okay, all right. So in your view was Government aware at that time that there was an amber light, to use that parlance?

Mr. Dermot McCarthy

I believe so, Chairman. Certainly by, I think, 2006 the ... if you like ... the amber was very visible. It might have been flashing a bit earlier. But the emphasis, if you like, in terms of the risk to economic performance that were highlighted included the potential downturn in the construction side. But also issues like exchange rate movement, commodity prices, the fate of the US economy. By contrast with those issues, this was something under, potentially, some measure of domestic control. What the messaging was understood to be saying was that it was no different, in terms of its risk significance, to those other issues.

Another part of the messaging at that time, Mr. McCarthy, is that they were preparing for a soft landing or the potential for a soft landing. You'd have been familiar with that messaging as well at the time. In regard to that messaging, are you aware of any evidence, and I'm not talking about commentary that's taken from third parties or external agencies that are not in Government but NGOs, financial institutions, whatever. I'm talking about evidence that was either in the Department of Finance or in the Department of the Taoiseach that supported - and I'm talking about evidence-based support now, as opposed to commentary-based support, that supported a soft landing theory?

Mr. Dermot McCarthy

Well I can't say that I'm necessarily familiar with everything that Finance would have done but I certainly would have been familiar with everything that they submitted to the Government. And they would have been advising that an orderly transition to a lower sustainable output was what was to come. My recollection is that the ESRI medium-term review in 2003 and their ex-ante appraisal of the national development plan in 2006 did provide analysis of the housing market that concluded with forecasts of housing demand and output that the soft landing was a credible and likely outcome.

And that was an external ESRI report, that was not a Department of Finance report?

Mr. Dermot McCarthy

Yes.

Okay, thank you. I'll just now move towards wrapping things up so, with your permission, Mr. McCarthy, and invite Deputy Murphy in to wrap up please.

Thank you, Chairman, and thank you Mr. McCarthy. Just three brief questions. We had in evidence from Ann Nolan that before nationalisation of Anglo could take place that the bond agreements would have to be analysed and looked at and ... to see what was there. But at the same time the Government was preparing legislation for nationalisation of a bank, more than likely Anglo. So were you preparing for nationalisation of Anglo in the run up to that night of the guarantee, including that night, without having done the due diligence work on the bond agreements in the bank?

Mr. Dermot McCarthy

I can't really comment on that, Deputy, because I wouldn't be aware as to whether such analysis had taken place. I don't recall anything on the night being said that implied there was an impediment to moving to nationalisation if that was the decision.

Okay, thank you. When the new Government attempted on 31 March to ... a second attempt at burden-sharing, there was a phone call between Jean-Claude Trichet and the Taoiseach, is that correct?

Mr. Dermot McCarthy

That is correct.

Who instigated that phone call?

Mr. Dermot McCarthy

The Taoiseach as I recall.

Was there any contact between the Taoiseach in November - the end of November - with the president of the ECB, Jean-Claude Trichet, in relation to burden-sharing at that final moment when a decision was being made whether we'd do it or not?

Mr. Dermot McCarthy

I can't be sure, Deputy, but I don't recall it.

Why wasn't the Department of the Taoiseach leading in the negotiations on the bailout agreement, including burden-sharing, at the time of the bailout negotiations in November 2010?

Mr. Dermot McCarthy

Well because the whole, if you like restructuring, both in the banking side and the fiscal side, were the responsibilities of the Minister and Department of Finance. They were the ones through ECOFIN and the normal contacts who would have been engaging with their counterparts in the various institutions. So it was, if you like the appropriate way in which the negotiations would be conducted.

And yet the Department of the Taoiseach led on the night of the guarantee?

Mr. Dermot McCarthy

I don't believe it did Deputy, the Taoiseach led on the night of the guarantee. But the, the input was in respect of the financial assessment and the advice was, the advice from the Department, the Governor and the Financial Regulator, with the NTMA views also relayed, they were all if you like finance entities. The role of the Taoiseach was to lead the process to a conclusion.

Final question then is, in relation to your time as Secretary to the Government and Secretary General to the Department of the Taoiseach, did you ever have concerns yourself or were concerns ever brought to you by senior management in the Government apparatus about improper influence on Government decision-making or policy formulation from individuals or sectors or industries outside of the State?

Mr. Dermot McCarthy

Never improper influence. Influence was certainly applied by those who had it but ... it was, is part of the job of Government to engage with that influence, assess whether it's valid and worthwhile and respond appropriately. So, but the, sort of, improper pressure for whatever reason, I don't believe I experienced it.

Okay and you never felt there might be an improper association between ... a part of the Government and a particular industry or sector in the State?

Mr. Dermot McCarthy

Improper, no.

Thank you. Thank you Chairman.

Thank you very much. Senator MacSharry.

Great thanks very much , and finally can I just ask a couple of quick questions? In terms of the percentage rate, 5.8% not being reasonable it said in one of the core documents there rather than bring it back up, and there was a quote where it was estimated that the most comparable rate for eight-year money at the time was 6.02%. Do you believe that Ireland got a good deal?

Mr. Dermot McCarthy

In the circumstances at the time, I think it was an appropriate outcome but the circumstances at the time were not good in the sense that the ... I think this was the first time in which, in which the new support mechanisms were being applied and in, in the way in which they were deployed there was as much attention in my view, from what I could observe, on protecting the interest of the contributors, as ensuring the effectiveness with the recipient, so that the interest rate was ... it was reasonable, having regard to the alternative market rates but it was certainly posing a significant sustainability issue. And it was flagged as an area of particular concern, both by the Governor and the CEO of the NTMA, as well as the Department of Finance and it was clear ... that opportunities would have to be sought to bring about a lower rate at the right time.

Mr. Cardiff, when he was here, said it was explicit in the memorandum of understanding that the rate would be reduced if and when time allowed. Is that the case?

Mr. Dermot McCarthy

From memory, there was certainly provision for the, the rate to be revisited.

You mentioned towards the end of your statement, when you were giving some views on, on those issues that have been addressed since and what things may or may not help and you mentioned the registration of lobbyists, and I had asked you earlier about did you ever feel, as a certain person in the Central Bank had, that their was an undue political or business interest leading Government or influence decision-making and policy in government, and you said no. Would you like to revisit that on the basis of what you said to do with lobbying? I mean do you feel that there was excessive lobbying or did this have an unhealthy input, or why do you feel things are better now or will be better with the registration of lobbyists, if you, if you said earlier that there was no ... you saw nothing in your 11 years?

Mr. Dermot McCarthy

Well, if I recall, Senator, the question you asked me was there some ... someone or some interests exercising an improper influence, and that is certainly not my experience.

Mr. Dermot McCarthy

But in terms of lobbying, I mean, at a ... in one sense, lobbying is the essence of public life - engaging and seeking to influence others. I ... my view is that it's healthy to have that as transparent as possible and that the merits of what people are being asked to take on board can be assessed. I don't believe that Government was too vulnerable to lobbying effort. I did believe and do believe that lobbying capacity is not equally distributed around society and one of the strengths of social partnership was that it gave everyone a seat at the lobby table and they had to listen to each other. There are other ways of doing social dialogue, clearly, but all of that is supported, in my view, by a good regime and a realistic regime for monitoring lobbying activity.

Okay. Just on the burning of bondholders, can you outline for us what was the difference in response from Europe, from, I presume it'd be, Trichet and the G20, or G8 or whatever it was ... that were influencing the fact that this wasn't going to be accepted? What changed between November and March, if anything, to the position of the EU and the troika and powers that be? Harden, weaken, was it the same?

Mr. Dermot McCarthy

My impression, Senator, is that it didn't change.

Okay. Did the efforts from the Governments of the day change or were they equally powerful and robust, or not?

Mr. Dermot McCarthy

I think there was extensive engagement on both occasions and there was an expectation of a measure of agreement for different reasons on both occasions but, ultimately, on both occasions the answer was "No".

Finally, in the establishment ... and commentary on the establishment of the Dáil about this inquiry, the Taoiseach spoke of uncovering what he described as the "axis of collusion" between Fianna Fáil, the banks and developers. What's you're own view of a statement like that?

Mr. Dermot McCarthy

It's a political statement, Senator, and I've come to appreciate all political statements.

But in the context of the inquiry?

There's an answer now using all your experience.

Would your knowledge - just, it's a very supplementary question - of your 11 years, obviously, in the Department, working under five taoisigh and, indeed, the benefit of hindsight lead you to believe that such commentary represents fair comment, or not?

Mr. Dermot McCarthy

Well, maybe not to comment on the comment but to comment on the substance of the issue-----

But I've asked you about the comment, now, in fairness.

I'll allow Mr. McCarthy to make his own interpretation of it as well. You can ask the question but Mr. McCarthy gets to make the answer.

Yes, well I've often heard you direct witnesses to answer the question.

I have but I don't think we're in a situation here where I'd be giving Mr. McCarthy-----

Well, I think it's an important question. I think it's an important question and I would ask you to answer it to the fullest extent possible.

Mr. Dermot McCarthy

In so far as, if you like, the substantive dimension is concerned, I didn't form a view or reach a conclusion that the actions or policies of the Government were based on a relationship or a disposition towards sectors or institutions. And I think it will be one of the beneficial outcomes of this committee's work to provide material and reach conclusions that may help the broader public to form a view.

Thank you very much. Have you anything else, Senator?

Are you happy with that now?

If that's bringing us-----

Are you happy with that?

No, I'm not particularly happy with it. But that's all I'm getting, isn't it?

Sorry, can we please return to the meeting there? And we'll conclude with Mr. McCarthy. Mr. McCarthy, is there anything by means of further, final, additional comment that you might like to add before I bring proceedings to an end?

Mr. Dermot McCarthy

No, thank you, Chairman.

Okay. With that said, I'd like to thank you again, Mr. McCarthy, for your participation today, and for your very accommodating engagement with the inquiry in regard to scheduling, and to now formally excuse you in that regard. I propose that the meeting is adjourned until 9.30 a.m. on Thursday, 16 July 2015. Is that agreed?

The joint committee adjourned at 9.36 p.m. until 9.30 a.m. on Thursday, 16 July 2015.
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