I welcome the Governor of the Central Bank, Professor Patrick Honohan.
Banking Crisis Reports: Discussion with Governor of Central Bank
Professor Patrick Honohan
Following publication of my report to the Minister for Finance I promised to come back to the committee to discuss the report and the question of the further stages envisaged for investigating the banking failures. In preparing my report, I had the benefit of a very effective team which was rapidly assembled to make sure that the job could be adequately addressed in the limited time available. The members of the team are listed in the report and I would just like to mention here the contribution of Rafique Mottiar, who is with me here today, Donal Donovan and Paul Gorecki, who led the team, as well as Nodhlag Cadden and Suzanne Pepper, also with me today, who organised the logistics and background work.
I remind the committee that the context for these reports is that "the Government considers it essential to thoroughly examine the conduct of the banking sector in recent years to arrive at a fuller understanding of the root causes of the systemic failures that led to the need for extraordinary support from the State to the domestic banking system." The Government has envisaged a two stage approach to the investigation, the first stage of which involved "preliminary reports" potentially providing a basis for the Government and the Oireachtas to prepare the terms of reference for the second stage, involving the establishment of a statutory commission of investigation.
The report I have prepared in response to the Minister for Finance's request is on "the respective functions of the Central Bank and Financial Regulator... in assessing and responding to risks to the stability of individual institutions as well as to the banking system as a whole". Although the report was described as "preliminary", it has been possible to establish a fairly clear and comprehensive understanding of the matters in question. Clear and unambiguous conclusions have been reached on most of the issues on which I was asked to comment, and there will not be any substantial need for further factual investigations regarding the performance of the Central Bank and Financial Regulator in these matters.
In preparing the report, an in-depth review of the powers, responsibilities, philosophy, mandate, resources, policies and actions of the Central Bank and Financial Regulator was first carried out on the basis of publicly available sources, such as annual reports, strategy statements, financial stability reports, proceedings of the Oireachtas, and speeches; and minutes and board papers of the Central Bank and Financial Regulator, as well as extensive internal files, principally of the Financial Regulator.
Documentary material only takes one so far. To obtain additional background information as well as elicit views of key officials, an extensive series of interviews was undertaken running to about 120 hours; all persons requested to attend an interview did so. All of the directors of the CBFSAI and the regulatory authority, as well as all senior management, managers and deputy managers in relevant units of the CBFSAI during 2003-08 were interviewed. In addition, several other officials of the CBFSAI provided invaluable assistance on a number of important issues. In addition, to obtain a fuller picture, interviews were also conducted with a number of senior officials of the Department of Finance, the NTMA, the former Financial Services Ombudsman and three former bankers.
There are legal constraints on the detail which can be published on individual credit institutions but I have sought to disclose as much detail as possible within these constraints. That meant concealing or scrambling the identities of individual banks in many places, but I do not think this has materially hampered the presentation or interfered with the possibility of explaining what went wrong.
The committee discussed last week the work of Klaus Regling and Max Watson. Their report overlapped to some extent with mine in that they devoted some attention to bank regulation and financial stability policy. They also discussed at some length macro-economic and fiscal policy on which my report had relatively little to say. There was a substantial degree of concordance between the two reports.
To repeat the main conclusions of my report, it points first and foremost to prima facie evidence of a comprehensive failure of bank management and direction to maintain safe and sound banking practices. This failure of bank management was not sufficiently countered by regulatory and financial stability policy for three main reasons: a regulatory approach which was excessively deferential and accommodating, insufficiently challenging and not persistent enough; under-resourced bank supervision that, by relying on good governance and risk-management procedures, neglected quantitative assessment and the need to ensure sufficient capital to absorb the growing property-related risks; and an unwillingness by the CBFSAI to take on board sufficiently the real risk of a looming problem and act with sufficient decisiveness and force to head it off in time.
The report also points to the contributory role of macro-economic and budgetary policies which contributed significantly to the economic overheating, relying to a clearly unsustainable extent on the construction sector and other transient sources for Government revenue, and encouraging the property boom via various incentives geared at the construction sector. A less accommodating and pro-cyclical policy would have greatly reduced the need for preventive action from the CBFSAI.
When I appeared before another Oireachtas committee in December I said, "We understand some of what happened, but some of it is still hard to understand." We now know a lot more about the dimensions of the crisis on which my report has focused, leaving relatively little to be explored at the factual level by the proposed statutory commission of investigation.
As far as other areas which deserve further study are concerned, in the same general territory, but just outside the terms of reference for my report, we still do not know enough about the risk management and decision processes in the major banks and how they failed to avoid disaster. It would be useful to commission independent reviews of risk management and governance of these matters for at least the two big banks. This can be a useful exercise on a forward looking basis anyway, but looking at the period 2003-08 would be key for the present purposes.
The potential role of accounting and auditing professionals is another matter that deserves additional factual exploration. It may be that this particular aspect should be deferred until after more of the NAMA purchases have been completed, because judging from the evidence provided to this committee in April by Brendan McDonagh, the due diligence for these purchases seems to have revealed some issues around loan documentation.
Finally there may also be a case for commissioning a study of the operations of the mortgage intermediaries in loan origination during the boom period.
At the Central Bank, we have learned our lesson and are already putting in place new procedures and arrangements that take account of that, and we will be making further announcements on this in the coming weeks.
I welcome the Governor of the Central Bank and his colleagues and congratulate him on a ground breaking report. It is comprehensive in its analysis of the issue.
The Governor referred to his appearance at the Oireachtas Joint Committee on Economic Regulatory Affairs in December. At that meeting, he called for a public inquiry along the lines of that into 11 September. He said there should be a detailed examination of the activities of the banks, Civil Service and key politicians. In the report, the Governor stated 75% of the fiscal crisis resulted from domestic issues. Is it not appropriate then, that the commission of inquiry should involve an examination of Government policy? The draft terms of reference for the report exclude that, although risk management for the banks is included.
What is the Governor's view on the resolution regime for banks? Has enough been done? Would it have made a difference if there had been a resolution regime in place before the guarantee was put in place, particularly for Anglo Irish Bank and Irish Nationwide Building Society? Who did the Governor interview? Did he interview the Taoiseach, who was Minister for Finance during the period, and the current Minister for Finance, the former Governor of the Central Bank or the former Financial Regulator?
The Governor made a presentation yesterday where he outlined the need for a tax on financial transactions. Could he elaborate on that? He also referred to the need to set aside reserves at Government level. I feel we do not provide a cushion — should this form part of our economic policy?
Does the Governor agree with Ewald Novotny of the European Central Bank's Governing Council, when he stated that we are now moving into an era of crisis in public finances? It has been borne out by the fact that since the €750 billion stabilisation package was put in place, the ten-year bond yield is still going up, particularly in our own case. Inter-bank rates are climbing, because there is a worrying exposure of the banks themselves to sovereign debt. How does the Governor see our borrowing requirements?
In the report, the Governor stated that the guarantee scheme was too generous and that he felt it should have been curtailed when it came to bondholders. Could we get more detail on that? What form should the extension of the guarantee scheme take in September?
On page 120 of his report, referring to the time of the guarantee, the Governor stated:
Only sketchy records seem to have been kept of the intensive round of informal meetings in the days and weeks prior to 29 September or of the events of that night. Although recognising the severe pressure in rapidly unfolding events, greater transparency with respect to the unprecedented decisions being considered, and the far reaching implications, would have been desirable.
Would the Governor define "sketchy"? Was he surprised at the lack of records kept? What type of records should have been there and were they consistent with earlier record keeping?
The draft terms of reference for the inquiry only relate to the period up to 28 September, crucially excluding the critical date of 29 September. The crisis is not simply about discovering who did what and who knew what. To uncover the deep roots of the crisis, we require expertise and broad social understanding. The Governor stated that there should be a detailed examination of the activities of the banks. Can there be a commission of inquiry without including up to and beyond the guarantee in terms of the decisions made by Government and about Anglo Irish Bank since then? Can any inquiry take place if it does not include Government macro-economic policy, considering 75% of the financial crisis was caused by "local" factors? Should the role of the Department of Finance be considered in the context of macro-economic policy in the inquiry? The commission of inquiry deals with the role of the Department of Finance in direction of financial supervision but not with macro-economic policy.
Professor Patrick Honohan
Deputy O'Donnell started with a question about the nature of the coverage of the public inquiry and I will answer that question last.
He also asked about the special resolution regime and this is an interesting and complicated question. The way I see it, if we try to grasp the essence of what people are talking about when they talk about the need for a special resolution regime for banks, is that solvency regimes for normal companies are designed around getting an arrangement and a settlement between creditors, monitored and supervised by a court, and which unfolds over a period of months, sometimes years. If a bank, with its short-term liabilities, is in trouble and found to be insolvent, months and years will not do the trick, one has to act quickly. If there was a special regime for banks which would take decision making out of the courts and remove the right of creditors to have their property rights defended in the normal way and transfer that to an agency such as the Central Bank or a special agency of that type, or it could be a court but under special circumstances, that would allow one to act quickly to separate the good parts that needed to be continued by the bank and leave the bad parts behind. That separation does damage the property interests of the creditors who are left behind. One is left with an entity that is pulled apart and the creditors left will have a grievance. They will say they had a claim on the whole thing, not just on what is left here.
Prior to the guarantee scheme being put in place, alarm bells were ringing in Anglo Irish Bank for the previous two years given that credit was not being extended by the NTMA to the bank. If a resolution regime was in place, would it have saved the taxpayer?
Professor Patrick Honohan
The "if" question is what can one achieve in a resolution. What kind of resolution regime will be acceptable to the Oireachtas and will be permissible constitutionally in Ireland, given the protection of property rights? This is the question we are now grappling with in trying to design a special resolution regime. We are working on this at the moment to see if a way can be found to separate those property rights that does not violate the Constitution and is acceptable to the Oireachtas. If one had a scheme in the American style — it does not have our Constitution, it has its constitution — then one could have acted in a way that would have separated those property rights. That is a big "if".
It would have ensured that bondholders would have shared in the risk.
Professor Patrick Honohan
The possibility is there for the Americans and they have arranged bank resolutions in which bondholders have lost up to September 2008. Since September 2008, as pointed out in the report, in this more tense environment they have closed 200 banks in the states and I have not found that any account holders have suffered since then which is indicative of the concern that policy makers have now about destabilising anything in the financial markets. We are at the edges of what is possible. Legally, things like that are possible in the states but, for whatever reason, in the past two years those 200 banks have——
The follow-on point is this. This links in to the sketchy records which would have been there at that time. Can Professor Honohan elaborate? He mentioned the various routes that could have been taken with Anglo, such as emergency monetary mechanisms, and various other forms that could have been used. Based on what Professor Honohan has analysed was there a sufficient investigation of the correct route to take in respect of Anglo or did he find that "no bank would fail" became effectively a mantra and the mantra became policy rather than seeking out what was best for the taxpayer?
Professor Patrick Honohan
The impression I have is that although other options were considered several months in advance, including the development of a special resolution regime, no way was found at that time to make that legally effective. It was not as if somebody said we could have a special resolution and this is the heads of a Bill. That ran into the sand because nobody could see clearly the way out and they did not develop it to the point that I think we can try to develop it now.
With regard to Anglo Irish Bank, in his report the Governor stated: "Nevertheless, the extent of the cover provided (including to outstanding long-term bonds) can – even without the benefit of hindsight – be criticised inasmuch as it complicated and narrowed the eventual resolution options for the failing institutions ...". Will Professor Honohan elaborate on that both in the context of the overall guarantee scheme at the time and how Anglo Irish Bank and Irish Nationwide should have been dealt with in a different way?
Professor Patrick Honohan
A few days earlier there was a failure of a big American bank and the bondholders were left behind. The new purchaser just took on the deposit liabilities and bondholders were left behind. That is the alternative. Could that have been done for Anglo?
Professor Patrick Honohan
The answer is that if one wanted to keep Anglo Irish Bank going in the Irish system one probably could not have done that but one did not need to guarantee those bondholders. What would one do later, suppose one did not guarantee them? One would still be there saying, "I hope, against hope, that I am going to be paid." What would one do now? Well, it is such a difficult hypothetical scenario to figure out as financial markets are still very tense. People would still be reluctant.
In the particular context of Anglo Irish Bank——
Six minutes remain in the Deputy's slot.
——to date €14 billion of taxpayers' money has gone into Anglo Irish Bank. In the context of the guarantee scheme does Professor Honohan believe the bondholders should have been left outside the guarantee scheme for Anglo Irish Bank?
Professor Patrick Honohan
I believe that it would have been better to leave them out but I do not think it would have saved €14 billion. One might have saved a bit, relative to what the end result would be.
How much would have been saved?
Professor Patrick Honohan
I will not put a number on it because this is still in play. We do not know if the subordinated bondholders will be made whole eventually. We just do not know that. The Minister has indicated that in extending the guarantee scheme for certain liabilities, as I think it is right to do, while the whole system is still being recapitalised and stabilised for a number of months, he is not going to extend the guarantee for the subordinated debt holders. I do not know where the subordinated debt holders will stand in Anglo Irish Bank.
In the short time I have left, can the Governor deal with the issue in terms of the guarantee scheme and the sketchy records, what he expected to see and who he interviewed? Did he interview the Minister?
Professor Patrick Honohan
The Deputy will see in the report all the people we interviewed, that is, all the directors and the senior management, all the people whose names appear in the document. That includes all the former senior people, both directors and management. In terms of——
The politicians.
Professor Patrick Honohan
——the politicians, obviously I speak with the Minister for Finance on a regular basis. We have had occasion to speak about the events but I did not interview him.
The current Taoiseach.
Professor Patrick Honohan
No, I did not but I thought about it. I just had the sense that there is time to do that if that needs to be done.
Does the Governor consider that should be done as part of the commission of inquiry? In the limited time available perhaps he would deal with that issue.
Professor Patrick Honohan
As far as the public inquiry is concerned, I am sure other Deputies and members will want to discuss that issue. Public hearings are very useful for understanding people's attitudes and motivations but for fact finding, they are not so useful. That is how I would colour an approach to public hearings and the people one would like to interview or not interview in public.
Given that 75% of the financial crisis was caused by domestic factors, is it appropriate that Government macro policy — this would include the Department of Finance — should form part of this commission of inquiry, in order for it to be comprehensive?
Professor Patrick Honohan
These are two separate questions. On the question of the Department of Finance, Mr. Somers was talking on the radio on Saturday about that. He has long experience in the Department of Finance and he has strong views on that. I would encourage the committee to ask Mr. Somers about his views——
What are the Governor's own views?
Professor Patrick Honohan
I do not want to stand against Mr. Somers's view. Last January when the Minister announced the start of this process he talked about the response and he said that part of the examination would cover the response of the relevant Departments and agencies, including the link between the banking crisis and overall economic management. That was the Minister for Finance's statement of January. In my view, this is not a great issue——
Is it Professor Honohan's view that under his terms of reference on day one, this would lead to a commission of inquiry that would also include Government macro policy? I looked at the terms of reference and certainly they would lead one to believe——
Professor Patrick Honohan
I had a chapter in my report about the macro situation. I interviewed the three senior officials of the Central Bank, one of whom is not mentioned separately because he was a director of the bank. I am sure they and others would have no difficulty——
I have a final question. Professor Honohan in his report finds that 75% of the crisis was caused by domestic factors. A commission of inquiry would have to deal with banking, with the individual banks, with Anglo and Irish Nationwide specifically, with the issue of supervision of the banks and the Department of Finance in that context. The one ingredient missing from the draft terms of reference is Government macro policy, and also the role of the Department of Finance. Based on the fact that in his own considered opinion, three quarters of the cause is due to local domestic issues——
Professor Patrick Honohan
But not necessarily three quarters due to Government macro policy. The reason I am hedging around here is that——
Yes, you are.
Professor Patrick Honohan
——I have a certain amount of difficulty with the whole concept of this commission of investigation. I do not really understand what the Government has in mind for it. When I was asked to do my report I said I know how to do a report like this and I have done it and there are certain other things that I think could be investigated in similar ways but I have a little bit of difficulty understanding what the motivation, goal and nature of that commission of inquiry is. If I understood that, then I would be able to answer more clearly what should be included and not included in it.
I will finish on this point. Under the terms of reference given to Professor Honohan, he was to look at overall Government macro policy and the crisis. It was a three-pronged approach to include the banking system issue, the issue of the regulation of the banking system and Government macro policy and the root causes of the crisis. Professor Honohan has stated that uncovering the deep roots of the crisis is the important factor. Based on what Professor Honohan said at the joint committee last December, he appeared to agree when asked if he wanted a public inquiry, that in terms of consistency it is not actually finding out and turning over every rock, it is about finding a system where we understand——
Professor Patrick Honohan
Exactly.
We still have not heard from some of the principal players. Professor Honohan said that maybe another forum could deal with the current Taoiseach who was the former Minister for Finance. Can we take it that in the interests of best governance, a commission of inquiry should examine Government macro policy? I ask him to answer that point.
The Deputy has overrun his time. Other members are entitled to ask questions and they must be allowed a bit of time.
Professor Patrick Honohan
I certainly think that Government macro policy is part of this envelope. It is part of what we are studying overall. I reserve my position on the commission of investigation and whether it should be in a particular element of its terms of inquiry because I do not really understand that commission. I will come back to that question, I am sure, in response to other questions.
I remind Deputy Burton that she will have 20 minutes as she proposed.
I thank Professor Honohan and the team working with him for what I think Herr Regling described the other day as an epic report. I presume that in 20 years' time, students in business school will have this as a case study and Professor Honohan will be going around doing the seven hours. It is a very good report. Because it sets everything out in clear English and largely does not pull its punches, it is very useful to the current debate. A number of reports like this one would mean we could avoid an expensive judicial commission of inquiry on the scale of the Moriarty tribunal and other tribunals because, to be honest, I do not think the country can afford that kind of inquiry, given the state of the finances at the moment, particularly when very often, these inquiries are set in a particular structure to achieve a particular answer.
I want to ask Professor Honohan about a number of matters. Professor Honohan said that if he went back 18 months from September 2008, he would be in the early days of the spring of 2007. It is obvious from his report that from the end of 2006, something was going seriously wrong with Anglo Irish Bank. It was also becoming a bad model in the sense that other boards of directors were questioning the other mainstream banks as to how those guys were doing so well. The graphs show that basically their lending and profits were growing at an exponential rate. Does Professor Honohan think the signs were there in terms of any ordinary analysis of banking data that Anglo Irish had uncovered a new Irish model of how to make money as a bank? Most banking analysts would have decided — in particular the Central Bank and the Financial Regulator — to look behind what was causing this extraordinary continuous growth and try to find out whether it was real or a bubble.
The second question arising is that even if this was not visible to regulators and the Central Bank, even though I think they did know and I would like Professor Honohan's view, were they in a growing panic, with first denial then suppression and then a case of just deciding not to talk about the awkward relative in the corner?
In March 2008, the share price collapsed in what was called the St. Patrick's Day massacre. In Dublin, London and probably in New York, a series of brokers in particular were aware that something had gone wrong with the bank and they did what they normally do, they withdrew their confidence in the bank by collapsing the share price. What warning signs or red flags did that send up in the Department of Finance, the Central Bank and the Financial Regulator? Does Professor Honohan think it credible that somebody who is at the apex of the structure as Minister for Finance, could have been left uninformed by the officials in his Department, by the Governor of the Central Bank — there are regular formal and informal meetings with the Governor of the Central Bank — and the Financial Regulator? I ask Professor Honohan to comment because it seems to me, and I think it is implicit in his report, that action should have been taken earlier. Ordinary bank analysts were reading the signals of a growth structure that was unsustainable and then there was the share price collapse a year and a quarter later. From there on in, there was an incredible crisis in that bank. We see from Mr. Casey's published affidavit in The Irish Times last week, that there was within the institutions what he described in capital letters as a green jersey agenda. What was happening there? Were they in awe because the people in the bank were extraordinarily rich? In footnote 12 on page 17, Professor Honohan states that they were “well-liked in political circles”, and of the other principal character in Irish Nationwide that he was “politically well-connected”. Will Professor Honohan comment on the meaning of the phrases “well-liked in political circles” and “politically well- connected”? These people were not politically connected to me and I would like him to expand on what he means by that?
Professor Patrick Honohan
Let me find one item before I comment. We say at several points and when we do not say it, we imply, that the regulator should have tumbled to the fact that Anglo Irish Bank was a very severe risk of things going badly wrong. We have that illustration of just because a bank looks as if its loans are backed by property, when one is in a bubble, the property can very suddenly loose its value. That risk should have been factored in but it is clear that this fact was not spotted. The sentence I was looking for in the report is where we actually break with custom by saying explicitly in the case of Anglo Irish Bank that as late as the middle of 2008, the regulator definitely had no solvency concerns about Anglo Irish Bank. That is a salient matter. The Deputy's question runs on to ask whether the Minister for Finance should have taken some action or should have known this.
I asked whether he would have known, or would have been advised.
Professor Patrick Honohan
He was not advised by the Central Bank or the Financial Regulator because the Financial Regulator did not have that. In paragraph 8.19 I state: "The clear consensus was that the problem was essentially one of liquidity rather than of solvency". There is another paragraph where I state explicitly Anglo Irish Bank. What were they doing if they were not worrying about Anglo Irish Bank's solvency? They were worrying about liquidity. They were seeing depositors not rolling over their funds. I am not talking about people coming in off the street but wholesale depositors, foreign institutions, foreign corporates, foreign banks not rolling over their deposits because they had decided that Irish banks were too heavily indebted overseas and so forth. This meant there was a drain on liquidity about which the Central Bank was very concerned and it could see that if this continued, the banks would have problems, which they did at the end of September. However, almost a year in advance of that, the Central Bank was starting to be concerned about that drain away of liquidity and its entire focus was on the fact that our banks were not able to roll over deposits from largely external depositors. We in Ireland have to take action against this drain of deposits, not in a sense stopping to consider or have a second thought at whether there was any justification for such a drain in deposits, as indeed there was for depositors in Anglo Irish Bank, as we now know. We now know there was something in the point of view of the depositors who were not willing to roll over their deposits. They did not know that the deposits would be guaranteed ultimately. That preoccupation with liquidity crowded out all other concerns. It was not as if they were sitting around doing nothing, they were working very hard to try to arrange that the liquidity would be available.
I was asked about the green jersey agenda and this touches on some matters that are under investigation and I do not want to talk about them. Largely the green jersey agenda was a concern to "Let's make sure the Irish banks have enough liquidity because the people out there on whom we have relied are not rolling the liquidity." I am referring to the situation two years ago and this was an understandable concern, but in a way it was looking at only one dimension and not the dimension of solvency. That is what the Minister for Finance would have been worrying about. He would have been asking about liquidity and whether we had it under control and if they would be a problem. He would not have been saying——
Does Professor Honohan think the Minister for Finance must have been told something by his officials?
Professor Patrick Honohan
I am sure the Minister for Finance was told in the sense that I have not tracked documentary evidence. However, I am quite confident that the Minister for Finance, would have been informed on a regular basis of the liquidity positions of the Irish banks.
Did Professor Honohan think that speaking to the Minister for Finance, and the serving Minister for Finance at the time, was outside his remit?
Professor Patrick Honohan
No, I am trying to avoid putting on record something that I am not 100% sure of. The domestic standing group, which we describe in the report, is a committee between the Central Bank, the Financial Regulator and the Department of Finance, the NTMA sometimes attended also. This meets on a regular basis at senior level and it communicates all relevant information, quite freely and openly. I can be sure, obviously I am thinking of my current situation, and I can inform and discuss things with the Minister for Finance and do. I can also be sure that when I am talking to the Secretary General of the Department of Finance that the message I would like to have conveyed will be conveyed to the Minister. I do not have any doubt that the Minister would have been aware of the liquidity situation, but he would not have been aware of the solvency concerns because the regulator did not have solvency concerns.
Is it not the primary role of the Central Bank and of the Department for Finance to ensure the prudential side of banking?
Professor Patrick Honohan
Absolutely, and this is why we identify——-
Will Professor Honohan take me through this again? We have top people earning large salaries and while they are looking at liquidity they totally forget about the solvency of the banks.
Professor Patrick Honohan
No, it is not good. This is what we are identifying as failures. No doubt about that.
Will Professor Honohan explain what he meant by "well-liked in political circles" and "politically well-connected".
Professor Patrick Honohan
I put that paragraph in as a footnote. It states:
While it is easy to imagine that senior management or CBFSAI Board or Authority Members might have instinctively and almost unconsciously shied away from aggressive action to restrain politically connected bankers and developers during a runaway property boom, no evidence has been presented suggesting that this was the case.
While that is absolutely right, I thought it would look completely naive. We are living in a real world. People know each other. These are personalities. They are well-known people and I thought that I should give some flavour of what I know and what everybody knows and everybody in the regulator's office knows. I thought I would give some flavour of that in this footnote. I would not change a word of it. I think it captures in a way the sort of environment in which things happen. That would be the case in any country. I do not find it surprising. I just pick out the individuals. These are the facts and this is the environment. I do not want to change a word of it.
I thank the Governor. The report indicates that a number of supervisors at middle rank in the regulator's office and a number of people who wrote commentaries, again I think in the Central Bank, were concerned about certain things, but when these were passed up the line, nothing happened. There is an old Sicilian saying that a fish rots from the head down. Is this not a case of this fish rotting from the head in all the institutions, the political institution, the Minister for Finance, the Central Bank, the regulator and the Department of Finance? In that context, given the catastrophic mistakes that the bodies made, which will cost future generations a figure ranging from €25 billion to as high as €40 billion to €50 billion in the long term, how many employees have been sacked? How many people have had their pay reduced? An officer was recently drummed out of the Army for making a very rude statement to a superior and the people of this country will eventually get the chance to give their verdict on its politicians but have there been any consequences for people working in the Department of Finance, the Central Bank or the Financial Regulator?
Professor Patrick Honohan
It is difficult for an expanding institution to get staff with experience, whether it is good or bad experience. People can learn enormously from mistakes made by institutions and cutting off noses to spite faces is not what I do. I and my senior colleagues have allocated many new staff to roles in the organisation where they are effective, based on their abilities and experience including the experience they gained during the crisis. I do not carry passengers but want to run an organisation which delivers on the goals set by the Oireachtas. In that regard, my allocation and deployment of staff are as good as I can manage at present.
Does the Governor think some of the middle-level staff, who were identified as having brought matters to their supervisors, might feel some angst that no action seems to have been taken against the people at the top? Some of those people receive pensions which are far higher than what some of the employees earn. On RTE the other evening, Seán O'Rourke produced a very expensive golf ball with the logo of the Financial Regulator. Is this what financial regulation in Ireland is all about? Did the Central Bank have golf balls with its own logo, or teaspoons or anything else?
Professor Patrick Honohan
I am not sure whether it would make the Central Bank better or worse if it had its own golf balls.
The Governor's report refers to excessive deference and diffidence. Can he explain the mindset of a public regulator in this scenario? Anglo Irish Bank had cupboards full of golf balls and other golfing material, such as umbrellas for a rainy day. Of course, the rainy day only came for the general public — it did not come for bankers. Is this appropriate behaviour? Has the Governor of the Central Bank sent a memo to staff forbidding golf balls carrying its logo?
Professor Patrick Honohan
I think the message has been received and the golf balls have now been handed out to RTE correspondents. I do not know of any golf balls or umbrellas in the Central Bank any more, so one does not have to write memos.
It is out of stock.
Professor Patrick Honohan
Yes. We are completely out of stock.
Given what Professor Honohan said about the people in banks who were politically well connected and well liked, does he think it appropriate that the non-executive directors of the Central Bank of Ireland and the Financial Regulator should continue to be directly appointed by the Minister for Finance without an outside agency, such as a Dáil committee, to check their credentials? We were talking about the boards of the banks but that of the Central Bank is given at the front of the report and it seems to comprise the same people. Knowing what we now know about the catastrophic failures in our system, is it wise that the Minister for Finance from the ruling party of the day should have complete say over the non-executive directors? Is it right that those non-executive directors should not be subject to any scrutiny, public or private, as is the case in most other countries? If people take up high positions or responsible public offices, should there not be at least some probing of their qualifications, their mindset and their understanding of the responsibilities they are taking on? Indeed, should the same not apply to our banks?
Professor Patrick Honohan
In some countries there have been serious problems with the appointment of non-executive directors on a political basis and these have made their central banks a political football. I do not think that has happened in this country over the years so I do not see the urgent need for what the Deputy has suggested. Some countries have parliamentary scrutiny and there could be merit in that but it is not always clear what type of board member one would ideally want. I refer to this in the report. Should one go for a board of experts or a board of generalists representing society at large? There is a lot of expertise on the board but, traditionally, the expertise on the Central Bank board has been of a general nature. Some people have argued that the board should comprise only experts, finance people who could get stuck into the minutiae of finance, but that does not always work because decisions are made within broader society. It is a delicate decision and has to be decided on by a Government.
I have a final question.
I will allow the Deputy to come back in later but I am going to Deputy Michael McGrath.
I just wanted to ask the Governor whether he thinks the boards performed well.
I compliment the Governor, Professor Honohan, and his team for their excellent report. I compliment them on the volume of work they got through and the fact that they produced such a comprehensive report in such a short timeframe. Last week, I asked Mr. Regling and Mr. Watson to apportion a weighting to the different factors which contributed to the crisis in this country. They were reluctant to do so but Professor Honohan appears more open to it and reference has already been made to his attribution of 75% of the crisis to domestic factors.
On last Wednesday's "Six One News", Professor Honohan made it clear that the source of the problem lay with the banks. He also said that, while developers lose money, they only do so if someone lends them money and that, while a failure of directors and management was at the heart of the problem, other factors contributed.
In his opening remarks today he succinctly summarised the key domestic contributory factors. He referred to prima facie evidence of a comprehensive failure of bank management and direction. He also said the regulatory approach was deferential and accommodating and spoke about under-resourced bank supervision. He also referred to the unwillingness of the Central Bank and the Financial Regulator to tackle the issues, and the contributory role of macro-economic and budgetary policies which contributed to economic overheating. Last week the authors of the other report referred to the international aspect, presumably monetary policy in the eurozone, the availability of liquidity and the general macro-economic context. If those factors account for 25% of the crisis, if there is to be a hierarchy of responsibility for the 75% domestic factors, can the Governor detail the responsibility of the banks, their boards and senior management, the regulatory function by the Central Bank and the Government's macro-economic and fiscal policy?
The Governor is clear the substance of the guarantee in September 2008 was necessary otherwise the Irish banking system would most likely have collapsed within days, an outcome that could have resulted in the further loss of tens of billions of euro. In principle, does the Governor agree it was the right call in September 2008 to introduce a wide-ranging guarantee?
The Governor is also clear that Anglo Irish Bank was of systemic importance in September 2008. Was the inclusion of Anglo Irish Bank in the guarantee the correct call by the Government? The report is clear about what the consequences of not including it would have been had there been a disorderly failure of the bank — it would have had a devastating effect on the remainder of the Irish banks and in all likelihood the main banks would have run out of cash within days, which would have meant Armageddon for the economy.
Last week, Mr. Regling said there was very little good advice available to the Government during the years when the mistakes were being made. In May 2008, the IMF and OECD predicted 3% growth for the Irish economy in 2009. In 2007, the IMF report on Ireland referred to sound economic policies and praised the Government's approach on a range of issues and on the management of the economy generally. Why was the advice so poor, notwithstanding the domestic mistakes that were made by Government that have been acknowledged? Why was advice from the Central Bank and from these international organisations so poor?
Professor Patrick Honohan
The 75% to 25% calculation is based on a simple macro-economic calculation that we did in chapter 2 of the report. It can be set as an exercise now for students to improve on that estimate.
Was it being radical or conservative?
Professor Patrick Honohan
That is not clear. Trying to allocate or apportion blame as one might in a car accident is not easy because these are like layers of protection.
If the banks had been doing their jobs, there would be no need for a Central Bank and Financial Regulator. In the early days of the State, until 1943, there was no Central Bank, only a Currency Commission. The banks ran their own business without any Central Bank protection while the Currency Commission produced paper bank notes. To some extent that tradition of the big banks that had been around since the 1800s as being able to run themselves prevailed to a great degree up to the present day. The idea that either of the two big banks could get into such trouble was not within the bounds of people's imaginations. That is a failing but it is the context in which this occurred.
Given that the banks did not do the job, the next line of defence must be my organisation. People want to blame other participants such as the Government but the Government establishes an organisation to do that job. It can be second guessed but without wanting to defend anyone in particular, a Minister is entitled to assume the agency he sets up to look after prudential regulation will do the job. That does not preclude macro-economic policy and the reliance on volatile tax revenues from culpability. If we go back over the years, however, there is always discussion about macro-economic policy. In this case it is obvious it did not help. I cannot put a number on it.
To clarify, in terms of the domestic hierarchy, the first failure would be the banking practices, the second failure is that of the regulatory function and the third contributory factor would be macro-economic policy of Government.
Professor Patrick Honohan
In terms of the banking collapse, that would be the hierarchy. One might stand back, set banking to one side and look at the overall policy. Government is responsible for overall policy in everything so should there be a commission into inquiry into everything?
No, but it should be included in this commission of inquiry, it should not be left out in the cold.
Deputy O'Donnell could do his own report.
Professor Patrick Honohan
We looked closely at the guarantee and thought hard about it. Obviously it was a surprise to a lot of people but there would always have had to have been an extensive guarantee. In that sense, it was the right thing to do in general terms.
The Deputy asked about Anglo Irish Bank. It was of systemic importance, it could not just have been allowed to fail and do nothing else. In a very long footnote, another possibility is discussed. If they had known Anglo Irish Bank was really a €20 billion or more problem, which they did not, would there have been another way out? It is possible they might have said they would guarantee everything else and liquidate Anglo Irish bank. That could be imagined but it would not have been trouble free, there would have been terrible criticism across Europe that a big bank had been allowed to fail and that it destabilised everything. Some of the costs, if the whole system had gone, would still have existed but it could be discussed over and over if they would have amounted to €20 billion.
We were told it would cost €60 billion to €70 billion if that happened.
Professor Patrick Honohan
In the scenario where everything but Anglo Irish Bank was defended, it could be argued it would be less. Allowing Anglo Irish Bank to fail could have led to a much larger scale. It is easy with hindsight to devise possibly better solutions but we cannot come up with anything much better, except for the question of subordinated debt, which we have discussed already.
The foreign advice is interesting and it is informative that the team that the IMF sent in May 2006, which was made up of specialists on financial sector regulation, said the boxes were all checked. Basically it gave a clean bill of health to the system. It gives an indication of the international environment of financial regulation which had shifted to a somewhat hands-off approach in many countries. It was hands-off while things were not too bad but in other countries if things got out of hand to the extent of rapid growth and reliance on property markets, they would say "Hands-off" up to a certain point. That was a mistake that people made. It gives an indication that it was not as obvious to specialists as it might appear obvious now to a financial journalist and the like that this was not going properly.
If Deputy Morgan does not mind, I will call Senator MacSharry for a short question before he leaves.
I have three short questions.
That is okay, then I will take Deputy Morgan.
In respect of the international advice, why did Professor Honohan mention that Morgan Kelly's papers, written without quantitative research, should have been picked up on if the IMF financial sector assessment programme had given a glowing report of the position here?
Last week I asked Mr. Regling and Mr. Watson whether, in a small economy such as Ireland, there are adequate counter-cyclical options open to us to adequately offset the impact of a low interest rate? They had mixed views on the issue but I felt Mr. Watson was of the opinion that fiscal policy alone could not do that. What options would have been open to us that could have adequately counterbalanced against 2% money at 8% growth and the wish of everybody to take advantage of this party? If, during the times when we did not know what we now know, we had used the resources within the National Pensions Reserve Fund and spent them on whatever at the time, would that have seriously impacted on our ability to deal with the crisis today? Does Professor Honohan consider that if we had succumbed to many external pressures at the time to adjust stamp duty and, in particular, move towards its abolition, would it too have seriously exacerbated the situation?
Professor Patrick Honohan
I mentioned Morgan Kelly because he is an interesting character and is well respected in the very technical economics field as published in top journals. Among the academic economists — sit up and pay attention — he moved away from his normal field and started to write about property booms. An example of something that regulators should always pay attention to is a contrarian with coherent but not necessarily right views. Contrarians are nearly always wrong but it is the nearly——-
Nearly.
Professor Patrick Honohan
Do not tempt me.
Go on.
Professor Patrick Honohan
It is the "nearly" that matters. The challenge to regulatory structures everywhere is to pay attention to the contrarians. Listen to them and filter the information and say whether there is something in it or not. In his case, there was something in it. Did he just get lucky? Maybe, but he was well known and a clever guy and more attention should have been paid to him.
With the benefit of hindsight.
Professor Patrick Honohan
Many people said it was a bit exaggerated but it was something to be thought about. Just because much of what he would have said would not have stood up — he was quite late in the day and was almost too late but it is an interesting example. He writes in a way that I would not endorse and some of what he writes is damaging to the reputation of the country but one has to take the rough with the smooth with academic observers. That is why we have intellectuals and academics because they say uncomfortable things and sometimes they are right.
It is just that one does not know when they are right.
Professor Patrick Honohan
Yes, one has to stop and instead of saying "This is an article by Morgan Kelly, give me an answer in response to it", one asks whether there is anything in it that draws attention to it. There are some counter-cyclical options, not only fiscal policy options but also regulatory options, which we have listed. It is easy to say that now. They would have been unfashionable and would have caused much criticism and push back from the industry. When I speak with colleagues abroad about our experience they say it is very tough for a regulator to take actions of that type against political opposition. They did not want to take the actions, so that does not arise, but regulators everywhere do not want to land in this situation because they know there will be political pressure. I do not say that in a party political way. Any government will resist regulatory action that will slow down a boom. The options are there technically but will they be acceptable to the whole of the body politic?
The rainy day fund was needed and thank goodness for the National Pensions Reserve Fund, it would have been great if it had been larger. In regard to stamp duty, we have the wrong structure of taxes so it never seems a good time to abolish it. I wish we did not have stamp duty but it is never a good time to abolish it because it is so distorting in preventing people from moving to where they want to move. Bacon looked at stamp duty and tried to fine tune it. We will always have problems with stamp duty as a tax.
Is that the essence of stamp duty?
Professor Patrick Honohan
I would not want to abolish it in the middle of the bubble. I have not given a great deal of thought to that but I am sure that is probably the case.
I thank Professor Honohan and his colleagues for an interesting and excellent report. I wish to ask three brief questions. In his contribution the Governor said the potential for accounting and auditing professions is another matter that deserves additional factual exploration but he goes on to suggest that factual exploration should not occur until after a substantial part of the NAMA purchases have been completed. Will he please elaborate on that because some of us have a great concern with some of the auditing firms involved with NAMA. For example, Anglo Irish Bank's auditors which published the 2008 accounts unqualified, which turned out to be substantially different? Perhaps he will explain that because I do not understand his comment.
In his remarks today the Governor said:
The report also points to the contributory role of macro-economic and budgetary policies which contributed significantly to the economic overheating, relying to a clearly unsustainable extent on the construction sector... A less accommodating and pro-cyclical policy would have greatly reduced the need for preventive action from the CBFSAI.
In what period did that intervention or preventive action on a budgetary level occur? Was it in 2004, 2005, 2006 or perhaps all around that period? In the report the Governor asks "Why was the danger from the emerging imbalances in the financial system that led to the crisis not identified more clearly and earlier and headed-off through decisive measures?" What is the Governor's answer to that question which he posed in his report?
Professor Patrick Honohan
I did not catch the last item.
I am quoting from the report. He asked "Why was the danger from the emerging imbalances in the financial system that led to the crisis not identified more clearly and earlier and headed-off through decisive measures?" It is not intended as a smart question, I would like to hear the Governor's views on a potential answer to that question.
Professor Patrick Honohan
The first question was about auditors and potential conflicts of interest. The number of large auditing companies has shrunk over the years and one finds people sitting on different sides of transactions. I was not focusing in that context when I suggested that perhaps one could wait until NAMA had assembled all the evidence from the purchase of the loans to provide the complete story. This was what I had in mind in suggesting to leave it until NAMA has bought the loans. We know from Brendan McDonagh that he has discovered all sorts of issues about loan documentation, or so it is reported. I am presuming a complete picture would be available when the loan purchases have been accomplished. I would have thought that NAMA might be a potential source of guidance and information on the factual analysis of the question of how well the auditors did their work. I have not really tied it together in the way the Deputy has with the fact that accounting firms will also be active in that process. I do not know whether we should wait or go ahead.
Does Professor Honohan understand why some of us would have a concern as to the honesty or the competence of at least one or two of the firms involved, given the record we are now aware of?
Professor Patrick Honohan
I understand the Deputy's point. It is not one that occurred to me when——
Would Professor Honohan understand the concerns?
Professor Patrick Honohan
I understand the Deputy' s concern without expressing a view on the weight to be attached to it.
Why not?
Professor Patrick Honohan
Because I do not know enough about the accounting situation and those firms. As to the question as to when corrective action should have been taken, one could go right back over decades of macro-economic policy and criticise pro-cyclical behaviour. Indeed, I noticed that the chart dealing with these taxes that proved to be so fickle and which vanished so quickly and the share of those transient taxes, was growing and growing from 1988. This has been something that has been part of our social partnership process. As I have written about it before and it has been part of the deal for the past 20 or 25 years, I would not want to be drawn into precise dates at which, so to speak, "This budget good, this budget not so good, this budget bad".
What about the general theory to which I referred?
Professor Patrick Honohan
We know clearly enough the real bubble from the banking point of view and the excessive lending clearly started somewhere in 2003. The period from 2003 to 2007 is the real bubble period. I did not set out to give a score card of fiscal policy. That could be done at another stage. On the question of how things should have been detected and action taken, Deputy O'Donnell asked me about the few opening remarks I made yesterday in Trinity College at the conference, on how one should plan fiscal policy and how one should account for the volatility and vulnerability of tax receipts. This is something people have not thought about too much in the past. The Stability and Growth Pact was there and it was a case of keeping everything at 3% and things would be fine. We were comfortably under 3% and so we thought we would be fine. Now people are looking a little bit beyond that point and deciding it is more complicated. One may be in a situation where things look fine now but one could be very vulnerable to a small shock.
There has been a lot of talk recently about having an independent fiscal authority or agency that would vet and second-guess the Government's fiscal plans on that basis. International literature exists on this issue and Professor Philip Lane of Trinity College has been talking about the Irish context. We are a small country and perhaps going for a separate agency is not what we need. There is the thinking of looking beyond the immediate and short term and the initiative of the Van Rompuy commission about governance of fiscal affairs in Europe. Perhaps Europe can bring some of this review to bear on the overall fiscal situation.
I am a great believer in drawing on Europe and on external opinions and advice. The Central Bank is planning to do more of this with regard to regulation by borrowing a regulator from time to time. We will invite an individual to come and join us to inspect banks and to provide that external view. Those are some of my thoughts on how one can bring more information and more analysis to bear on when to take action.
Prior to his appointment, Professor Honohan may remember we shared a platform about 11 months ago at the Magill Summer School. He delivered a lucid paper about the effect of international banking collapses and the policy lessons to be learned. I delivered a piece of polemic that could probably be repeated today because things have not advanced very far in the meantime.
I am interested to hear to what extent Professor Honohan believes the policy direction he highlighted then and prior to his appointment has come to pass and whether he thinks there are other areas in which the policy still needs to be fine-tuned. I refer to Professor Honohan's excellent report. I like the fact that in the summary he uses bold print to emphasise key phrases. If they are all written down together it is almost like a Twitter version of the report.
Borrowing from the Senator's own skills.
I heard Professor Honohan make reference to the radio comments of Michael Somers yesterday. He made a few comments about his experience both in the National Treasury Management Agency, as a former civil servant in the Department of Finance and he may also have been involved in the Central Bank but I am not sure. Some of his comments were about an ongoing practice which I do not think was related to whoever was in government at any particular time and which I do not think was unique to Ireland, namely, the idea of quarterly reports from the Central Bank being vetted by the Department of Finance and being watered down with regard to their public impact. As a new Governor, can he offer us confidence that this kind of practice will not progress in the future? We see it in our next door neighbour where they appointed a new office of budget responsibility. It has been a criticism that Government will lack that power in the future to finesse, so to speak, these figures for public analysis and that has been a problem in the past.
I am also interested to hear the Governor's views on taxation. Does he consider the report of the Commission on Taxation gets that balance right in that we have relied on transitory taxes in the past and that what is needed is a basket of smaller, more directed and more direct taxes that are more guaranteed in terms of what can be collected in any financial year as opposed to what has been the practice in the past? I acknowledge there are political difficulties in introducing new taxes. I ask for his comments which would be welcome.
Both Houses of the Oireachtas are discussing the new structures to be put in place under the Central Bank Reform Bill. This is informed by some of the examination being carried out currently. Are the flawed structures, the balance between financial regulation and the role of the Central Bank, the relationship with the financial institutions, adequately addressed, in the Governor's view in the Bill? Will the new structures provide the confidence that has been lacking and needs to be gained for the future? Does he envisage the need to have a review process like the Central Bank legislation in the early part of the last decade? If it is not working will we need to look at a way of changing it?
Professor Patrick Honohan
With regard to the policy actions taken, the fiscal policy orientation has been set very clearly for more than a year. It is a credible path for restoring fiscal balance and, despite the pressures existing in other countries, the overall programme put forward by the Government makes sense and is on target. I am sure there will be increasing pressure to make the programme more precise and to say exactly what is going to be done. That will happen in the budget but there may be pressure for an earlier indication, just as announcements were made at the beginning of this adjustment which gave us a lot of credibility.
NAMA took a while to get off the ground but is working well. As I had expected, it is buying assets at prices that reflect the fact that the property market is very depressed, thereby avoiding the charge that it is a device for the covert recapitalisation of the banks. The banks do need to be recapitalised and the Central Bank has set out a credible and tough calculation of how much they have to raise by the end of the year. The policy actions are in the right direction and we are getting there, despite the quite difficult international conditions which have prevailed over the past number of months.
There were questions about the quarterly reports of the Central Bank and the role of the Department of Finance. Our economic staff consult with the Department of Finance and others when making forecasts and I hope that continues. The reports are signed off by the board of the Central Bank but the Secretary General of the Department of Finance is a member of the board so has a say. However, in our extraordinary institutional structure, the Governor of the Central Bank has great freedom to say what he or she feels. If the Secretary General of the Department of Finance wanted to remove a word in a quarterly report, I could always use the word anyway. I do not think that will be a problem in the future. Let us not suggest that dialogue among the different agencies of government is not constructive. It is enormously useful to hear the opinions of different agencies and, while we differ with them when we have to, we work co-operatively with them.
I do not see future taxation as comprising a basket of small taxes. I do not want to second guess the recent Commission on Taxation but the Commission on Taxation in the 1980s envisaged a very broad-based approach. One can collect much of what is needed by straightforward income tax and value added taxes. A well-designed property tax would be a great element of our tax structure so I would not look for a little tax here and a little tax there. A little tax here and a little tax there is very like a little tax concession here and a little tax concession there. A uniform tax provides a platform on which the best prospects for the economy can be built. There is more to be done in the improvement of the tax structure.
I was asked about Central Bank legislation. In the end, everybody was dissatisfied with the structure created by the 2002 legislation in which the Financial Regulator became an entity but not in a legal sense. The regulator was within the Central Bank with a certain amount of independence but that independence was ill-defined. This probably helped fuel a desire on the part of the people running the Financial Regulator to assert their independence and to resist interference, leaving the risk that things would fall between stools. As documented in the report, this is what happened to some extent in respect of the dialogue between the microregulator and the macrofinancial stability people. Such a dialogue is not easy to set up, however, and has not been easily achieved in other countries.
In the field of bank regulation, people talk about two cultures and they are not science and arts. They are regulation and macro-economics and their practitioners do not talk the same language. When I worked in the World Bank on teams comprising a dozen regulators and economists, the task was to get them to understand one another. If we went out for a meal the economists would sit at one end of the table and the regulators at the other.
The structure has now, in a de facto sense, been dismantled and the legislation in the Dáil will remove it statutorily. I am satisfied with that. Some minutiae remain, such as the need to ensure the new structure maintains the independence of the Governor in performing European functions, so amendments will have to be made to ensure it is compliant with the treaty provisions for the European system of central banks. Members should not be surprised to see a number of amendments including the words “subject to the complete independence of the Governor in...”.
I have a follow-up question. The difficulty in framing terms of reference for investigating the Department of Finance comes in separating the political role of the Minister for Finance and the role of the Department of Finance. Surely it must be possible to make a distinction between the two. On an ongoing basis, the civil servants in the Department of Finance produce policy but they often try to stymie a new policy if it runs against the long-standing policy. There have been administrative failures within the Department and they should be open to scrutiny and investigation.
Professor Patrick Honohan
I am sure that is correct but let us not zoom in on the Department of Finance. The relationship between Ministers and civil servants in the State is a fundamental issue. The role of civil servants in developing policy, and of Ministers in deciding policy, were live matters for discussion some decades ago. I do not think anybody is wholly satisfied with the way we have structured our arrangements but that is not to say they work terribly. If this is a matter of concern it is a matter of concern across the board. Everybody loves to bash the Department of Finance and that is not new — it goes back to the foundation of the State. I was recently reading——
How does the Governor find time for reading?
Professor Patrick Honohan
The first Governor of the Central Bank was Joseph Brennan, the Secretary General of the Department of Finance in the 1920s. He was an adviser to Michael Collins in the treaty negotiations, even though he was a British civil servant at the time. He fell out with Ernest Blythe and was the subject of a number of Dáil debates. In 1951, James Dillon said he did not like the Department of Finance, the Currency Commission or the Central Bank. He said we needed people like Joseph Brennan, who was no one else's man——
Like yourself, Professor Honohan.
Professor Patrick Honohan
We need the Department of Finance as a bulwark against what we might otherwise do. I would be very reluctant to see the Department of Finance isolated as something of a problem. It is a key part of our structure in society.
It is contrary.
Professor Patrick Honohan
It is not contrary. It has mainline people. This speaks to the whole business of what kind of investigation should follow on from this. I am not really clear in my mind that anybody knows the design of this commission of investigation that will be set up. What is it designed to achieve? Does it have the tools to do it? We can have a number of other reports, somewhat like mine, on the banks. There might be room for some hearings. The committee may want to see people and understand their attitudes and motivation and, for that reason, it can be useful to have public hearings. To lock this up into a commission of investigation without fully defined terms of reference and without a clear modus operandi ——
Does the Governor get that from the current draft terms of reference?
The Deputy is being previous in regard to what will be in the terms of reference.
On that point — I was not going to mention it — we would welcome further discussion with the Governor on his view and on the kind of people who should be on this commission which is critically important. Given that we have two wonderful foreign experts, it would be useful to have his views.
I welcome the Governor. The description of his report is an epic with which I agree. If I was sitting my leaving certificate next year I would certainly read and study his report. The two reports provide salutary lessons for politicians, the Government and all parties. If we take those lessons on board and if we respond positively and correctly to the crisis in order not to make the same mistakes, his work will have been worthwhile.
The macro-economic mistakes are accepted and the Government has put its hands up. The Governor mentioned, as did the two experts who appeared before the committee, our failure to counterbalance the stimulus provided by our entry into the euro. For me, that is probably one of the most important mistakes we made. Nobody has picked it up other than probably Dr. Garret FitzGerald in his column in The Irish Times. Perhaps the Governor would expand on that? What kind of counter stimulus should have been put in place in 2003, 2004 and 2005? Interest rates decreased from 6% to 3% as stated by Mr. Max Watson and Mr. Klaus Regling. Irish banks were into a cross-border borrowing scenario in a big pot of euro currency instead of the small pot of Irish currency and we all lost the run of ourselves. The banks gave out an extra €3 billion in three years. It was very difficult at the time. Nobody said, “hold on, a minute”. If I was a student in the Governor's economics class would I have heard him say “this is all wrong”. A salutary lesson that has to be learned for the future is that we got it wrong. The bonanza we got by going into the euro was the big problem.
The Governor mentioned governance. Mr. Regling and Mr. Watson mentioned seven times that we did not have the expert advice. Were it not for the crisis, the Governor would be lecturing in Trinity College and we would not have the benefit of his great performance to date. While I am not trying to be patronising, his laid-back approach is very refreshing.
We did not have experts such as the Governor in the public service up to now. It was remarkable to find that there were probably no significant specialists in the Department of Finance, in the Financial Regulator's office, the Central Bank or across the public sector. If we are to learn one really good lesson from this, is it not that the whole structure at the top level of the public service needs to be moved forward into the present era? I am not getting at the Department of Finance because it saved us from ourselves in regard to public expenditure many times. When considering that a recent report showed that of 314 people who presented for the post of Secretary General, only one could be successful and the major point by the foreign experts was that there was no proper advice. Will the Governor comment on the fact that this is a big lesson to be learned in terms of fundamental and radical reform not only of the financial element but of other elements of the public service at the top level?
On the guarantee I welcome what the Governor said in response to Deputy Michael McGrath and the necessity for it. It was being described as a disaster and there are lessons to be learned from that. On the question of the subordinated debt, there has been misunderstanding as a result of his comments. In his report, the Governor states that "it complicated and narrowed the eventual resolution options for the failing institutions [I take it these are Anglo Irish Bank and Irish Nationwide] and increased the State‘s potential share of the losses." The key word here is "potential". In fact, there has not been any losses to date. The reference to losses of €14 billion is ludicrous. First, it was only dated subordinated debt that was included in the guarantee and, second, in accordance with table A4 of the report the total subordinated debt for Anglo Irish Bank was €2.1 billion and for Irish Nationwide €300 million. Given that none of the dated subordinated debt, which was covered by the guarantee, has been repaid or is scheduled to be repaid before 29 September next, the earliest maturity date for these bonds is 2014, there will not be any losses and as the Governor said earlier the guarantee will not include subordinated debt. Therefore, the treatment of the subordinated debt will be in accordance with the restructuring plans of Anglo Irish Bank and Irish Nationwide as they have been presented to the EU Commission and the Irish authorities.
Is it true that the holders of the subordinated debt will not be exempted from possible losses after 29 September? Is it correct to say there will be no losses as a result of the subordinated debt. The Governor said earlier that it is an ongoing process. I am sure Mr. Alan Dukes and Mr. Mike Aynlsey will be well able to deal with their subordinated debt holders to ensure their losses are kept to a minimum.
In his report, the Governor mentioned the existing long-term bonds and suggested that the long-term bonds in Anglo Irish Bank and Irish Nationwide — I appreciate he did not name them — "complicated eventual loss allocation and resolution options." In the 1990s, Sweden included long-term senior debt in its guarantee. There is a precedent for that. To attempt to force holders of senior debt on that famous night of 28 September could have heightened the stress in the financial markets. In that difficult judgment it had to make, was not the Government right to include those debts given that many economists say there will not be a loss at the end of the day?
There was no time during the past year and a half when the Government attempted to restructure Anglo Irish Bank and Irish Nationwide that burden sharing with the long-term bond holders could have been achieved. In practice, what long-term debt senior bonds complicated "the eventual loss allocation and resolution options"?
On the issue of liquidity and solvency, if there is any defence of the Financial Regulator and the Central Bank, is it fair to say there was never really a question in anybody's mind of solvency being an issue? It is very easy for all of us in hindsight to say that this rather than liquidity was the issue.
Professor Patrick Honohan
I will start at the end with regard to this question of the decisions of September 2008. I agree it is easy to say with hindsight that solvency should have been recognised as the issue but actually it was the job of the regulatory structure to test and assess those things. Outsiders could not have known, neither could Ministers have known. Given the information they have, the regulators did not know. However, they could have had a method of supervision that would have obtained that sort of information and brought it to light. This is really where the problem lies, that going into September 2008, in fact, a year in advance of that or even further back, the vulnerability and the possibility of a solvency issue should have been much more to the front of people's minds. That is the message of our analysis. It would not be up to outside commentators or the Government or the Department of Finance to have that assessment.
The Deputy has made a statement with which I do not disagree, that numbers like €14 billion are exaggerated. However, I think he goes too far in the direction of saying that this potential can never be real. I do not want to go into an elaborate discussion of the "if this, then that" because, to some extent, the more I talk about this now, the more I am narrowing options as well. I think we should park that for a year or two and let us then look back with the benefit of history at what comes out. This speaks to some extent to the issue raised by Deputy O'Donnell as to whether investigations should continue to look into the months after September 2008 and up to the present day. Some of this work can be done with real-time scrutiny but some of it cannot be done with real-time scrutiny and we are in real time here in dealing with restructuring and restoring the health of the banking system. We are well on our way to doing that so we cannot be involved in——
Can the Governor confirm, as in his report, that the total potential loss, as he puts it, in Anglo, is €2.1 billion?
Professor Patrick Honohan
I really do not wish to get into refining this and it would not be a good thing for me to do.
To return to the earlier question of expertise and knowledge and spotting things going wrong, it is not just the free market orientation, it is the whole idea that the euro area was a seamless zone. We stopped looking at things like balance of payments and international borrowing. It was almost old thinking, so to speak, to be asking how much were we borrowing from abroad. There is no "abroad", we are in the euro area. As somebody said recently, perhaps it was the chairman of the UK FSA, banks are global in life and national in death. We discover the fact that national boundaries do exist when there are problems. This is one way in which that huge expansion of foreign borrowing in the mid-2000s, was not really on anybody's radar because they had turned off that part of the radar.
Regling and Watson said there was not good advice and to some extent, my report agrees the advice to Government was not adequate. There has been much talk over the past number of years about economic expertise in Departments. As a professional economist, I think there is a lot to be said for having more specific economic expertise. This was tried in Whitaker's time. He wanted to have an economic service and he had special streams of people training up in economics. I have not rehearsed or prepared this and I am speaking from memory but there was a sort of isolation of those people. They were in the economic stream, therefore, they were not going to be real career people going to the top of the organisation. That service was dissolved. The general Civil Service had some economists and some were not. I will speak positively about the Civil Service. I have been working quite closely with several senior civil servants. They are men and women of great ability and application. Most of them are not specialist economists. I think the place would do better if there were more specialist economists but there are excellent people working there who work hard and exercise good judgment. This is not a simple issue. This is a small country and I think we need to be constantly rebalancing the use of expert resources and devoting them to where the pressures are. One could spend one's whole day at meetings of working groups and committees in Europe, for example, and then not know what is happening at home. This may have been the case over the years.
The report documents the resources that were diverted from looking at what the banks were doing now to preparing the new Basel II CRD regime which is very complicated and elaborate and was going to provide us with a new and better system. However, this meant those resources were not being deployed to looking at the banks. It is not just the resources one has, but since they are limited, it is a case of where one deploys them. These are ongoing challenges for any Government or my own organisation. It is very easy for me to come in here from outside and say such and such was wrong but one must ask how well would I do in this situation and how well would I deploy staff and identify the appropriate staff, make sure they are on top of the information that will matter ahead of the game. We do not know.
I appreciate that answer. I agree with Professor Honohan that we have an excellent public service. However, the culture that existed in Whitaker's time is still there. Professor Honohan would not be here today were it not for this crisis. If we are to move forward into the new era of modern management, we must have private sector people involved. It is ridiculous that nobody has been able to come in from the private sector into the upper echelons of the public sector and we must have more people like Professor Honohan. This is one big lesson for us. All politicians over the years have agreed on the need for reform but it has not happened to date. Professor Honohan is only here because of the crisis and he is very welcome.
I think the Deputy is extending his time a little. We will move on to Deputy Terence Flanagan.
I thank the Governor and his colleagues for a fine publication. It is an excellent report which is frank and honest. It confirms to many people their opinion that close political connections were factors and that much of this crisis was home grown and caused by bad Government policy.
Has Professor Honohan examined the issue of the bonus culture in the banks? Did it contribute a huge amount to the reckless lending entered into by both lenders? What is Professor Honohan's opinion of the bonus-driven system for remunerating senior management? How might the system change in the future? The fact that Ireland had never experienced a property crash added an element of complacency and arrogance to certain people in banks and in government who could only see property prices increasing indefinitely.
Is Professor Honohan satisfied that enough change has been made in senior management at the banks and the Financial Regulator? Have the people at the front line prior to the crisis been removed or transferred to other duties? Professor Honohan's report states that attempts were made to introduce directors' compliance statements and to improve the corporate governance code but that lobbying took place to prevent such measures, even though the Department of Finance wanted them. Can he expand on that issue?
What should happen to the people who are guilty of wrongdoing and have destroyed this economy? What will result from the inquiry? Will it be a whitewash?
Professor Patrick Honohan
I wonder if I could ask the Chairman for a two-minute break.
Certainly.
Sitting suspended at 12.02 p.m and resumed at 12.06 p.m.
We will resume.
Professor Patrick Honohan
I will address Deputy Flanagan's question about the bonus culture in banks. I would like this issue to be focused on when we look at the behaviour of the banks as it did not come up in the examinations carried out by the supervisors. Paying bonuses for solid achievement is one thing but structuring bonuses to reward short-term performance is, potentially, a problem. We need to understand how bank staff were motivated at middle and senior levels and to what extent that contributed to bad decision making. Studies carried out in other countries show that it has been a problem but Irish banks were not behaving in exactly the same way as American banks. I do not want to jump to conclusions but I want to know why so many banks seemed to depart from their normal policies when it came to property-related and developer loans.
Was it more endemic in certain banks than in others?
Professor Patrick Honohan
I do not know. The best way to approach this might be to get each of the two big banks to engage an independent external consultant to look at the way their risk management and bonus systems operated. The case in Anglo Irish Bank may be more of historical interest but it is important for the two big banks and the system as a whole. It could be done with the say-so of the Government or the Oireachtas, or the Central Bank may ask for the work to be done.
So it is something the Governor will pursue.
Professor Patrick Honohan
Yes, if no one else pursues it.
The fact that there had not previously been a property crash also fuelled the problem.
Professor Patrick Honohan
I think so, yes. We thought we had a property crash in the 1980s but it was nothing like this.
Yes, we had one in the early 1980s.
Professor Patrick Honohan
We never had one as big as this. Deputy Flanagan also asked about the codes of conduct. The code of conduct does not add up to much in itself, it is one of those things we might like to have, and I am not expressing a judgment if the particular code it had was great, but it was the pattern of asking for a pre-consultation. I am all in favour of consultation; there is consultation in all sorts of areas and the first initiative may not be the best way to achieve the result. Pre-consultation, however, almost suggests something will not be released unless they were all in favour, and that is more or less what happened.
Vincent Browne has made a big deal of this in trying to personalise it but that is not my reading of it, it was not a personal intervention by the Minister for Finance. When the Department wants a person's attention in a letter, it uses the term "the Minister" but that does not imply he has zoomed in on this.
Does the policy come from the Minister?
Professor Patrick Honohan
It does but it is one thing to have policy coming from the Minister and another to have political lobbying for a particular reason and there is no suggestion of that in this case.
The Department of Finance was in favour of the code of compliance and corporate governance statements. How could it be overruled?
Professor Patrick Honohan
In this case the Department was against them so the Financial Regulator decided to find some other way.
What about the senior management in the banks?
Professor Patrick Honohan
In the banks there have been extensive management changes. I remarked in the other committee that in an ideal world the big banks would have had new people from outside. I said the last time that they were competent and effective people and that is the case. They are well respected. After a banking crisis, one might expect new people at the top but my job is to ensure there are satisfactory people at the head of the banks and there are.
What about the staff who were asleep at the wheel in the Office of the Financial Regulator? Have they been redeployed?
Professor Patrick Honohan
I answered that question in response to Deputy Burton.
Deputy Flanagan should know to address questions through the Chair.
Through the Chair, the last question on the penalties has not been answered.
Deputy Flanagan, please. The Deputy keeps asking extra questions.
I am not, I am just following up on my questions about the penalties.
Professor Patrick Honohan
I think I answered that question in response to Deputy Burton — my goal is to operate an effective organisation. That is the perspective I have on staffing. That is my role and that is all I have to say about it.
What should happen to the people who were involved in wrong doing?
Professor Patrick Honohan
I have confidence in my staff in the roles they are performing.
In general, what should happen to the people who were involved in this crisis?
Like everyone else, I welcome the report. The Governor's style of presentation is refreshing, with great clarity. As a layman, it is understandable.
The Governor said previously that there was an overall approach of deference towards the banks and that regulators were not prepared to second guess the banks. How did that manifest itself? The Governor also stated certain aspects of the inquiry should be in private and some in public. What sections should be heard in private?
When the Minister with responsibility for making strategic decisions and policy decisions had on one side the IMF, the OECD and the ESRI giving advice, organisations that are respected and use quantitative research, and on the other hand occasional contrarians are making remarks, to whom should he have listened?
It was not me.
A decision must be made, the Minister is not in the luxurious position of commentators and Opposition spokesmen trying to score points. Who should the Minister for Finance defer to in respect of the decisions he had to make?
The Governor, Mr. Regling and Mr. Watson have acknowledged there was no good advice out there, or that there was not much of it. How did the IMF, the ESRI and the OECD get it so wrong? Where did it all go wrong for them?
Professor Patrick Honohan
We have a lot of evidence about this deferential attitude coming through in different ways. There was the example given of the code of conduct that was brought forward in this tentative pre-consultation manner, with a rapid retreat when the industry was not satisfied.
We also see it in the dialogue with particular banks. We documented what I called the famous, it may be famous now, the five banks, five property developers' inspection, which was an inspired inspection to carry out, even if it came a bit late. There was a catalogue of failings in the banks' risk management and their knowledge of developers. One bank was asked by an inspector about one developer who owed several hundred million euro and how much he might owe to other banks. The response was that he would owe some hundred million but it was actually a billion more. The banks did not know the overall picture. That should have triggered alarm bells, with bank managers carpeted by the regulator. Instead the record shows that wrap-up meetings were held to consider the reports back to the banks and those meetings lasted between 20 and 30 minutes. There was an attitude of "Who are we to second guess this bank that has lent hundreds of millions?" There is a pattern that emerges from information of that sort.
Deputy Chris Andrews asked what should be investigated in public and what should be investigated in private. The distinction I make, broadly speaking, is that where there is no question of criminality, if we are to get to grips with factual matters, a lot of progress can be made in private. That is the most effective way to get the factual information. That is why the examination of banks' risk management did not need television cameras in the room. People would be second guessing, hedging and so on. One gets the facts in private. What one gets in public is the person behind the facts, the attitudes, the presuppositions, the motivations. One is trying to find out——
Does that mean the Governor gave us no facts today?
Professor Patrick Honohan
No new facts. All the facts are laid out. This raises the question, and it is underlying a number of the questions that have been asked, of what the commission of investigation is going to do, how is it going to be conducted and who will conduct it. I would go so far as to suggest to the committee that it might want to push this back a bit and think a little about what exactly it needs. Of course, the committee may want to have some hearings where it has some people on television cameras. For something as substantial as a statutory commission of investigation, does it have the need for such a thing now, given how far we are on in understanding? I feel we understand the whole regulatory position. We can do some work on the banks in a sort of similar way but using independent outside consultants, foreigners, coming in and looking at that. That could be tabled. Then, perhaps, we could have some hearings and look at the motivations and the attitudes. The committee might say that now it has all the ingredients and ask how it might draw all this together. It might not be a statutory commission of anything. It might be some way of drawing it together which would use some other technique that we have not thought of. It is just an idea.
In relation to the ESRI.
Professor Patrick Honohan
Deputy Chris Andrews asked if it was fair to ask the Minister for Finance to second guess the advice he is being offered by the agencies. I think it is not fair. The Minister for Finance is responsible for policy but he is not responsible for the advice he gets. He has to be given some slack in this regard and say this was the advice he was given. Deputy O'Donnell is trying to widen it out into a broad fiscal policy area and I would try to talk about banking.
But Garret FitzGerald——
Was the advice wrong? Would the Governor have that knowledge?
Professor Patrick Honohan
The IMF comes every year for its overall macro stuff. It was giving warnings in 2003. What nobody was warning of was this big banking meltdown but one could criticise fiscal policy based on the advice that was given by external and internal agents. There would be no difficulty in saying that. There was a diversity of views and the Government of the day, as Deputy Michael McGrath has acknowledged, would have done it differently with the benefit of hindsight. On the more narrow issues of banking and the advice of expert agencies, I do not see how the Minister can be expected to second guess that advice.
I thank Professor Honohan. I call Deputy Noel Ahern to be followed by Senator Quinn and Senator Ross.
I am a little concerned how it has come across today and previously on Friday that the Governor did not interview the Taoiseach. Will he clarify if that was his own decision?
Professor Patrick Honohan
Yes.
I think he said he reflected on it and thought about it. The people on my left seemed to sense, maybe more so on Friday, that the Taoiseach was not available to him.
Professor Patrick Honohan
No.
I would like the Governor to clarify that because I would be nervous that the policy of deference that was previously in the bank——
We do not think Deputy Noel Ahern is a nervous type.
It is in a spirit of inclusiveness that he includes the Taoiseach.
The Deputy is eating into my time. Perhaps the Governor would clarify that issue.
I am learning from the masters.
Will the Governor clarify if the Taoiseach is available?
Can we have some order, please? The Deputy will learn from the masters in Limerick.
Will the Governor clarify that the Taoiseach is available to him at all times and that he can pick up the telephone and walk over to Government Buildings at any time?
"My door is always open" is how he would put it.
The Governor was fairly scathing in his comments about the Central Bank and regulatory staff in regard to all the things they did not do, including the lack of forceful warnings, etc. I saw him being interviewed on the media last week. It has been mentioned here this morning that if the Government decides to have a commission of investigation, it can do so. However, in regard to the Governor's examination of his own patch he considers that everything has been done on the fiscal and banking sides and he feels that his report is very thorough — nobody can deny that — but he cannot visualise any other set of eyes going in and having a look within the Central Bank. What is the Governor saying there? Is he saying we have learned our lessons, let us move on, let us forget about the circus?
It is not a question of forgetting about the circus, it is a question of forgetting about the tent.
I would like some order for Deputy Noel Ahern who is asking questions. I am sure the Governor is well capable of replying to the questions. He does not need Deputy Burton's help.
As the Governor has said we are in real-time scrutiny. We have learned our lessons for the moment and the academics and historians can look at things in a few years' time. Has the Governor general advice to offer? Chairman, what is happening? Am I——
We need to know what is happening now.
Am I——
I ask Deputy Noel Ahern to address his remarks through the Chair. The Deputy can ignore that side.
The Governor mentioned Morgan Kelly and quantitative research. Is that a standard practice or request in banking circles or in Central Bank circles? As a Minister of State at the Department of the Environment, Heritage and Local Government a few years ago with responsibility for housing, I recall the officials and I having a meeting with the Central Bank and the Department of Finance. This takes up the point raised by Senator MacSharry in regard to what counter-cyclical fiscal policy the Government should have had. At the time we were proposing a small measure because we were giving out about 100% mortgages and suggested to the Central Bank and the Department of Finance that the financial institutions be asked to increase a percentage of the deposit of their loan book in the Central Bank. We were asked if the research had been done and if the Department was working on a hunch. It said it was an interesting point, that it would keep its eye on it and asked us to come back in a year's time, when we had verifiable research data. Is that the way it is in banking, that unless one goes in with a lorry load of reports, nobody will speak to one unless one has done the research? We do not want people talking off the top of their heads but it sounds very formal that one has to do in-depth research into everything or else one is rubbished, be it Morgan Kelly or me, but I will not put myself in the same company.
Why not?
Why did the Governor include the part about bankers and developers who are politically well connected? In the corridors of the banking world, are there bankers and developers who are not well connected? Is he genuflecting towards the conspiracy theories that others might hold. I would make an equation and say that if one looks at Royal Ascot this afternoon — if other places are not more exciting — one will find that in the winners' enclosure the big crowd is always around the winner. If trainer A and owner A win the first race, there is a mob around him or her and there is nobody around the horse which finished second. I often think many of these people place each way bets, so to speak. Are there developers and bankers who are not politically connected——
The Galway tent and the Galway Races. They cannot leave it alone, they miss it.
My last point is I still have a problem with this opinion that 75% of our problems were domestic. Was there some form of swine flu spreading in Greece, Spain, Portugal and Italy and all these other countries? If it was all our own fault how come so many others have the same problem? Was this virus coming from the IMF? We note the glowing tributes the IMF gave our own work. Is it the case that all these people in the regulatory world at home, at Commission level, at IMF level, everywhere else, were asking the wrong questions? Were they looking at the wrong issues? Did we keep to all our Stability and Growth Pact commitments and obligations? Did we, at the time, answer everything that was put to us and fulfil our obligations? Was it the case that much of the fault was with the regulatory systems not just at home but also abroad, that they were testing and examining everything by using the wrong criteria?
Professor Patrick Honohan
I will start with the last question. There has been a big international downturn and so any country with weak policies is exposed because this is when the exposure comes to light. This is the reason Greece is under pressure now whereas it might have been able to muddle through a few more years and then come under pressure. As the tide goes out all the rocks appear in the water.
The reason I say that 75% of the crisis is home-grown is that although other countries have been doing badly, they have not been doing as badly as we have in terms of output. The output fall and the rise in unemployment here is quite dramatic. If we had only had the average experience of the euro area, we would only have had a quarter of the fall we have experienced. That is a very simple first approximation to the fact that the tide has gone out on everybody but our rock is sticking up much more than the others.
Yes, but would that not relate to the height of the building we climbed in recent years?
Professor Patrick Honohan
That is the problem——
If I was only on the top of a two-storey house then I would not have as far to fall as from the top of a skyscraper.
Professor Patrick Honohan
Over the years in the 1990s and up to the early 2000s, we were moving very solidly forward and we got out to the frontier, as far as one could safely go. However, even from that advanced situation, we would not have been vulnerable. It was the later phase when we became dependent on property that introduced the fragility and that is what went wrong. It was a banking policy and the associated banking situation created that.
When I say that we have covered the matters that arise in the Central Bank and the Financial Regulator, we could then cover banking. We learned the lessons from each of these components. We do not just move on, we take those lessons to heart and we correct things. We are doing a lot of things in the Central Bank and the Financial Regulator now. There has been a lot of restructuring and a lot of changes in how things are organised. We have many new staff. We will be coming out over the next number of weeks with a number of public statements and policy statements on where we are going and with regard to a strategic plan and so forth. Where that part of this analysis and other reflections is leading is not yet exposed in this report but it will be coming.
The other components, the banking, the auditing, will also lead to correction. The Regling and Watson paper is helping the understanding and absorption by society of what has happened and why it happened. This is the reason I do not see the need to point fingers at particular names. I agree some people were in certain seats at the time but it is something that has happened to us because of a lot of things came together. Understanding those things and how they reflect on our society is one of the useful results. It is not just a case of moving on but also of understanding, absorbing and then moving on.
The Deputy asked whether a person questioning policy would be taken seriously if he or she did not have a body of background work. I think it is dangerous for people to be very dismissive of views that are not backed up with months of work. Sometimes the most important advances in knowledge come from a little insight which is not fully fleshed out but just emerges as a thought that this might be a way of doing something. Then the research may or may not come in to support the idea. If it is a case of policy then policy has to act before the research, particularly in something like banking where things happen very quickly. One has to draw on experience and other areas. The Deputy is right in saying that people should not be dismissed out of hand even if they do not have a great body of consultancy reports to back them up.
The Deputy also asked me about political connections. In every society the big bankers are well known to the politicians. They may not be well liked by the politicians or some may be liked and some may not be liked but they will certainly be well known and that is not surprising. Deputy Ahern asked me why I wrote that. He may not have been here when we discussed it earlier. I put it in a footnote because in this dry as dust, do not mention any names report, if the reality of people was not acknowledged then the reader might think one was not aware of these connections. There is nothing wrong necessarily, in people knowing bankers — I know some bankers.
I apologise for having to leave the meeting for a little while. Professor Honohan's position is very powerful. I found the report to be very good. My query is about this commission of investigation. From the words he has used, I wonder whether we need another commission of investigation or an inquiry. Professor Honohan's report seems to me to do exactly and in a very short timeframe what does not always happen when tribunals of inquiry and commissions are set up. We have a very bad history in Ireland of the length of commissions of inquiry or investigation. They end up costing a lot of money and time and nobody ever ends up in jail as a result of them. Professor Honohan's report was produced in a short period and from the words he has used in the last half an hour he is now in a powerful position to be able to make proposals to the Government. Both he and Matthew Elderfield have built up a faith in themselves and the nation trusts them and relies on them. I think Professor Honohan can demand anything. I wonder whether we need another inquiry or another investigation. Professor Honohan believes we do not and that there are easier ways and if he says so, then the nation and the international financial markets will back him. If I understand him correctly, he is saying we should leave it in his hands. We can trust him to deliver a speedier and more efficient investigation. Does Professor Honohan recognise how strong a position he is in and does he feel he could say to Government that we do not need an investigation and that he could have the information for it within a couple of months?
Professor Patrick Honohan
That is not up to me. To some extent, the things I need to know for my job, I can do those things. I think what we do not want is a sense of something being suppressed or covered up in some way. We do not want that. At this stage that the idea of a commission of investigation is not really fully fleshed out. Once one commits the Dáil to such an action, one is into a process and I do not see where it is going exactly. At this stage what I would probably say to somebody who asked my advice, is that it is a case of "Let's hold back on this for a while. Let's do the things that I have suggested in the banks." It goes without saying that it is up to this committee and other committees as to whether they want to have hearings, but that is not like a committee of investigation that is trying to get into facts, such as the investigation into the Abbeylara incident. Members may want to have some such hearings. There is a danger that if we do not know what a commission of investigation is to be, it would grow to cover everything and more and that we would launch a juggernaut.
Our history and our traditions are like that, inquiries seem to go on a great deal longer and cost a great deal more. The report that Professor Honohan produced in a few months is concise and easy to read. I think it should almost be compulsory reading for students.
In pages 46 and 47 of the report, Professor Honohan discusses the principles-based as against the rules-based regulation. He may have touched on that when I was absent, but it would put my mind at rest to know that what is being proposed will not stifle our ability to have start-up businesses and entrepreneurial flair in the economy of the future.
Professor Patrick Honohan
Absolutely not. I want to turn more of my attention than I have been able to heretofore, to looking at the whole question of access to finance by small firms and the question of distressed households. We are looking at ways of helping distressed household and these very practical dimensions of banking in the current environment that need to be working better to get us back on our feet. There are a great many practical issues around the effectiveness of the banking system and the whole structure of debt in society that need to be sorted in the coming months. I would regard this as a real priority now.
Could Professor Honohan comment on the role of stockbrokers in this crisis? At the meeting with Mr. Klaus Regling and Mr. Max Watson, one said as an aside, that there were some extraordinary reports from stockbrokers coming out throughout this period, right up to the last minute. There has been a tendency, and it was certainly true throughout the banking crisis, for stockbrokers to puff banking shares. There is no doubt about that and there is absolutely incontrovertible evidence of that. They were reassuring investors, foreign and domestic, that all was well here right through the crisis and indeed they were saying after the crisis had broken that all would be okay.
That is bad enough but some of the brokers who were puffing the shares were working for stockbroking firms owned by the banks, the same banks whose shares they were puffing. I am sure Professor Honohan knows who I am talking about and there is no need to do it. It is not a unique system and it not a problem which is unique to this country but it is very important in the circumstances in which we find ourselves in the banking crisis. The Financial Regulator regulates brokers as well as banks. Could Professor Honohan tell me what he proposes to do in future to ensure that this type of activity does not continue because the results are utterly misleading? It means that many innocent and not so innocent people invest in bank shares and lose a significant sum of money and did so as a result of brokers' appalling advice. It was not just bad advice, it was flawed advice and it was conflicted advice. This will be allowed to continue unless it is stopped.
Has Professor Honohan plans to look at stockbrokers because their role in this area was not noble. I think it was Deputy Burton who referred to the March 2008, St. Patrick's Day massacre. At that time, stockbrokers behaved in a different way, they were actually selling shares short and, as it happens, they were correct. The regulator's people moved in and said "You are not going to have this kind of carry on at all" and they set up an inquiry following on the HBOS inquiry in the UK on the same day. What was the result of that inquiry? There have been questions about that inquiry for two years and like a great many things that happened in the Central Bank prior to Professor Honohan's appointment, which I emphasise, there were no answers available to questions of that sort. An inquiry was set up to look into the activities of two Dublin stockbrokers in particular at that time. That has disappeared somewhere into the ether. Is the attitude of the Central Bank and the Financial Regulator to let the stockbrokers do whatever, then set up inquiries and do nothing or will they stop the type of activities which will damage and mislead the public?
I do not agree with Professor Honohan's remarks on the Department of Finance, but I understand the defensiveness there is among people about an investigation of the Department of Finance. A great many people have trouble about it, and perhaps we are wrong. I do not know what happens in the Department of Finance, it is a kind of amorphous jelly fish, one can never get a hold on the staff. One can never find out what happens in there or what its powers are, but the Department is mysterious, very powerful and not transparent.
When it is said that we need the Department as a bulwark to stop us doing things that we might otherwise do, my antennae get a little alarmed and it means to me that it is very powerful indeed and yet we do not know where the staff are powerful and if they exercise the kind of power they have. They have power over the Minister and the Central Bank. I did not know, for instance, that the Department of Finance had control over Professor Honohan. He made a reference to the Secretary General, who might alter a word in his annual report. Do the staff in the Department of Finance read Professor Honohan's annual report before it goes out? Is there a kind of osmosis level of co-operation that we do not know about? Do they have that sort of input into other areas of the Civil Service and the State? The reason I think the Department of Finance needs investigating is because of this lack of knowledge of where it penetrates.
The Senator is stretching the point.
I am asking detailed questions about what happens in the Department. Will Professor Honohan give an indication of where the Department stands? Do the staff have a significant input into the choice of directors in Anglo Irish Bank, the Central Bank and the Financial Regulator, in consultation with the Minister? If they have that sort of power, they should be investigated and if they do not have power, we should forget about them. We must know what is going on in the Department of Finance.
Professor Patrick Honohan
I wish I was better prepared on the question of stockbrokers. I do not have the relevant information at my fingertips. The Senator mentioned an inquiry. I will see if it can be dug out and what may be disclosed.
Has the Governor got somebody who will contact me about that?
Professor Patrick Honohan
Yes. The question of the advice given to investors is becoming very high-profile in several countries and there is one case in the United States which everybody is looking at. Mr. Matthew Elderfield was before this committee recently and said that, while the Stock Exchange once had powers over stockbrokers, gaps had appeared in the system over time. Now stockbrokers are regulated by the Financial Regulator and it is no longer a neglected area.
Has the Governor any plans to do anything about stockbroker advice?
Professor Patrick Honohan
The question of stockbroker advice to certain investors is a matter of active investigation.
It is under investigation at the moment.
Professor Patrick Honohan
Yes, though I do not know whether the provision of advice about bank shares is of particular focus.
Is it part of the investigation?
Professor Patrick Honohan
I do not want to tell the committee that stockbrokers' advice on bank shares is being investigated because I am not sure that is the case. The Financial Regulator has to look at many things but I am not sure whether this is high on his list. I will note the Senator's question, however, and look into it.
I was also asked a question about the power of the Department of Finance. Power comes in different ways and the Department of Finance has important powers granted by statute, such as the power to sanction expenditure. It is a key structure within the State but it is the Minister who takes the decisions. It is the relationship between the Minister and civil servants which may be difficult to understand. Although the Department has power, the ultimate statutory responsibility lies with the Minister. However, it is not something on which I am an expert.
In his statement, Professor Honohan said: "The potential role of accounting and auditing professionals is another matter that deserves additional factual exploration." He went on to say: "there may also be a case for commissioning a study of the operations of the mortgage intermediaries". What about the legal profession? Are financial consultants, valuers and estate agents included in the term "mortgage intermediaries"?
Professor Patrick Honohan
I was thinking more about mortgage brokers.
The others also played a role in the decisions made by people.
Professor Patrick Honohan
Some entities are ones on which people are entitled to place reliance. Those professionals hold themselves out as dealing with people in a fair and expert way and are often subject to regulation. There is no point in investigating property developers.
We know where they ended up. However, the legal profession is supposed to be regulated. Are valuers supposed to be regulated?
Professor Patrick Honohan
I do not exclude them from the investigation. I simply picked out auditing, accounting and mortgage brokering as areas where an amber light shone, suggesting we needed to investigate.
It is necessary to investigate stockbrokers and other private players who came into the property market and drove it onwards. One example is the Irish Glass Bottle Company site where private money came in from solicitors, doctors and others to drive the market wild. The people responsible were a big contributor to the problem and should be investigated.
I call on Deputy O'Donnell and Deputy Burton to ask final questions.
In the upcoming question of the renewal of the bank guarantee scheme, what does the Governor think should be covered? Does he think subordinated debt should be excluded? What is his view on senior debt? Can the Governor comment on the effect of extending the tax-designated schemes up to 31 July 2008? Does he believe that, in the context of the question about directors on various boards, there are too few people for too many places? Does he not find that this is a major flaw in the system?
Professor Honohan mentioned that, while officials give advice, ultimately it is the Minister who makes a decision. The professor seems to perceive need for further inquiry but does he feel the advice given to Ministers by officials should be in the public domain? As it stands, such advice is not in the public domain so the picture is inconclusive. Mistakes have been made and they need to be looked at but we need to be in command of all the facts. Policy decisions are made by Government on foot of advice but we have no idea what that advice is.
Professor Patrick Honohan
Subordinated debt should not be included in the guarantee. Banks should be allowed to issue new guaranteed debt but should also be allowed to issue unguaranteed debt so that they can be weaned off the guarantee. This process should take months rather than years.
What about the senior debt?
Professor Patrick Honohan
New senior debt should be included to the extent that the banks need it. One must remember that the banks have to pay a fee for the guarantee.
What about existing senior debt?
Professor Patrick Honohan
There should be no grandfathering of that debt — to the extent that it is guaranteed it remains guaranteed. Some of the old debt is only guaranteed until the end of September. This does not mean it will not be paid — it will simply not continue to qualify for the guarantee.
The Governor is really talking about new debt. Should the commission of inquiry look into the advice given to Ministers?
Professor Patrick Honohan
This is a very important question but it is above my pay grade.
The Governor might seek a salary increase.
Professor Patrick Honohan
I do not know the answer to the question. It would require wide legal and constitutional expertise to get to grips with it.
Would the Governor like to see that advice in the public domain?
Professor Patrick Honohan
Everyone is moving towards greater openness but sometimes that openness is phoney. Some things are brought into the open but other things are kept behind closed doors and one has to be careful not to design something that creates obstacles to good advice. I am exploring these issues at the moment. Although we are too closed at the moment, a phoney opening would be worse.
Is the Governor happy that no further State investment will have to be made in the banks? I exclude Anglo Irish Bank.
Professor Patrick Honohan
No, we are happy with the programme we have laid out. We have said what the banks need to raise. I cannot be absolutely definitive because the banks have a programme of raising capital, they must do it by the end of the year and if they do not manage to do that, there might be small amounts from the State. We envisage, however, that they will be able to do without it.
Is the Governor saying he is not persuaded of the merits of a full-scale sworn inquiry, possibly under a judge? Does he favour a detailed investigation of each of the covered institutions that would be carried out in private that would report in public?
In the report, the Governor drew attention to the domestic standing group and the fact it produced in the run-up to the crisis a report that looked at private sector acquisition of troubled institutions, nationalisation and talked about a guarantee which pointedly did not include subordinated debt, although it is not clear if it included senior debt. The Governor suggested that it was not necessary to guarantee senior debt and particularly not subordinated debt. He also just said the extended liability guarantee should have covered new debt and rolled-over debt that was the subject of guarantees. That was broadly the Labour Party position.
Deputy Burton should hold on there.
From the time the guarantee was announced, we opposed it for two reasons. Anglo Irish Bank and Irish Nationwide were one reason.
We cannot go into that now.
Our position is clear. The Governor also referred to Merrill Lynch and its advice that opposed what the Government ultimately adopted. If we do not have a full inquiry, would it not be wise to at least publish the reports of the DSG and the advice of Merrill Lynch? This is about our trying to develop an understanding.
The Government says our deficit for 2011 will be around 10%. In the Greek context, does the governor think that target is in line given what has happened?
The bank guarantee scheme was a disaster and was quite rightly opposed by the Labour Party, that is what Deputy Burton said in June 2009.
Absolutely, and I condemned the tax breaks.
The letter from the Minister for Finance states that he will make available to the committee documents that were prepared in the crisis management period and that he will appear before the committee. He will make available all the advice that was given to him in writing.
I am asking the governor for his opinion about the availability of information.
The Deputy said no information had been forthcoming but the Minister has said it will be forthcoming.
The Minister's record on issuing documents is not great. If the governor is suggesting we should not have a full commission of inquiry, and that suggestion merits examination, should the Merrill Lynch report and the DSG reports be published, along with the advice in the Department on the tax breaks? I had been on a crusade about them from 2003, along with the millionaires who paid no tax. There must be material in the Department about that. Does the Governor think that information should be released?
Professor Patrick Honohan
As far as the documents on the bank guarantee are concerned, I do not see a difficulty with that. Obviously there are a lot of documents in the Central Bank that cannot be released, there is not just an open door policy for all documents.
I appreciate that.
Professor Patrick Honohan
As for my attitude towards a sworn commission of inquiry, I am saying we should push the idea back and see if we really need it. We should reflect over the summer on what we need. There is no mature model.
I am sure the staff in the Department of Finance are listening with interest to the Governor's recommendation.
And the deficit?
Professor Patrick Honohan
My position is that the Government's plan for fiscal adjustment is credible and satisfactory. There are, however, international pressures, particularly in the eurozone, to show rapid progress towards fiscal correction and I am sure we will be able to design fiscal policy and concrete measures needed to get through the fiscal adjustment. That will allow us to achieve that target over a number of years.
The tax designation schemes were due to expire in 2002, then 2004, then 2006 and then until 31 July 2008. What impact did those have on the financial crisis?
Professor Patrick Honohan
I could not put a number on it. In 2006 a detailed consultancy report on the scale of the schemes was issued.
The schemes were extended until 31 July 2008.
Professor Patrick Honohan
That is right, they were extended after that but I could not put a number on that. I did not do any calculation of that.
Was the Governor surprised they were extended as the years went on?
I thank the Governor and his colleagues for attending. This has been a worthwhile meeting and it has given us food for thought for the coming weeks and months. It has also been helpful for the public, explaining many of the issues people have raised with us.
The joint committee adjourned at 1.05 p.m. until 12.30 p.m. on Wednesday, 16 June 2010.