Thank you Chairman.
Good morning Chairman, members of the joint committee. I welcome this opportunity to appear before the inquiry and I will, of course, be as helpful as I can to assist you in your work. As you are aware, I have already submitted a witness statement, which addresses the lines of inquiry as requested by you. I will not repeat or summarise my witness statement here, but I will make some short introductory remarks.
I spent just short of 40 years at Bank of Ireland. I was group chief executive for the last of those 40 years until my retirement in 2009. My lifetime career covered both retail and wholesale banking, and I held senior management positions with the group in the US, the UK and in Ireland. During my time with Bank of Ireland, I always endeavoured to do my job to the very best of my ability in the interest of the bank and in the interests of all of its stakeholders.
As you will be aware, Bank of Ireland is a long established entity, which has played an important role in the Irish economy since it opened its doors in 1783. Bank of Ireland has, down through the years, fostered a culture which is based on sound judgment and prudent decision-making. To put it in simple terms, Bank of Ireland has a more conservative approach to banking than many of its peers. This conservative philosophy continued, notwithstanding the significant growth that occurred during the period from 2000 onwards. Rolling five year strategies were adopted by senior management and the board in 2001, 2002, 2003 and 2004. Loan book growth in each of the markets in which we operated was an integral element of strategy throughout this period.
When I assumed the role of CEO in 2004, there were a number of factors impeding the bank's ability to achieve breakthrough in performance. As a group, Bank of Ireland had evolved as a collection of related but autonomous businesses. We found ourselves with multiple processes and systems and fragmented support infrastructure and an inability to avail of scale benefits. We were failing to adequately manage our costs, our relative financial performance was mediocre and our total shareholder return was in decline. As CEO, I was committed to addressing these factors.
In 2005-06, we undertook a new strategy development process. Over a nine month period, from September 2005, we undertook extensive work, using leading international expertise, to get a fuller understanding of the international trends driving the financial services environment and competitive scenarios. To identify implications and options for the bank, we undertook a robust process with significant involvement and challenge from the board. From this process we determined the following: (a) that the economic outlook for our key geographies would be broadly favourable with sustained GDP growth and low unemployment in our chosen markets; (b) that we would be able to support growth, including capital and liquidity through securitisation and wholesale funding; and (c) that we would build on our core capabilities in existing developed geographies, rather than new areas; and finally that we would grow the loan book in a diversified way. The board approved this strategy in July 2006.
As things transpired, the growth of Bank of Ireland's loan book during this period generally reflected economic expansion and the overall growth of the market. There was growth in each of mortgage lending, consumer lending, SME lending, corporate lending, property and construction lending. Of course, it is now obvious that the absolute amount of property and construction lending was too much. The economic shocks in Ireland and the UK exposed this vulnerability with crystal clarity. While the consequent fall out from this was considerably better than our peers, this is of cold comfort.
Basel II regulatory obligations dictated that the bank undertake an internal capital adequacy assessment process to assess capital adequacy against the banks risk profile. This was undertaken in early 2007 and the results were submitted as required to the financial regulator. Bank of Ireland considered three different stress scenarios as part of this process, the first we assumed oil prices would reach $200 a barrel and remain there for an extended period. The second stress was a significant reduction in foreign direct investment in Ireland due to material changes in the corporate tax rate; and the third stress was a sudden drop of 20% in Irish and UK residential property values.
We considered these scenarios to be severe at the time, they were considered in fact to be in the one in 25 likelihood of occurring within a one year time frame. We did not believe that we were vulnerable to a shock of this extent, however we were wrong. As we know now the severity of what ultimately occur was considerably greater than this. According to the Oliver Wyman review of risk governance in Bank Of Ireland undertaken in 2009 the bank stress position was ultimately due to the combination of the severe downturn in the Irish and UK economies and the lack of liquidity in wholesale markets. There was an assumption in the 2006 strategy that Bank of Ireland's core lending business could be grown strongly and that the required funding could be sourced. As things transpired both of these assumptions were flawed, unless we had taken a very contrarian position relative to peers, Bank of Ireland was naturally exposed to the macro risks in our core markets of Ireland and the UK.
Oliver Wyman also identified three broad limitations which contributed to Bank of Ireland's stress position: one, risks in the core business and strategy may not have been fully appreciated; two, risk management and control was not geared towards understanding the aggregate risk profile; and three, the link between the overall exposure limits and the risk appetite statement was incomplete and dependent on expert judgment. While improved risk governance structures in particular the availability of consistent risk information would have helped the bank to more fully realise the amount and nature of the risk it was accumulating at an earlier stage and potentially reduce the impact of the crisis, the banks fundamental difficulties arose primarily because the strategy did not anticipate the exceptional extent of the reduction in property values combined with the contraction in wholesale money markets.
I personally deeply regret this failure and its consequences. Not withstanding the fact that the state has been repaid in full by the bank, I regret that state assistance was required to support the bank and that shareholders lost a significant proportion of their investment ion Bank of Ireland. I am very sorry that this ultimately happened on my watch. Throughout the 2000s my colleagues and I together with the board made judgments based on what we genuinely believed were solid grounds following thorough analysis and significant challenge. These judgments good or bad, were always made in a considered fashion and in good faith. It is encouraging today to see Bank of Ireland make significant progress in its own recovery and in the recovery of the Irish economy. The states support for the bank at a pivotal point in its history has been profoundly instrumental in facilitating this recovery. Thank you, Chairman.