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Joint Committee of Inquiry into the Banking Crisis díospóireacht -
Wednesday, 2 Sep 2015

Nexus Phase

Irish Nationwide Building Society - Mr. Michael Fingleton

As we have a quorum, the Committee of Inquiry into the Banking Crisis is now resuming in public session and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off.

Our focus today is on ... we begin today with session 1, public hearing with Mr. Michael Fingleton, former chief executive of the Irish Nationwide Building Society and, in doing so, I would like to welcome everyone to the public hearings of the Joint Committee of Inquiry into the Banking Crisis. Today, the focus of the inquiry is on Irish Nationwide Building Society and at our first session this morning, we will hear from Mr. Michael Fingleton, former INBS chief executive. A qualified chartered accountant and barrister, Michael Fingleton joined the building society in 1971 and was 38 years with the society until his retirement in 2009. Mr. Fingleton, you're very welcome before the committee this morning.

Mr. Michael Fingleton

Thank you.

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

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

The following witness was sworn in by the Clerk to the Committee:
Mr. Michael Fingleton, former Chief Executive, Irish Nationwide Building Society.

Thank you, so if I can invite Mr. Fingleton to make his opening remarks to the committee please. Mr. Fingleton.

Mr. Michael Fingleton

Good morning Chairman, members of the committee. I appear before this committee on a purely voluntary basis. I will, of course, co-operate fully with the inquiry in so far as it is legally possible for me to do so given the issues that have been the subject of correspondence between my solicitors and the committee. I've already submitted a detailed witness statement which addresses the lines of inquiry as requested by the committee. This opening statement deals with the issues set out in that written statement. I prepared that statement on the basis of my recollection and the limited documentation available to me. My statements were prepared without access to information and documentation from the society which has not been available to me since my retirement in April 2009. I will confine my opening statement to a summary of some of the evidence given in my statement, together with some relevant comments.

The society's motivation for entering the commercial property market was the shortage of housing in Ireland in the early '90s following the extended downturn in that market in the '80s. The explanatory memorandum issued with the Building Societies Act 1989 encouraged building societies to get involved in residential development and provided specifically that building societies should be a "major source of funding for housing by investing directly in residential development". Following the entry of Bank of Scotland and the other foreign-owned banks into the market in 1999 it became increasingly difficult for the society to compete in the residential loans market. Their entry resulted in a period of intense competition, with all major lenders taking steps to protect and increase their market share, sometimes irrespective of price considerations. In addition, the brokers who controlled up to 50% of the market were predominantly aligned to the larger financial institutions.

It was decided by the society for good commercial reasons that it would off ... not offer 100% home loans as a matter of policy. Such loans were only provided by the society in exceptional circumstances. For the same commercial reasons, the society also refused to introduce tracker mortgages. We did not engage in self-certification of income mortgages or expand into the sub-prime lending market, and for some time resisted the term extension of loans to 30 and 35 years. The society also refused to lend at margins of 1%, which at that time was a prevalent practice in the market. In this prevailing climate, it was difficult for the society to grow its residential loan book. I would note that our fellow building society, the EBS, had 90% of its loan book in residential lending and it was not saved from the effects of the economic collapse as house prices fell nationally by up to 60% following the crash.

In 1995 the society came to the conclusion that building societies as stand-alone institutions had no long-term future and that the best option for the society was to seek a change in section 102 of the Building Societies Act 1989 which would enable it to effect a trade sale, thus realising the full value of the society for the shareholders. The enabling legislation was finally passed in August 2006 after ten years of unnecessary and inexplicable delay. The desired sale did not materialise for reasons detailed in my opening ... in my statement. Once it became apparent that we would not effect a trade sale of the society in the short term, I reviewed the society's position in the market and decided to downsize its balance sheet, reducing its commercial loan book, and from September 2007 I began taking appropriate steps to do so. I'd every expectation that this would achieve a significant reduction in the society's exposure based on the premise that in excess of €5 billion of the loan book was due to mature in 2008. At this time the society accepted the market consensus that in the event of a downturn in the property market, a soft landing scenario would apply.

Under this scenario, it was anticipated that a fall in real property values of around 20% would occur over an extended period. The society would have, at this time, welcomed such a development on the basis that it was in the interests of a more stable market. We were influenced in our views by the forecasts and commentaries arising from successive reports by the Central Bank, the IMF, the OECD, the EU, the ECB, the Department of Finance, the EIB, the World Bank, the ESRI and the NESC. In addition, all the economists in the banks, stockbrokers and academia were of the same view. Indeed, this consensus view appears to have been prevalent in every one of the 69 countries affected by the crash. In addition, prior to the general election of May 2007, all major political parties were seeking to increase spending, and indeed some campaigned on the basis of a proposed reduction in taxation. It was clear that parties on all sides of the House expected that the revenues from the property market would continue to accrue to the Exchequer.

The financial crisis which preceded the property crash originated in the US on the back of the sub-prime debacle which caused the banking crisis in which the rating agencies played a major role. A range of powerful institutions which went bust or had to be rescued or nationalised, such as Washington Mutual, AIG, Merrill Lynch, Freddie Mac and Fannie Mae, and, in April 2008, Bear Stearns. On 26 September 2008, the bankruptcy of Lehman's caused the collapse of the liquidity market in Europe and in the United States. As David Doyle, former secretary of Finance, said in his evidence, and I quote: "Lehman was the killer". If Lehman's and, to a lesser extent, Bear Stearns had not been allowed to fail in 2008, then things may have been different and the ultimate extent of the crash may have been somewhat moderated.

I reiterate, for the reasons outlined in my statement to the committee, that the society was not insolvent on the night of the guarantee. No individual financial institution could have prevented the property bubble in Ireland. The only entities that could have acted to prevent the property bubble were the regulator, the Central Bank, the Department of Finance or the Government. The ECB, who had the powers to compel the Central Bank to take any necessary action - sorry, the ECB also had the powers to compel the Central Bank to take any necessary action. However, none of them chose to do so.

The losses from property lending incurred by the banking sector in Ireland were not just confined to Irish institutions. The foreign-owned banks, namely, Ulster Bank, Bank of Scotland Ireland Limited, ACC, Danske Bank and KBC, all incurred significant losses estimated to be collectively in the region of €40 billion. The Building Societies Act 1989 states that it shall be the duty of the auditors to carry out such investigations as will enable them to form an opinion on whether the society has kept proper accounting records and maintained satisfactory systems of control of its business and records and systems of inspection. Where the auditors are of the opinion that the society has failed to keep proper accounting records or systems of control, they shall state so in their report. The committee should note that since their appointment as auditors of the society, KPMG, in each and every year have expressed satisfaction that the financial statements of the society correctly showed the financial position of the society and that proper books of accounts and records have been kept and that the directors had established and maintained reliable systems of control and, accordingly, issued full audit reports - full unqualified audit reports.

I do not accept that the NAMA valuations provided an accurate assessment of the value of the society loans. The extent of the losses attributable to the society on the back of the NAMA valuations of the society's commercial book is an issue which is in dispute. It is, in my view, that NAMA exceptionally discounted the society's loans in the absence of any, or with little credible, challenge to their valuations.

On 23 May 2012, in its address to the chartered certified accountants in Galway, Mr. Frank Daly, chairman of NAMA, said that having completed the due diligence of the property portfolio and having assessed the property portfolio in more detail, NAMA's view was that the assets had more potential than they initially had reason to expect. He went on to say, "A high proportion of the property assets in Ireland ... are located in or close to counties with large urban centres of population (Dublin and neighbouring counties, Cork, Limerick and Galway) and the long-term prospects for much of this property will be better after the economic situation stabilises." It is a matter of record and fact that the society's Irish commercial properties, including development lands, were located in precisely those locations - in Dublin, Wicklow, Meath, Kildare, Cork and Limerick. A reference to that is KPMG due diligence report, June 2007.

In the United Kingdom, where the society had the majority of its commercial loan book, with 60% of its lending to the London market, I have identified profits that have accrued or will accrue to NAMA in the region of €1 billion from sales relating to a relatively small number of borrowers. I am awaiting the receipt of further information and documentation in relation to many other borrowers to enable me to conduct a similar evaluation. I outline now examples relating to three properties to illustrate my point: property A - NAMA valuation £18 million, realised £200 million, excess £182 million; property B - valuation ... NAMA valuation £12 million, realised £100 million, excess £88 million; and property C - NAMA valuation £165 million, realised £250 million, excess, £85 million. The total accumulated profit in relation to those three properties amounted to £355 million, equivalent to €443 million. It must also be noted that at the time when NAMA was calculating the discounts, UK property prices were already on the rise again, particularly in the London area. The London property market has clearly performed strongly since this time.

I believe the society was a victim of the financial crisis which originated in the sub-prime market in the US, precipitated by the bankruptcy of Lehman's. However, I accept that the society was a contributor to the resulting property crash that followed by being unable to sufficiently reduce its exposure to the commercially property market, despite having realistic expectations to do so, while the decision of the society to downsize its commercial loan book in September 2007 and despite having diversified geographically its market exposure.

The financial crisis which occurred was in the ... was an event, the occurrence, size and magnitude of which was unforeseen by even the most astute observers of financial markets. As a result, the collateral damage caused by the collapse was immense for everybody concerned. Almost all commentators, as already said, accept that the financial collapse was not foreseen and could not have been reasonably foreseen. In my 30 years ... 38 years with the society, I had, prior to the economic collapse, gone through three recessions and downturns in the property market. I did not expect the predicted slowdown to be any worse than any of those previous recessions and none of the other market participants did either. Having built up the society in a competitive, innovative and cost-efficient manner over the years from a business with €20,000 profit and five employees with one branch office to almost €400 million profit and 455 employees with 50 full branch offices, it was an absolute shock and bitter disappointment to me that the society succumbed to such a cataclysmic financial crisis, a one-in-100-year event which caused such huge damage to every element of the nation, both corporate and personal. I regret very much ... I have and I am continuing to pay the price, personally, as a result.

In particular, I regret it for the society's employees, shareholders and borrowers, who all became casualties of the crisis, and I regret it for the taxpayer and the State, who had to fund the deficit.

Thank you, Chairman. I am happy now to take your questions.

Thank you again, Mr. Fingleton, for your co-operation with the direction by the committee to come before us here this morning. And I'll open up questions by inviting our first questioner this morning, which is Deputy Pearse Doherty.

Go raibh maith agat agus fáilte chuig an choiste, tUasal Fingleton. Can I ask you, just following on from your last comment, what is it, exactly, you regret?

Mr. Michael Fingleton

I just regret that the State and the taxpayer had to pick up the bill for the collapse of the whole financial market and, in particular, for the banking sector.

Okay. In your contribution you mentioned, for example, contributors or those who could stop the property bubble. You mentioned Lehman's, Bear Stearns - as instigators of the crisis - the regulator, the Central Bank, the Department of Finance, the Government, the ECB. In your view, where does Irish Nationwide and your role as the chief of Irish Nationwide, INBS, for the last 38 years ... where do you stand in relation to the fact that you regret that other people had to pick up the tab for the bank that you were in charge of that went bust?

Mr. Michael Fingleton

Well, over 38 years, Deputy, I was CEO and later, in ... since 1975, I became managing director of the society. And in that year, I changed the name of the society, of course, to Irish Nationwide. We were called the Irish Industrial Benefit Building Society. I changed the name to Irish Nationwide and I was instrumental in the appointment of KPMG as auditors to the society. Over the years, up to 1992, the society ... I built up that society, as CEO, with the full co-operation of our board and I always insisted that the board would be fully involved in the lending process, which was unique - and is unique - among financial institutions. And during the '80s, we expanded, slowly and conservatively, the development of the society, particularly in the home loans market. But in addition, we also did small ticket commercial loans for shops and individual offices, for farms and even for small developments and building construction. I think we have ... we had about 10% of our book in that area of the market. And in 1992, following the change in legislation, we took advantage, if you like, of the encouragement, as I've explained earlier, of the legislation which enabled the societies to engage in development and construction of housing. And we were encouraged, as I said, to do it and I quote, "[that] building societies should be a major source of funding for housing ... by investing directly in residential development". That was the purpose of the Act and the genesis of the Act in relation to that area. So, we decided at that time to get involved and we acquired, I think, 70 acres of land in Lucan.

Mr. Fingleton, we won't have time ... and I'm sure other members will have time to go through the whole history of Nationwide, but in terms of the specific question of the regret that you've expressed, what role did you play yourself in relation to where Irish Nationwide found itself basically lumped on the Irish taxpayer-----

Mr. Michael Fingleton

I ... I-----

-----and do you regret any decisions that you took or the way that you managed the bank in ... in ... to bring it to a point where it ultimately went bust?

Mr. Michael Fingleton

I don't regret any decisions I took. What I do regret is that, at the time, the society had a commercial loan book that was, at the time, too large and, as a consequence of the crash, was deemed to have significant losses within that book.

Whose fault was it that the society had a commercial loan book that was too large?

Mr. Michael Fingleton

It was ... I was part of the strategy. I was part of the operation and I was part of the decision to increase ... to engage in commercial development-----

But you don't regret that decision, as you've told us-----

Mr. Michael Fingleton

Well, I regret it now, of course, but at the time-----

Okay, so you do regret-----

Mr. Michael Fingleton

-----at the time, certainly, I didn't. It was a normal commercial decision and it was based on demographics and all the rest of it that availed in the environment and the market at the time.

Okay, we'll come back to the commercial property. Is there any other decisions, bar allowing your commercial property exposure to increase to significant levels, that you regret?

Mr. Michael Fingleton

I regret that when we took the decision to downsize the balance sheet and, in particular, downsize the commercial book, that we didn't get the time to do it because we were turning over our commercial book every three years. I think that's borne out in the due diligence report by KPMG in 19 .... in 2007. And we had matched our wholesale funding, which was between three and five years, to the maturity of those loans. Funny enough ... and that was a comfort to us at the time and it was a big plus. So, therefore, if we had got another year of normal lending or normal markets compared to 2007, Senator, there was the maturity of €5 billion ... there was a book of €5 billion of our loans due to mature in that year, 2008. Therefore, we would have reduced I'd say by, realistically, maybe €3 billion. So, we'd have our book down from €8.5 billion down to €5 billion.

Okay. Mr. Fingleton, you were in charge of Irish Nationwide Building Society for 38 years. During that period, the bank made a series of business decisions that led to it eventually going bust and to be bailed out by billions of euro of taxpayer's money. In the annual accounts of Irish Nationwide Building Society, it was reported that a pension fund of €27.6 million had been set up and subsequent newspaper reports revealed that that separate pension fund that was set up at that time was for your exclusive benefit. Can you explain to the committee why a pension fund of €27.6 million was set up in the year 2007?

Mr. Michael Fingleton

I'll try, Deputy. In the early '90s, I think it was '91 or '92, I looked at my pension fund and the value that accrued on that fund. It was managed by an outside insurance company - an outside fund - and I discovered that if I had invested all the contributions in the lowest deposit account or the lowest paying deposit account operated by the society at that time, that would have produced more than what was produced by the insurance company in the fund. So I agreed with the society at that time that I would manage my own fund and I would invest the contributions that were provided by the society in that fund. So I made the decisions from that time on what to invest in and the fund was, of course, administered by the trustees of that particular fund. So that's the genesis of where it started and originated. And over the years the fund built up to almost €30 million based on my decisions on what to invest in.

And when the fund matured and when the retirement came, as I said, there was €30 million in it, €30 million in it. Now the net cost of that, Deputy, to the society - booked it in a public document that doesn't appear to have got great circulation - was in my view almost nearer to €3 million than what the experts said was nearer to €4 million. So in that period, I increased that fund by almost ten times, tenfold. So you can appreciate, because pensions and the pension pots and funds are very much discussed within your environment, and you can appreciate what €3 million, what sort of a fund €3 million would buy you today, or even €4 million would buy you today. So the cost to the society was €3 million, or if you believe the ... some of the experts who have examined the account, and I will come to that in a minute, nearer €4 million.

Was there a bonus culture in Irish Nationwide?

Mr. Michael Fingleton

No, Senator.

Mr. Michael Fingleton

There was no bonus culture in the Irish Nationwide.

So there was no bonuses paid in-----

Mr. Michael Fingleton

Oh there was, sorry. There was no bonus ... there was bonuses paid on the basis of results on an annual basis. There was no bonuses culture from the point of view that if, to promote the business, in other words, to, you have to get so much lending done and you'll get so much if you achieve targets. There was no target-related bonuses paid in Irish Nationwide, except to the branch managers to incentivise them to get more home loans or attract more home loans for the society because that's where we were weakest for reasons I have outlined in my statement, that we didn't do tracker mortgages or we didn't do 100 per cents or we didn't do self-certification. We didn't take on loans at a 1% margin-----

Is your view today, with hindsight, in relation to the bonuses that were paid out, as you mentioned, to individuals and the large pension pots that were set aside in the annual accounts that we've referred to - your own one that had a value of €27.6 million - is your view ... what is your view? Is your view that people were entitled to those bonuses and pensions funds even though that there has been, as you mentioned, victims of the crisis which don't have any pensions out there and have suffered immensely as a result of the financial crisis?

Mr. Michael Fingleton

Oh, I'm fairly conscious of that, Deputy. I certainly would say in hindsight they were excessive. That's all I'll say really.

Mr. Michael Fingleton

If it was today, they just wouldn't be paid, but at that time in the market - and we were, the society was extremely successful at the time - and I think that ... you see, I did not determine my bonuses. They were done by the remuneration committee, which comprised the three, or all the non-executive directors, and they decided what my bonus was.

If you go to the core booklets on Vol. 1, page 43 and 44, in a letter dated in February 2008, it regards the inspection of commercial property lending exposures-----

Mr. Michael Fingleton

What are you, sorry-----

Page 43 and 44 of Vol. 1, and I will quote it anyway-----

It'll come up on the screen in front of you as well, Mr. Fingleton.

Mr. Michael Fingleton

Sorry?

It will come on the screen for you there in a few moments. Oh sorry, it won't.

It won't, no.

I will quote. It says the Financial Regulator "calls into question the adequacy [and] controls and risk management in place in INBS for large commercial property loans and suggest[s] that a significant degree of approval authority rests with a single individual, Mr. Fingleton, who also appears to be the only source of information on some of these large clients". What is your views of the Financial Regulator's statement that he made at that time?

Mr. Michael Fingleton

I don't agree with it, Deputy.

Why do you not agree with it?

Mr. Michael Fingleton

Because it's not true.

What part of it is not true?

Mr. Michael Fingleton

It's all not true.

All of it is not true.

Mr. Michael Fingleton

Except that I did have, it was my job to have knowledge of the different exposures of the society.

So I would have knowledge but I didn't have exclusive knowledge Chairman, or Deputy, of any those loans.

Okay, and the "significant degree of approval authority rests with a single individual", you'd ... do you disagree?

Mr. Michael Fingleton

That's a nonsense.

Mr. Michael Fingleton

Yes.

Did you challenge the Financial Regulator in relation to his ... to this-----

Mr. Michael Fingleton

Chairman, even at the ultimate end of the process the board approved all the loans over €1 million, not Michael Fingleton.

Okay. Why would the Financial Regulator say to the chairperson of INBS that a "significant degree of approval authority" lay with yourself?

Mr. Michael Fingleton

I don't know, you'll have to ask ... I know who ... I know who said it, you'd have to ask her because I don't think ... I think there was always this perception, and I emphasise perception Deputy, that I, sort of, controlled the whole operation of the society. But I took steps to ensure that I didn't control it or couldn't control it. I maintained and kept and ensured that the board always had the final say and that was ... no other institution had the board involved in the lending process.

Did you ever provide a name-----

Mr. Michael Fingleton

And that was ... and I can maintain that right from the time I became CEO of Irish Nationwide. Secondly ... it's gone out of my head now ... anyway, that's-----

Did you ever provide a name and an amount to-----

Mr. Michael Fingleton

Sorry, I've, I've-----

If I can finish this question, did you ever provide a name and an amount to one of your staff members in INBS to provide a loan to an individual, for example, on a Post-it note?

Mr. Michael Fingleton

No.

Mr. Michael Fingleton

No.

Okay. Did you ever provide it in any type of form?

Mr. Michael Fingleton

No.

Mr. Michael Fingleton

I ... loans, loans ... I might introduce loans, people might come to me and the process was people came to me, I would meet them, I would always have a lender with a notebook, taking notes, or an underwriter in the case of a home loan and then I would pass them over to them to deal with the detail.

Mr. Michael Fingleton

And that was my-----

Mr. Fingleton, in the core documents of Vol. 1, again on page 5, it states that over the period 2001 to 2003, Nationwide increased its level of commercial lending by over 60%. This was a source of concern for the regulator, that the society did not have the appropriate skill sets or controls in place to effectively manage this exposure. On page 47 of the core booklet that you have in Vol. 1, we see that by September 2008, 80% of INBS's loan book was in commercial property and 81% in land and development exposure was in speculative property activities. Do you think that this was an appropriate lending strategy for Nationwide, as a building society, in which to engage?

Mr. Michael Fingleton

I don't Deputy. It was a normal expansion of the business. The reason we had more ... or more ... volume in commercial loans is that we couldn't increase our home loan book for reasons I've already stated. And we developed-----

To clarify, you say you don't, so you ... is it you don't believe it was appropriate but it was also a normal expansion, so which-----

Mr. Michael Fingleton

It was normal expansion as I've said-----

Inappropriate normal expansion is that what you're saying?

Mr. Michael Fingleton

No, no I'm not saying it was ... an ... an inappropriate-----

So it was appropriate?

Mr. Michael Fingleton

So it was within ... it was in the parameters of our liquidity, our capital availability and the share-to-deposit ratio. All the parameters and requirements of the regulator was complied with. It was also within the capacity of the society because it was normal lending at the time within the strategy and within the objectives of the society to engage and expand our loan book in that area.

Were you aware of the risks?

Mr. Michael Fingleton

And remember Deputy we were, we ... we got out of commercial ... or got out of a construction, more or less, and we did more development and, indeed, more income generating investments, particularly in the UK, because we were turning over our book every three years.

But were you aware of the risks that existed with the fact that you put 81, 80% of your loan book in commercial property and 81% of land and development were in speculative-----

Mr. Michael Fingleton

The risks ... the risk was diminished in that you're talking about land development and a lot of our lending was in that area and the risk to that was that we wouldn't get the planning or that our customers wouldn't get the planning, because that was the criteria.

Our customers ... the loans were based on the premises ... on the premise that the borrower would get the planning. Once the planning was received, our risk would be transferred to another lender for the construction phase and we would get our money back. And we would get our money back in all our books between ... I think the timeframe was between six months and three years of when the planning accrued. That was the purpose of it. So the lower ... the shorter the period, Deputy, the lower the risk and that's how we dealt with our lending in that-----

Can I go to maybe - just in relation to the risk - again the core booklets, Vol. 2? It's on page 45 and this is Project Harmony, the report in June 2007, and it notes:

The overall approach to risk assessment would not be described as highly developed given that the Group continues to rely heavily on the Managing Director, does not have sophisticated IT systems and operates across a limited range of products. This modus operandi would be described by the management as fit for purpose, particularly given the degree of Board oversight of the lending approval process.

End of quote from the Project Harmony report.

Mr. Michael Fingleton

Sure.

Can you explain why you considered such a modus operandi to be fit for purpose for a financial institution with a balance sheet of €16 billion at the end of 2007?

Mr. Michael Fingleton

I didn't ... did I decide? It was fit for purpose within the parameters and the criteria in operation within the society.

Did you have a sophisticated ... do you dispute what the Project Harmony? For example, did you have a sophisticated IT system? It's reported that you never even had a computer yourself. I'm not sure if that's accurate or not. But was there a sophisticated IT system? Do you dispute what Project Harmony says in the report in June 2007?

Mr. Michael Fingleton

We had a system. Remember, Deputy, we were operating in a very narrow and simple, straightforward market in property and being funded by deposits on the wholesale market. We were just in a narrow banking function. Therefore, it didn't take great sophisticated systems that would normally operate in the larger banks-----

You had €16 billion of a loan book, with respect, at the end of 2007.

Mr. Michael Fingleton

We hadn't the €16 billion.

Sorry, €16 billion was-----

Mr. Michael Fingleton

Our assets.

At the ... yes, here, the balance sheet was €16 billion.

Mr. Michael Fingleton

At what date?

Did that not require a computer, for example, for the managing director?

Mr. Michael Fingleton

Oh we had, of course. We had a very good system that catered for the needs of the society.

Okay. So ... okay, I'll leave it at that.

Can I ask you, in the letter from INBS, and again this is in core booklet, Vol. 3, page 41? This is a letter from INBS to the Financial Regulator's office in April 2008 and it's in response to the Regulator's query of February 2008 - its report on commercial property lending. The letter from INBS states:

Mr. Fingleton is closely involved with the U.K. and Ireland commercial lending managers in assessing large commercial loan applications and in ongoing reviews and discussions with large borrowers. The Chief Executive is ultimately responsible for all lending and it is essential that he is involved in all material loans being approved by the Society.

That's coming from your own institution to the Financial Regulator. So, is it reasonable, or not, to say that with regard to commercial loan applications, that you were ultimately responsible for the lending?

Mr. Michael Fingleton

Well, as CEO or managing director ... listen, you are always ultimately responsible for whatever takes place within the organisation, and lending was our prime activity within that organisation. So, I would have to familiarise myself very thoroughly with all the loans that were being proposed, all the loans that were there for approval and all the loans that ultimately went on to the society's loan book.

We going to start moving to wrapping up, Deputy.

Yes. Mr. Fingleton, in the core booklet - again Vol. 1, page 71 to 73 - this is a review by Deloitte in the second quarter of 2008 into your bank, Irish Nationwide, commercial and residential lending. It had the following to say with regard to critical issues. On page 71 of these documents it quotes:

No Credit Committee approval was present on a number of reviewed files, mostly relating to loans originating in Belfast.

In many cases the Commercial Loan Application was approved by only one member of the Credit Committee, while at least two members are required under the terms of reference to approve these loans.

It goes on then to say in page 73:

Until December 2007, board approval was required for all loans in excess of €1 million. In a number of incidences, no board approval could be located in either the loan file or the board minutes for loans which, according to the lending policy in operation at the time, would have required board approval.

You have told this committee that at all times - and you're very proud of it - that the board was involved in all of these decisions; that you didn't, despite what the Financial Regulator says, have ultimate responsibility in terms of these decisions, or the authority lay with you. How come is it that Deloitte is pointing out, again and again, that the board didn't approve these ... that the credit committee didn't approve some of these loans?

Mr. Michael Fingleton

Chairman, or Deputy, I just have to say on that one that this is an issue or an allegation or allegations that are in dispute and they're a matter for another jurisdiction. And I would dispute those and the chairman of the credit committee would dispute those allegations and that remains for another day. I cannot comment for legal reasons.

Okay, that's fine. Just for clarity, you are disputing the Deloitte report, the Financial Regulator's report, Project Harmony's report in relation to-----

Mr. Michael Fingleton

Sorry, excuse me.

-----Deloitte's report, the Financial Regulator's letters in relation to your authority and the Project Harmony report? It's that just for accuracy purposes.

Mr. Michael Fingleton

I've made my ... I've stated in my answers the responses to your questions-----

Can I finally ask you ... in relation to ... INBS's overarching driver was demutualisation and sale and this is talked about in the Nyberg report. In your opinion, did the desire on the part of management, and on your part also as part of that management, to maximise the value of INBS result in the adoption of poor lending practice and an increased level of risk in the loan portfolio?

Mr. Michael Fingleton

We certainly would have wished to maximise the value of the society. That would be normal for any institution who wishes to sell its organisation to a third party. Sorry, the second part of your question-----

The question is: did the fact that you wanted to sell ... the demutualisation and sale, did that result in your view, as part of the management to maximise the value of INBS ... did that result in the adoption of poor lending practices and an increase in the level of risk in the loan portfolio?

Mr. Michael Fingleton

I don't accept there were poor lending practices and it was not a motive at all in relation to the demutualisation of Irish Nationwide and the subsequent sale of the society, which was a normal ... we engaged in normal business ... ongoing development of the society.

I will invite you back in at the end, Deputy, when we are wrapping up. Deputy Kieran O'Donnell.

Thanks, Chairman. Welcome, Mr. Fingleton. In relation to the loans acquired to the society by NAMA - you made reference to them earlier - the discount overall was 61% and you spoke about where you feel the discounts were too high. Now, they were the highest discounts of any of the financial institutions and, Chairman, I am referring here to Vol. 1, page 125. Can you explain how you got into a situation where you became partners with developers in terms of profit-sharing, where you gave 100% loans to developers, you took up to 50% of the profit on the development, you charged them a rate of interest? And were they non-recourse loans? So can you give a background in that area?

Mr. Michael Fingleton

Okay. Chairman, yes, I refer back to 1992. We were coming out of the recession of the '80s, where there was little or no increase in the real value of house prices, there was little or no construction going on. I think there was about 15,000 or 20,000 houses being built annually - and we had, of course, the 1989 Act just passed and, as I said to the Deputy ... that building societies ... it encourages us, it stated that, "Building societies should be a major source of funding for housing by investing directly in residential-----"

Mr. Fingleton - and I don't wish to interrupt you - I'm aware of that. What I really want to ask is-----

Mr. Michael Fingleton

Sorry, I thought the Deputy was asking me a question.

No, I was asking you a question.

Mr. Michael Fingleton

Oh, was it you?

It was, Chairman, yes.

Mr. Michael Fingleton

I beg your pardon. I'm sorry.

I haven't started yet, Mr. Fingleton.

The question is, at the time of, we'll say, the bank guarantee was brought in, of the development loans, which were of the order - commercial loans - they were €9 billion of the €12 billion of loans in Irish Nationwide at the time, what percentage of them-----

Mr. Michael Fingleton

€8.5 billion.

€8.5 billion. Right, we'll round it up. But what percentage of those were ... involved joint ventures where there was profit-sharing with the developer for Irish Nationwide?

Mr. Michael Fingleton

I think there was around - I am only guessing, Senator - maybe 30%.

Now, I've seen and we've seen figures where it's been reported ... the Central Bank have said it was around 65% by value.

Mr. Michael Fingleton

Are you talking about land development now or are you talking about income-generating investments-----

I'm talking about-----

Mr. Michael Fingleton

Just the loan book?

-----the loan book.

Mr. Michael Fingleton

I'd be surprised if there was 60. I would certainly think it may be 50.

And of the lands that were yet to be developed, what percentage of those would have been profit-sharing?

Mr. Michael Fingleton

I don't know. I haven't got that figure, Deputy, yes.

Of those loans, the 50% - let's assume that it was of the order of about ... over €4 billion - what percentage of those were non-recourse loans where the only security given was the asset?

Mr. Michael Fingleton

There were certainly ... in the UK, they would be mostly non-recourse in relation to the joint ventures. In Ireland, there would be some non-recourse but the majority of them would be recourse.

Why were so many of the loans non-recourse? They appeared to be very high-risk.

Mr. Michael Fingleton

Because non-recourse was not available in the UK from our customers in relation to the joint ventures. Because they were contributing 50% - up to 50% - of their profits to the society, they would not give personal guarantees.

But did you not ... in terms of the interest, was that not, Mr. Fingleton, reckless of a form for you, as CEO of the society, to put the members' interests at such risk, or not?

Don't make a judgment there now, Deputy.

Well, put it this way, that ... you're saying that the developer was dictating that they would not give any form of security bar ... other than the asset itself.

Mr. Michael Fingleton

It wasn't available. But, Deputy-----

Ye could've demanded it.

Mr. Michael Fingleton

We would ... when you ... we would be going on our experience with those particular developers or borrowers. From 1992, the vast majority of them were customers of ours, right up to 1997. That is 15 years. And we had little or no losses incurred in that period. And we had ... we had ring-fenced our area of activity and diminished the risk element by ensuring that all those loans would be redeemed within a three-year period. And effectively they were. So-----

But is it not-----

Mr. Michael Fingleton

We had to ... we were basing all our decisions based on other considerations but principally on the basis of our experience in that market which we had built an expertise in in the intervening period of 15 years. So you have to take into consideration that element of risk in the lending.

But, in September 2008, is it not fair to say, Mr. Fingleton, that you had a development loan book too much of which was tied up in joint ventures with non-recourse loans?

Mr. Michael Fingleton

Well, if there was too much of it tied up in joint ventures, I don't think the recourse would have made much difference, Deputy, in the final analysis, the way things turned out.

But you don't-----

Mr. Michael Fingleton

It certainly didn't make any difference to the recourse loans we had here in Ireland or the few ... or the number ... we had a number, quite a number ... we had all our recourse loans in the UK in relation to that-----

And you don't see that-----

Mr. Michael Fingleton

----big interest-bearing investment properties.

You don't see that as a contributory factor to the high discount with NAMA?

Mr. Michael Fingleton

It was a contributory but it wasn't the major issue in relation to the discounts applied by NAMA to our loans, I can assure you of that.

On 7 September, Mr. Purcell, your secretary of the board and financial officer, and two other colleagues arranged a meeting with the Central Bank on behalf of Irish Nationwide, with representatives ... together with representatives from AIB and Bank of Ireland. Were you aware that this meeting had been arranged?

Mr. Michael Fingleton

I was.

Okay, and who requested the meeting?

Mr. Michael Fingleton

As ... my understanding ... well, you have Mr. Purcell here this afternoon, he'll fill in more detail, but my understanding was that it was the regulator.

And was a decision reached at the meeting?

Mr. Michael Fingleton

No, there was no decision reached at the meeting, as I understand.

Why didn't you ... why did you not attend the meeting, Mr. Fingleton, as CEO?

Mr. Michael Fingleton

I was ... I had other engagements that required my attention. You do recall, Deputy, the false Reuters report and it might be interesting to know the background to that in that the night the Reuters report was issued, on the lines, we contacted the regulator's office and we informed them that the report was totally erroneous. And the ... I think our head of supervision said that they would get on to the media and that they would make a statement saying ... confirming that that was erroneous.

That's ... Mr. Fingleton, that's in the public domain. I suppose, I want to get ... the meeting-----

Mr. Michael Fingleton

Well, I don't think that's in the public domain.

Well, it's ... it's-----

Can I ask you, Deputy, just to get to ... to ask Mr. Fingleton to clarify the purpose of that meeting?

The purpose ... that's really ... the purpose of that meeting on 7 September?

Mr. Michael Fingleton

The purpose of that meeting ... from the regulator's point of view, they felt and believed that, following the Reuters report, there might be a run on the society or that there would be a run on the society the following Monday or whenever it was ... the following day - maybe the following Monday, I think it was - and that they wished to establish whether a major bank would supply, if the society needed it, some liquidity. Now, Deputy, it is clear from evidence given to this committee that the society didn't need any liquidity to absorb any run or withdrawals caused by the false Reuters report.

Is it ... if I can just refer you to page 96 of Vol. 1, where it's a letter from the Financial Regulator to Mr. Walsh and on page 96, he says-----

Mr. Michael Fingleton

Let me see now.

It's "Liquidity Risk".

Mr. Michael Fingleton

Let me get it ... let me get it. Let me see, "Liquidity Risk" ... 96. Okay.

Paragraph 3, top of the page.

Mr. Michael Fingleton

96, "Liquidity Risk", is it? Okay.

Yes, it's the fourth page of an overall letter from the Financial Regulator.

I want to direct you-----

Mr. Michael Fingleton

Okay.

-----to three sentences down:

Currently [Irish Nationwide Building Society] has no access to ECB monetary operations, [it] has not been accessing the wholesale markets for [lending] in recent months and is relying on retail and corporate deposit initiatives.

So, clearly, at the time, the Financial Regulator had concerns about your overall liquidity position. Ye were heavily reliant on deposits. And, following on from that, just to give it context, there was a meeting on 7 September where Mr. Richie Boucher stated that the Financial Regulator sought a meeting with him for the purpose of ... to discuss potential liquidities both for Irish Nationwide Building Society. So, you weren't able to access ECB funding, so-----

Mr. Michael Fingleton

Deputy ... sorry, Deputy, in relation to the wholesale funding, we didn't need to access wholesale funds at that time.

We had €4 billion of cash or near cash on deposit with counterparty banks.

So you’d no liquidity-----

Mr. Michael Fingleton

To over 25% of liquidity and a multiple of the requirements laid down by the regulator in the new requirements he introduced in 2007. We had no need ... and, in fact, I think ... I haven’t got it confirmed yet but I think we might have paid back €750 million to our funders in February or March in that year.

Which you were required to do.

Mr. Michael Fingleton

Which we were required to do. So we had no need even to roll it over.

Can I just follow on from that question? You had a meeting subsequently with David Doyle on 18 September, the then General Secretary of the Department of Finance.

Mr. Michael Fingleton

Yes.

What was discussed at that meeting?

Mr. Michael Fingleton

What was discussed at that meeting was that we ... were suggested ... we looked for a meeting, first of all, with the Minister and the Minister wasn’t available. And that's ... the chairman and myself.

For what purpose?

Mr. Michael Fingleton

The purpose was to ask or suggest to the Government that they would increase the guarantee on deposits from €20,000 to €100,000. That was the purpose of that meeting. And that was on the 18th of-----

Mr. Michael Fingleton

September and-----

Mr. Fingleton, did you-----

Mr. Michael Fingleton

-----deposits were increased on 20 September from €20,000 to €100,000.

Fine. Did ye discuss solvency of Irish Nationwide on that . . . at that meeting?

Mr. Michael Fingleton

I think ... I'm not too sure, Chairman. I can’t remember that. I don’t think we did but I’m not too sure. No, I can’t ... I can't remember. But certainly we did ... the purpose of going to meet the Minister and we met instead the-----

Do you accept, Mr. Fingleton, that, in terms of scale - size - that Irish Nationwide’s cost to the Irish taxpayer, €5.4 billion, has been the biggest single banking failure in size in the history of the Irish State? And, in that context, that it cost €5.4 billion, do you still believe Irish Nationwide Building Society was solvent on the night of the guarantee?

Mr. Michael Fingleton

I certainly do believe we were solvent on the night of the guarantee, Deputy, and there's been no evidence produced, as far as I am aware, to this committee by all the participants to date to suggest otherwise.

And do you accept that the €5.4 billion of taxpayers’ money that’s ended up going into Irish Nationwide Building Society, which they will never see a red cent of-----

Mr. Michael Fingleton

If you accept-----

Is it the biggest single failure?

Mr. Michael Fingleton

Deputy, if you accept the discounts applied by NAMA, yes. But I don’t accept the discounts applied by NAMA and I have evidence - and will produce evidence at a future date - to really substantially disavow those discounts.

So you're disagreeing fundamentally with an independent organisation like NAMA?

Mr. Michael Fingleton

Sorry, Deputy, can I just finish? Therefore, I'm not saying there wasn’t ... there would have been a ... certainly cost to the taxpayer. It may not have been €5.4 billion. Even if it was €4 billion, it still would be too much.

Well, do you want to-----

Mr. Michael Fingleton

And it would have been too much for the taxpayer and the State to bear.

Mr. Fingleton, do you want to take this opportunity to apologise to the Irish taxpayer and the members of Irish Nationwide Building Society for your stewardship of the institution?

Mr. Michael Fingleton

I have already extended my ... I regret the thing fully and ... very, very much and I've already stated that and if there was a-----

What would you have done differently?

Mr. Michael Fingleton

Sorry?

What would you have done differently, Mr. Fingleton?

Mr. Michael Fingleton

Well, if I'd done differently I don’t know what I . . . in hindsight, we all have ... would have done things differently in our lives and in our business lives as well. I would’ve not lent in 2006 or 2007. If we had stopped lending in 2006 instead of 2007 - when we ceased in September 2007 - we would have eliminated totally our commercial book.

Can I ask you, Mr. Fingleton, what was the set-up remuneration-wise within Irish Nationwide for executives like yourself? What was the ... how was your remuneration arrived at? Like, you were on €2.3 million of a salary in 2007, which was in excess of what the CEO of AIB at the time was on. How did you arrive at that level of a salary?

Mr. Michael Fingleton

I didn’t arrive at it, Deputy.

How was it arrived at?

Mr. Michael Fingleton

The remuneration committee arrived at it and it was made up of a basic salary and a bonus.

How was the bonus arrived at, Mr. Fingleton?

Mr. Michael Fingleton

On the basis of the performance of the society in that given year.

And what was the bonus that you would've agreed, we’ll say, for ’07 and ’08 at the time?

Mr. Michael Fingleton

I didn’t agree anything. I didn't agree anything. It was done in retrospect, it wasn’t done in prospect in relation to delivering any profits or any elements of lending or anything else.

Well, do you believe-----

This is your last question.

No, I’ll ask a very simple question. Do you believe, Mr. Fingleton, in light of the fact of the performance of Irish Nationwide, that the bonuses in ’07-’08 were warranted?

I need to be mindful there----

Mr. Michael Fingleton

Oh, not at all.

They weren’t warranted?

Mr. Michael Fingleton

They wouldn't be ... in hindsight-----

Sorry, I'm going to have to pull you back in that area because that relates to other matters that are part of a civil action-----

But the ... can-----

-----and it doesn’t matter if the witness wants to co-operate or not. I have to be mind ... and that’s-----

I'd only one final question on that, Chairman.

Sure, go on.

Can I ask Mr. Fingleton that ... it’s reported that, we’ll say, on your ceasing as CEO, that you were presented with a watch of-----

Ah, tut, tut.

Please, if we can return to the evidence books, please.

Can I ... Mr. Fingleton, the Financial Regulator in December ’04 noting the ongoing concerns with the level of resources at senior and executive management Irish Nationwide.

Mr. Michael Fingleton

What page was that?

That was . . . that’s Vol. 1, page 3 and 2. That letter was dated 9 December 2004. And it was repeated in March 2008.

Mr. Michael Fingleton

What page is it at, Deputy?

That’s page . . . it should come up on the screen. It’s Vol. 1, page 3 to 12, letter, Financial Regulator, and Vol. 2, page 35. I’d say you're probably reasonably familiar, Mr. Fingleton, with the overall tenant of what's being put forward.

Mr. Michael Fingleton

Well, there's a lot of documentation, Deputy, and I can’t remember it all specifically. So, I'll see can I deal with ... what page-----

It’s page 3 to 12 on Vol. 1, which is the initial letter, Financial Regulator and-----

Mr. Michael Fingleton

In November 2004, is it?

Correct. December 2004.

Mr. Michael Fingleton

Or December 2004, yes, I have it now. I have it, Deputy, yes.

Chairman, can you give time for the witness to locate-----

It’s a Central Bank document so I don’t think it will come up on screen, Deputy.

Time-wise, Chairman, it’s very important.

Yes, yes, I can give you a small bit of flexibility.

Vol. 2, page 35 to 38, is a letter from the Financial Regulator to Mr. Walsh that's dated 7 March and really the tenant of it is that it would appear the regulator continually repeated that there was lack of strength at the board or senior management level over a six-year period. In view of these concerns over resources that was in senior management, why did the building society expand its loan book and, in particular, to commercial lending throughout this period? They're basically saying that the ... that you did not have the strength at either board or management level to deal with dealing with that level of loan expansion, particularly in the commercial area.

Mr. Michael Fingleton

I ... we didn’t ... you will ... I refer to the full reply and detailed reply of the Chairman, Dr. Walsh, to that letter, in December 2004, where he pointed out clearly that we had increased the level of management substantially in the organisation, which, clearly, the regulator wasn’t aware of. And, secondly, we also pointed out that while we needed some further strengthening of the management for normal administrative reasons, we were finding it difficult to get the calibre of employee because we were being sold ... the perception was out there that we were being sold and nobody was prepared to join us on a contract and all we could offer in anticipation of the sale was a contract.

Well, if you-----

Mr. Michael Fingleton

And that is the position. So, we weren't deficient in management ... in adequate management, but we could do with more. That’s all.

Mr. Fingleton, why didn't you demutualise earlier? You had the opportunity. Irish Life and Permanent demutualised much quicker and ... Permanent TSB, rather, demutualised much quicker.

You could have done it over a five-six year period. Why didn't you do that? Why did you push so hard so that you could actually, once you demutualised it, you could sell straight away? Why weren't you willing to wait the five-year period?

Mr. Michael Fingleton

Because, at the time, when we made the decision in 1995 we looked at our position as a stand-alone building society. And our advice was, at the time, that we hadn't the critical mass to convert to a company and launch the society in ... to the public. So, therefore, we decided then that we had two options. One was to merge with another building society. Secondly was to effect a trade sale and the second one we chose to do. At that time, we sought to get the change in the legislation. There was absolutely no commercial reason for that change in legislation not to have been implemented at that time. Even the Central Bank, without ... without the Government or the Department of the Environment bringing in new legislation, the Central Bank could have made the decision in the interests of the shareholders or depositors, but they chose not to. So we lobbied for years for the change in that legislation and we were obstructed from time to time. If you want the whole history-----

Mr. Michael Fingleton

-----chapter and verse-----

Mr. Michael Fingleton

-----we'll give it to you.

Mr. Michael Fingleton

And it was unnecessary for the delay, and it was not caused by the society; it was caused elsewhere.

Mr. Michael Fingleton

I've ... as already set out in my statement-----

Mr. Michael Fingleton

-----written statement.

Mr. Fingleton, why didn't you increase the size of the board in your tenure to bring in, like many other institutions, where they would have had eight or nine, ten people on the board? Why did you maintain it at five, where you had only three non-executive directors? Two of them were executive directors. Why did you maintain the board and more or less the same people over that ten ... whatever ... year period?

Mr. Michael Fingleton

That was the decision of the board, Deputy. It wasn't my personal decision. That was a decision of the board, that they felt that the board was adequate in size to deal with the level of business being generated and conducted by the society.

And was there ever an occasion ... And, finally Chairman, if I could direct the witness to Vol. 1, page 83. It's the Deloitte and Touche report and it deals with the-----

What page, Deputy?

Page 83. Sorry, well I don't know if it's 83 or 63, Chairman. It's the ... it's 63, I believe.

The Deloitte report, is it?

Deloitte. Deloitte and Touche report.

83. It's actually page 83.

Is it 83? Page 83, at the end, Mr. Fingleton, right. And I just want to get an idea of the day-to-day activity around commercial lending and in terms of approval of commercial lending. And this particular report speaks about ... and I've a few quick questions that-----

You're running out of time, Deputy-----

-----so you'll have to be moving on.

Were there ever occasions, Mr. Fingleton, where you approved a loan prior to it being approved by the board ... or, sorry, you approved and granted and extended a loan prior to it being approved by the board?

Mr. Michael Fingleton

I never approved a loan outside the procedures and policy of the society.

That's not my question, Mr. Fingleton. My question is ... is there any occasion where ... prior ... up to December 2007, any loan above €1 million had to be approved by the board.

Mr. Michael Fingleton

Correct.

Were there ever occasions where you, as CEO, approved and extended a loan of over €1 million to a developer or anyone else ... a commercial loan, without ... or any loan ... without the prior approval of the board of directors?

Mr. Michael Fingleton

Deputy, you're ... I could, in certain circumstances, in conjunction with two members of the committee, approve a loan without the approval of the board.

And could you extend the funding?

Mr. Michael Fingleton

I could extend the funding, again, on the same basis.

And what were those ... how would that situation arise?

Mr. Michael Fingleton

It would arise ... it was an urgency or a commercial circumstances that was needed to be addressed.

So it's not ... so, is it fair ... you ... you made reference earlier, Mr. Fingleton, that you were unique-----

That's a supplementary now, Deputy. You're over time.

-----you're unique amongst institutions. Any loan of above €1 million had to go to the board. That is not the case, Mr. Fingleton. There was ... you had the discretion to grant a loan above the €1 million level without prior approval of the board.

Mr. Michael Fingleton

But the board had to be notified of it at earliest opportunity.

But not prior to making it.

Mr. Michael Fingleton

Well, Chairman, the board was required ... or, the requirement of the board was to approve all loans over €1 million, and there was an exception. There had to be some exceptions within an organisation to deal with the commercial realities of the day.

And in hindsight-----

Mr. Michael Fingleton

And that was-----

Last point.

In hindsight, why did you change the rules that after December 2007, loans above €1 million no longer had to be approved by the board? They could be approved by the credit committee without being approved by the board. Why did that change come in?

Mr. Michael Fingleton

I wasn't party to that change. It was changed by the board and, maybe, you have the chairman in this afternoon and you will ask him why. But that was the decision of the board and not me.

Now, Mr. Fingleton, I just want to deal with a couple of matters myself and, time permitting, I will invite Senator O'Keeffe, after which then I'll propose that we take a break. Just to stay on that matter with regard to the management of loans at board level. Can I just specifically ask-----

Mr. Michael Fingleton

I'm sorry, Chairman.

I want to deal with the issue of the management of loans that Deputy O'Donnell is relating to you, just to-----

Mr. Michael Fingleton

Okay.

-----deal specifically with it. Did you authorise loans before they were approved by the board and were the loan amounts ... were the loan amounts required board approval? Did that happen?

Mr. Michael Fingleton

No. I ... outside I could approve loans in conjunction ... in certain circumstances, with ... in conjunction with two members of the committee. My signature would be required.

Okay. And in any situation, would there ... was there subsequently seeking of retrospective approval?

Mr. Michael Fingleton

I will point you to, again ... not again but, as an aside, Chairman, it might help. There's been an investigation, and I'll just mention it once, by Ernst and Young into the affairs of the society post-2010. And it states in that report, which has been circulated and misinterpreted by outside interests and inside interests ... in that it states that they found no evidence to suggest that I had approved solely any loan.

Okay. Mr. Fingleton, earlier this morning when you were speaking in your opening statement, you said about being here as a voluntary witness. You are here as a directed witness, like every other witness that has been here before the banking inquiry. I do appreciate your co-operation, but you are not here in a voluntary capacity, just to clarify that. And-----

Mr. Michael Fingleton

Well, I accept that, Chairman, and I-----

-----and you are here under oath. So, I just want to get it on the record. Are you saying, as a matter of fact, that you never authorised loans before they were approved by the board?

Mr. Michael Fingleton

Yes, that's what I'm saying. Yes.

Okay. Were loans given out without proper legal paperwork being in place?

Mr. Michael Fingleton

I can't say, Chairman, that in every instance all the paperwork would be on the file, but whatever was necessary and essential was always there and there was no security ever compromised, either legally or physically, in relation to any loan.

Okay. I'd just ask a question-----

Mr. Michael Fingleton

And we ... also I would point out that we employed outside solicitors to examine the legal title of every loan and we employed the best, both in the UK and in Ireland. And I went out of my way to identify in Ireland ... I remember well ... identify the best commercial solicitor in Dublin. And the partner of that firm was my adversary when we set up our own legal department against the wishes of the Law Society here, in the early '80s, to do our own mortgage work.

Mr. Michael Fingleton

And yet I gave that firm the business because of the calibre of the person who would deal with our business.

Okay. I want to just briefly also deal with the lending strategy of your institution, Mr. Fingleton. Did anyone on the board ever challenge the overall lending strategy? In particular, did anyone on the board ever challenge the practice of taking equity stakes in developments in exchange for 100% funding?

Mr. Michael Fingleton

No, not to my knowledge-----

Okay, there was a------

Mr. Michael Fingleton

-----or my recollection or knowledge, Chairman. That's the straight answer.

You, earlier, spoke about the composition of the board and you said, and you explain, as to how decisions were taken on the board. Did any members of the board ever propose an increase or new members ... that the board size should be increased, or that other members should be brought on board to it, and was that ever proposed, and was there ever a vote taken on such a proposal?

Mr. Michael Fingleton

We did seek to increase the board level in 2005 and 2006 and I approached a number of people. But because of the fact that we were being sold, the individuals concerned felt that this was a short-term thing and they weren't interested in taking up the position. And we were looking for a particular calibre at the time of ... at a very high level. Some of them weren't interested because of the imminent sale of the society and others weren't because they were just too busy in their own businesses. That is fact, and also the chairman, I think, asked a former director general of the Central Bank to become a director and that did not materialise either.

Did those proposals ever come to a vote, Mr. Fingleton?

Mr. Michael Fingleton

Sorry?

Did those proposals ever result in a vote on the board?

Mr. Michael Fingleton

No.

Okay. Just finally, Mr. Brendan McDonagh from the NTMA, when he was before this inquiry, spoke about the INBS business model. In one comment he said, "I think we might, and I speak again personally here Deputy, I think a few of my colleagues and myself would have been sceptical about the business model of INBS and Anglo Irish Bank." That is in regard to the NTMA's perception of your institution. Mr. McDonagh then also went on to say:

Yes, that we had concerns about placing the deposits, particularly in INBS and Anglo. We stopped placing deposits.

Do you have any observations or comments that you would like to say with regard to Mr. McDonagh's comments about your institution?

Mr. Michael Fingleton

I have, Chairman. The reason they did not deposit with the society was simply that our ratings weren't high enough. It is as simple as that.

Senator Susan O'Keeffe.

Thank you, Chair. Mr. Fingleton, in KPMG's corporate governance review in 2008 it said that board packs ... it's a very specific question about ... "board pacts are very detailed and at times lack clarity and structure". For example, there is little market and operational overview and salient financial commentary provided. What would your observation be in relation to that ... to their observations?

Mr. Michael Fingleton

Senator, you either give too much or you give too little. There is always a happy medium. We wouldn't ... I wouldn't agree. We gave all the information that we thought as an executive, to the board who enabled them to reach their decisions and to deliberate on whatever was before them in relation to the agenda. The interpretation by KPMG in their report, I think, was ... is that the one you are referring to?

Mr. Michael Fingleton

-----would be that it would be better if we had fewer detailed documents and more focused and shorter and more to the point documents presented to the board. I would agree with that. It would lead to more efficient conduct of the board and its time.

Can I bring you, please, to Vol. 2 of the evidence books, on page 24? Again, this is the Financial Regulator ... a very detailed letter that was sent to you ... sent to the INBS ... dated 20 November 2006 which means, obviously, this work had gone on for quite a considerable time.

Mr. Michael Fingleton

What page is that on?

Page 24, Vol. 2.

Mr. Michael Fingleton

Vol. 2.

And it specifically-----

Mr. Michael Fingleton

Hold on a second.

I beg your pardon, I thought it was coming up. I am sorry.

Mr. Michael Fingleton

Wait until I get it. I see. What date was that letter?

The date of the letter is 20 November 2006. There is obviously a lot of detail in the letter so the work had gone on over a long period of time prior to the writing of the letter.

Mr. Michael Fingleton

That was following an inspection-----

Mr. Michael Fingleton

-----Senator. You are okay. Go on now. I have it now.

Page 24, M21, you will see, this is relating to credit risk and, it says:

The inspectors are concerned at the following:

1. The Managing Director, who is a member of the committee, did not attend any of the 27 meetings reviewed by the inspectors, covering the period 8 May 2005 to 11 May 2006 [so that would be a year].

It then goes on to say:

2. [Mr.] Darragh Daly, Homeloans Manager, who is a member of the committee, attended only 2 of 27 meetings.

3. The quorum of three members was only achieved for 2 of the 27 meetings.

4. For the four meetings of the committee in July 2005, only one member [...] was present.

And so on, so I just draw------

Mr. Michael Fingleton

Can I, yes sorry-----

I am asking, just as an example, Mr. Fingleton, of some of the things that the Financial Regulator was drawing attention to about the way in which the society ran its business and you have said here that, in answer to my colleagues, that pretty much things were done well and you employed good people, and so on. I am saying, well, that is one very specific-----

Mr. Michael Fingleton

I am not saying, Senator, they were done perfectly, you know, but they were done as well-----

Mr. Fingleton, the managing director did not attend any of the 27 meetings.

Mr. Michael Fingleton

The managing director-----

Who was the managing director?

Mr. Michael Fingleton

The managing director never attended any-----

A member of the committee.

Mr. Michael Fingleton

-----never attended.

Why not, Mr. Fingleton?

Mr. Michael Fingleton

I will tell you ... I will explain to you the background. I was authorised ex officio to attend all credit committee meetings. But I excused myself permanently from 2002 to the time the committee was set up to 1 December 2007 when the board decided to allocate the credit committee with the full powers to approve loans. And I did that, Senator, to ensure there was no conflicts of interest and that I would not have undue influence on the credit committee and that it would remain fully independent.

And were you aware that the quorum of three members was only achieved for two of the 27 meetings?

Mr. Michael Fingleton

That is seriously in dispute by the chairman of the credit committee. I will just leave it at that.

Okay. Do you accept in relation to the detail of this particular inspection there are many other matters raised here ... are those just for the record, are those also in dispute, Mr. Fingleton, or do you accept any of them?

Mr. Michael Fingleton

No, there are some of them that are valid, of course they are, but I will point out to you, Senator, just in case I will forget it, that the regulator's system of prioritising complaints ... he had a high priority, he had a medium priority and a low priority, and you will notice that any of those 30 items referred to ... some of them are not extremely serious, they are just observations by the regulator ... that there was not one single high priority in that ... in any of those 30 observations.

In fairness, Mr.-----

Mr. Michael Fingleton

If they were considered to be serious by the regulator, he would have ensured that high priority would be up there in lights.

Well, it does say actually on page 30 of that same document, "High Priority - Absence of or unsatisfactory operation of critical risk management and critical internal control systems, inadequate Board/management oversight/control over the operations of the institutions." It is there on page 30.

Mr. Michael Fingleton

That's a high priority.

Yes, and you have just said there weren't any. I am sorry, I am just-----

Mr. Michael Fingleton

Is that the description of them, Senator? Is that the description of them?

It does say, "Absence of or unsatisfactory operation of critical risk management-----

Mr. Michael Fingleton

That is the description of them.

It seems to me to be a grading of the finding.

Mr. Michael Fingleton

Sorry?

It is described as a grading of the finding.

Mr. Michael Fingleton

That is the grading; it is not the content.

Mr. Michael Fingleton

It doesn't relate to the content, Senator.

However, there are quite a number of findings here, you would agree.

Mr. Michael Fingleton

There always is.

There always is.

Mr. Michael Fingleton

I can recall, Senator, through the Chair, that you had another building society in here.

And I think the regulator had identified 76-----

Mr. Michael Fingleton

-----if I'm not mistaken-----

Mr. Fingleton, it is not a competition about how many things were wrong with your's or with somebody else's. We're here talking about the INBS.

Mr. Michael Fingleton

No, I'm only saying that it was a normal practice of the regulator to identify things and incorporate them here and we would deal with them, and they were all dealt with.

Can I ask about-----

Mr. Michael Fingleton

Have you got replies to those, Senator? I don't, I did not get them in my documentation.

I think ... I'm not entirely clear. There are replies to some of them but I just wanted to draw your attention to that.

Mr. Michael Fingleton

Is there a reply? Is there a letter of a reply by the society, because I can only consider it and respond to you if the copy of the letter of reply is in my possession? Because that will then indicate how significant or otherwise was the nature of any or all of those particular----

Okay, I would like if I may-----

Mr. Michael Fingleton

-----observations by the regulator.

I would like if I may to ask about the appropriateness of the €1 million bonus that in September, in 2008-----

We had legal briefings yesterday afternoon, Senator, on this matter-----

Okay, that is fine, thank you.

-----so I just want to pull you back a bit now.

In evidence to this committee, Mr. Boucher from Bank of Ireland talked about the meeting that was held in September 2008, in early September 2008. This was in relation to INBS, and he said, "I would say that weekend was a weekend when, on a personal basis, I realised the extent of the issues in the system were very, very serious", and he goes on to talk ... it was a lengthy meeting. Were you at the meeting, Mr. Fingleton?

Mr. Michael Fingleton

No, I was not, Senator.

Were you aware of the meeting?

Mr. Michael Fingleton

I was, Senator.

Okay, and he, Mr. Boucher, said, "Eventually, we were asked to look at, from memory, I think a quantum of around about €4 billion and we fed back to the regulator that we weren't comfortable, [that] that wasn't an accurate picture of what was needed, but even if it was, that we wouldn't be in a position to provide that - we were very uncomfortable taking on an exposure to that entity." And he talks about wishing to have, you know, I actually felt we should have left the meeting. So I just wonder, Mr. Fingleton, what-----

There will be no time for a reply now, Senator, as you're out of time.

Mr. Michael Fingleton

I wasn't there.

What is your response to Mr. Boucher in relation to that ... his observation of that-----

Mr. Michael Fingleton

Well, the regulator called the meeting. He was in attendance, and I think he gave evidence, and you asked him that question I think, or somebody asked him the question - through the Chair I just mention this - and he says that he ... there was no ... he gave no information to the meeting. There wasn't that much information given because we weren't aware of what the purpose of the meeting was at the time or what the significance of it was and what information was required. And you will have Mr. Purcell here this afternoon, who will tell you precisely what transpired at that particular meeting.

But was INBS not asked-----

Start wrapping up, Senator.

Yes, thank you. Was INBS asked to provide documentation or detail for that meeting?

Mr. Michael Fingleton

I think there was some documentation brought but what was disclosed ... I mean...you have to understand, Senator, that these were competitors of ours, you know, and the documentation ... we wanted to see and establish the ground rules as to what was required and what was not required, and what we will disclose and what we will not disclose, because at that time, Senator-----

Were looking potentially to rescue you.

Mr. Michael Fingleton

-----we were not insolvent and we had no threat. We were ... there was a threat of a run following the false Reuters report and .... but that we had more than adequate liquidity. It was the regulator, as part of this green jersey thing that was mentioned by the-----

The Central Bank.

Mr. Michael Fingleton

-----by the Central Bank CEO-----

That is right, John Hurley.

Mr. Michael Fingleton

-----arising from some discussions he had with people in the EU and elsewhere, and this was part of bringing that together, which was ... that was the purpose of it, I think, so we weren't quite clear at that time but the bottom line is, irrespective of what, as the regulator pointed out to you in his evidence, these people from the two banks were looking after their own interests.

But the bottom line is, did you need to be rescued at that time?

Mr. Michael Fingleton

I have said, Senator - twice at this committee - that we did not.

You did not need to be rescued.

Mr. Michael Fingleton

No.

Mr. Michael Fingleton

We had adequate liquidity. We had €4 billion, almost €4 billion liquidity. I would say, in cash, I would say that our liquidity position would out-match in ratio terms any other institution-----

So the meeting was unnecessary.

Mr. Michael Fingleton

-----on that day.

The meeting was unnecessary.

Mr. Michael Fingleton

Well, it mightn't have ... I don't know was it unnecessary ... it depends on the regulator. He called it. He thought it was necessary. We didn't think it was necessary afterwards.

Thank you, Mr. Fingleton. I now propose that we break for 15 minutes to 11.30 a.m. In doing so, I'd remind the witness that once he begins giving evidence he should not confer with any person other than his legal team in relation to his evidence on matters that are being discussed before this committee. With that in mind I now suspend the meeting until 11.30 a.m. and I remind the witness that he is still under oath until we resume.

Sitting suspended at 11.15 a.m. and resumed at 11.40 a.m.

We are back in full quorum and Mr. Fingleton is almost present. I now propose that we go back into public session and in doing so I just remind members about their mobile devices and so forth, and invite Deputy John Paul Phelan. Deputy, you have ten minutes.

Thank you Chairman. Good morning, Mr. Fingleton. Firstly, can I ask you in relation to the Irish Nationwide annual report from 2007? It shows that in the period 2002 to 2007, profit before tax increased by 303% and total assets by 190%. It is document B02, IBRC00678-002. I don't think you are allowed to show. It is the annual report from 2007 of Nationwide, showing that tax ... profit before tax increased by 303%-----

Vol. 1, page 3.

Yes, and assets by 190%. This was at a time where you said in your opening statement that there was increased competition in the Irish lending market. Do you think ... the question really is: do you think that level of increase was sustainable in the context of that increasing level of competition in the Irish market at that period of time?

Mr. Michael Fingleton

Well, in relation to the society, obviously, that level of lending probably couldn't be sustained because you come up against regulatory ratios and all that, which would diminish the lending going forward. That would be the criteria there.

And why wasn't there any action taken to ensure a more sustainable level of growth?

Mr. Michael Fingleton

Well, we were operating within the parameters and the guidelines set down by the regulator in relation to all regulatory ratios and we were comfortable within that in relation to our lending, and within the strategy and the risk appetite of the society. And also, as I said before, we were turning over our book every three years. So it was within that context, Senator, sorry, Deputy, that we were engaged in our lending programme.

Okay. Can I ask, in your opinion did those levels of growth indicate that the pursuit of growth was affecting credit quality and lending standards within the institution in those years, 2002 to 2007?

Mr. Michael Fingleton

They weren't really, because we were dealing with tried and tested customers for the last, what, 15 years, who had delivered, who had performed, who had done what they said they'd do. They were professionals and they knew their business. So, from in that context, Deputy, no.

Can I ask you, then, in relation to an article that was published in The Sunday Business Post, 23 June 2013?

Mr. Michael Fingleton

The Business Post?

Yes, 23 June 2013. It cited a report compiled by KPMG into Irish Nationwide where it said that 15% of all residential mortgages issued in 2006, which amounted to €111 million, were to just 39 clients who borrowed on average €2.8 million each for the 39 of them. How was that situation allowed to happen? Was that not an over-concentration of the risk from the point of view of the building society?

Mr. Michael Fingleton

Well, it depends on the underlying security and the proposal and the quality of the borrower and the evaluation of the risk and the asset. And while we might have a fairly large exposure to a single borrower, there'd be a number of stratification of loans within that exposure, which you already referred to, in the average loan. All these things would be taken into consideration in relation to the decision to lend that money.

Mr. Michael Fingleton

And it was within the context of what we were doing and within the policy at the time.

Would many of those 39, from your recollection, those 39 loans of an average of €2.9 million each, have been initiated through you personally, do you have any recollection?

Mr. Michael Fingleton

This is one of the myths that are still around, you know, that I brought in everybody and I approved every loan. No, Senator. UK loans would be introduced by the manager of the UK office almost exclusively. I think we had one or two that were Irish. The Irish loans from customers that were there since the '90s, I would have introduced them to the society, but they'd have started off as customers in the Irish market and became customers in the UK market. I would say, if you look at the top 30, maybe five might have come through me. I don't know, I'm just guessing now, but they'd be the Irish, they'd be the Irish ... some of the Irish borrowers.

You refer to it as a myth yourself, Mr. Fingleton, but it was a widely held view. I used to work in financial services before I became a public representative and a view did exist that you were Irish Nationwide Building Society and that you, more than perhaps any other financial institution operating in the Irish market, had, and I think you indicated this in your opening comments to Deputy Doherty-----

Try and pose a question now, Deputy, rather than presenting an argument.

-----a particular knowledge of individual loans and exposures that existed. Is that not the case? Is it not borne out by several of the letters from the regulator, in particular, which showed a concentration of power, if you like, in your office?

Mr. Michael Fingleton

The regulator misunderstood totally the powers that I had. I had defined powers given me by the board and approved by the regulator's office, and they were the normal powers to manage the society and promote the business and develop the business. And, therefore, it would be my duty as CEO to be fully familiar with all the loans, not least as they moved through the process but also as a member of the board where the final decision was being made, so it wasn't unusual. I was suffering from the perception that was out there that it was me and me alone, because I was seen as the face of the society that I came into in the '70s and '80s, and I did promote myself and the society through PR, because we couldn't afford to buy advertising space at the time. So it evolved from that time because I was ... my picture was appearing in the paper day in, day out in relation to some sponsorship we were doing, or some statement I would make, or some conflict I would have with some of the banks or whatever, and that's how that evolved.

Okay, but did that not also stem then from the fact - Deputy O'Donnell asked earlier about the fact - that your board was smaller that virtually every other institution?

Mr. Michael Fingleton

Well, every other institution was larger than our institution and as I said, I think, in my statement, we had a maximum of seven directors and a minimum of five, and the requirement was three. And I said, also, that the maximum the society had even after the new board came in and took over in whatever it is, 2008 or 2009, and even that board, with two extra directors, the Government directors, only had seven.

Can I ask, then, in relation to the document I referenced earlier, Vol. 1, page 3, the letter from the regulator from 9 December 2004, first paragraph, "High-level concerns"? You spoke earlier on that there weren't many high-level concerns but this was one on the issue of corporate governance, where it says: "As you are aware", it was addressed to you: "Dear Michael", the Financial Regulator-----

Mr. Michael Fingleton

It wasn't addressed to me, Deputy.

And it would have been addressed to-----

Michael Walsh.

Yes, Michael Walsh actually.:

As you are aware [I'm sure you were aware of the document] has on many occasions expressed its concerns with regard to the level of resources at senior [executive level] ... management level within INBS. In particular, the regulator stressed the need for increase in size of the board, a strengthening of the executive management team. The latter point was to address concerns such as an over-reliance on the managing director, succession planning for the managing director, and the absence of a senior executive to oversee the commercial lending function

Were there any actions taken following that letter from 9 December 2004 to address-----

Mr. Michael Fingleton

Oh, yes. Yes, there were. We did try to increase the level of the board but we were being sold. That was the perception outside and it was difficult to get the ... a director of the calibre which we were seeking. And the regulator was ... emphasised that we needed to get the top-notch people with a lot of specific experience maybe, you know, that would assist the board in ... and provide the advice and the contributions and all the rest of it that they would ultimately make.

On an issue ... on the issue of-----

Mr. Michael Fingleton

And in relation-----

-----over-reliance on you and-----

Mr. Michael Fingleton

Yes, but ... what this again-----

-----on succession planning-----

Mr. Michael Fingleton

Again, this-----

-----for your position.

Mr. Michael Fingleton

Again, this was the perception, but also they were ... had concern about succession and we had dealt with that-----

Was it dealt with?

Mr. Michael Fingleton

Sorry?

Was it dealt with?

Mr. Michael Fingleton

Oh, it was, yes.

Mr. Michael Fingleton

We ... they were anxious that we recruit and we had already put it in train ahead of commercial lending. We already had a commercial ... head of commercial lending. I think there's confusion here with the regulator but he was, I believe ... we believed he was going to retire and we were trying to recruit then a top-notch guy from another institution. We were coming up against this perception of being sold and we could only offer contracts. Now, we did succeed in getting one head of lending from another institution but, at the end, he changed his mind and didn't come, principally because we were being sold.

So, in other words - this is my final point, Chairman - this "high-level concern" in relation to over-reliance on you and succession planning for your position, you didn't ... you ... because of the fact that you were being sold, you feel that that's the reason why it wasn't addressed.

Mr. Michael Fingleton

There was ... I think the chairman ... I think you've a letter from the chairman there. He responded fully and totally to each point raised by the ... that particular letter and I believe, as far as I recollect, he dealt fully with the paragraph you're referring to.

Senator Marc MacSharry. Senator, ten minutes.

Thanks, Chairman, and welcome, Mr. Fingleton, and thanks very much for the time. This question may have been somewhat covered already by some colleagues but during the period 2003-2006 with commercial lending being the driver for the reasons that you outlined earlier on, the society trebled its book from about €3.5 billion to just under €11 billion. Considering the risk assessment capabilities of the society at that time and, indeed, the management of information, the MIS systems that were available to the society at that time, was that growth prudent or sustainable in your view?

Mr. Michael Fingleton

It certainly was within the parameters of the policy ... the lending policy of the society and our capacity to deal with it, because there was, as was pointed out by the Deputy here, there was a higher concentration in relation to customers than would probably normally be the case, although from the evidence produced to this committee from other institutions, it appears we weren't alone in the high concentration with particular individual borrowers. So it was within our capacity in volume terms, in number terms, to deal with all those-----

So you're happy that you did have the capacity; it was prudent at the time-----

Mr. Michael Fingleton

Our IT system was adequate for the needs. As I said, we were in a simple business - just money in and money out, fixed on a property and secured on an asset. And also, Senator, the growth reflected that our book was being turned over and redeemed every three years.

Did the demutualisation-----

Mr. Michael Fingleton

Sorry, which was unique in relation to any institution and, therefore, our risk and exposure was limited and-----

Mr. Michael Fingleton

Sorry, yes.

Yes, okay. Around the same time in the early 90s, Irish Permanent, then building society, demutualised and made changes and so on and they had very much laid the foundations for their ultimate flotation. Did this add pressures to your own outlook from a corporate perspective to say, "Look, this is where the society needs to go or should ... or ought to be going"?

Mr. Michael Fingleton

Well, as I said in my statement, Senator, that my opinion was at the time, that I formed, and the advice the board had and the advice I gave the board, was that all societies had no future as an independent stand-alone institutions. And that was all societies, not just Nationwide, but, in particular, us because of our size and our lack of critical mass, we ... it would be not feasible for us to go the incorporation route, the plc route and go public. It just wouldn't ... we just wouldn't get the support for it, and that was the advice we got independently as well as my own feelings on the matter.

So the core business of home loans, is it fair to say or not that there was an abandonment of core business in favour of growth using the commercial market that was out there, as you said, because of a deficit in the 1980s for housing?

Mr. Michael Fingleton

No, not a hope. We tried ... we made all the effort to expand our home loan book and, as you may be aware and as I've already mentioned it in my statement, when Bank of Scotland came into the market in 1999, all things changed in that marked irrevocably. They undercut everybody, competition intensified, our book was attacked and we, effectively, couldn't compete, because, principally, we did not ... we refused to adopt as a policy 100% loans, we refused to adopt as a policy tracker mortgages, we refused certification, we refused to lend at uneconomic rates such as 1%. Nobody could lend risk ... or buy risk at that level. And that is why we failed to grow our book in the analysis. We were evaluating the risk compared to what the market was dictating. And we weren't into market share; we hadn't the capacity. And you also had the brokers who controlled 50% eventually of the market and they were aligned, almost totally, to the bigger institutions, and they all fought for their market share and we were left behind.

Mr. Michael Fingleton

So it was as simple as that.

Mr. Michael Fingleton

And we also, as I just ... it came up in the remuneration ... somebody asked me about remuneration, you know, about promoting lending through incentives and bonuses and all the rest of it. The only element of our lending that was incentivised was the promotion of our home loans and we set targets for managers and incentivised them by bonuses to achieve volume.

But surely you would have had commercial loan targets as well?

Mr. Michael Fingleton

No, they're ... we didn't utilise our branches for commercials. There was only, I think, one or two branches that would deal with that commercial ... that were a source of commercials for us.

Mr. Michael Fingleton

Except in maybe a small ticket like a pub or shop or whatever it is, farmer-----

Mr. Michael Fingleton

-----that sort of thing.

You mentioned Bank of Scotland coming in. When they did, and you said your book was attacked and they were very much pursuing your business, did that lead to a looser underwriting strategy-----

Mr. Michael Fingleton

Oh, absolutely, yes.

-----or policy in the society?

Mr. Michael Fingleton

No, no. That's why we didn't make progress. That's why we didn't make progress. We'd a very ... as I pointed out, what we didn't engage in, and which caused problems for other institutions following the crash ... we all know about the tracker mortgages, we didn't do any of those. So that wasn't implying, Senator, a loosening of requirements. In fact, we increased them. And at the end of 2006, only 17% - this sticks in my mind - of our home loans was in excess of 90% when 92% was the norm, and that's of our-----

Some months ago at this stage we had the various auditing firms in as witnesses and in questioning I had asked one - I had asked them all in fact - had they ever had a company firm that they were auditing ask them to remove an auditor or a person from the audit team for overzealous or invasiveness or ... and so on. One particular firm admitted that that happened on three occasions and in one instance it was a financial institution. Can you tell the committee of inquiry did Irish Nationwide ever request the removal of the member of an audit team from their auditors?

Mr. Michael Fingleton

Not to my knowledge.

So not to your knowledge, so therefore you know nothing.

Mr. Michael Fingleton

I don't ... not to my knowledge.

In terms of the top 25 exposures, were there any employees who had a stake in those self-same top 25 investments?

Mr. Michael Fingleton

Sorry, say that again.

In terms of the top 25 borrowers, were there ever any employees or board members or yourself or whoever party to those 25 exposures - the top 25?

Mr. Michael Fingleton

Absolutely not.

Okay.

How many of your own clients, who the society would have lent to, did you in any other capacity go into business with?

Mr. Michael Fingleton

Yes, I had a relationship with one; that's all.

Okay. Was that a politician?

Mr. Michael Fingleton

Outside of the society.

Was that a politician?

Mr. Michael Fingleton

Yes.

Would you like to tell the committee who it is?

Mr. Michael Fingleton

I don't want to discuss it.

That's fine.

When you ever invested, yourself, in anything, did you ever borrow from the society yourself?

Mr. Michael Fingleton

Yes. I had some buy-to-let properties over the years but I will say, Senator, that I always had a deposit account in the society that was at least as much as the exposure on the loans and sometimes double.

Understood. Can I ask, in the event of you wishing to borrow on that, what way would it have been managed in terms of credit committees and underwriting?

Can I make an intervention here Senator? The witness is free to answer if he wishes, but if they're nature of financial confidentiality, you can be more discretionary in your responses, Mr. Fingleton, if you so wish.

Mr. Michael Fingleton

Thank you, Chairman. They would go through the normal process and be approved by the board and I would get no concessions.

Would you step out?

Mr. Michael Fingleton

Oh, I wasn't involved. I wasn't involved. I wasn't involved in it at all. They'd be done in the normal way on the normal terms. That's it, no concessions.

Throughout your period of-----

Final question, Senator.

-----tenure, your relationship to Government or, you know, was the Minister for Finance of the day accessible to you as the head of a mutual or was there contact there? In particular, you had mentioned about appropriate representations being made to Government at the time to amend the section 102 of the Building Societies Act of '89. So, you know, what shape did that take? I mean, did you contact Ministers directly? Did a PR firm do it on your behalf? What-----

Mr. Michael Fingleton

I ... in the '90s, I contacted the shadow Minister for Finance in relation to getting a change in the legislation. At that time I was seeking a change in the Central Bank Act because, as I said earlier, the Central Bank had the powers, themselves, to effect a change to allow us to effect a trade sale. They didn't need the Government to bring in new legislation to do so and there was a Central Bank Act going through in 1995, I think. And the Opposition - I think the Minister - put in a proposal to change the legislation and it was defeated by the Government on the day.

Just very last question. In your tenure did the society lend to mezzanine or shelf companies abroad for the purposes of buying property here?

Mr. Michael Fingleton

No.

That's all. Thanks very much. Thank you.

Senator Michael D'Arcy, you've ten minutes.

Thank you, Chairman. Mr. Fingleton, you're welcome.

Mr. Michael Fingleton

Thank you.

The document, Chairman, if you could bring it up please, is Vol. 1 INBS page 68 and 69. Mr. Fingleton, it is the Deloitte report in relation to the commercial and residential lending review, completed in May 2008. The reports states:

the Society reviewed and revised its commercial and residential lending policies ... in December ['07]. Of particular note for commercial lending was the extension of the power of the Credit Committee from the approval of loan applications up to €1 million ... to the approval of all commercial loan applications [post 2007. As a result the] Board [was] no longer directly involved in the approval of loans; prior to ['07] the Board approved commercial loan applications in excess of €1 million.

Can you explain why the board made this decision?

Mr. Michael Fingleton

I don't know, Chairman. Personally, I don't know, but you'll have an opportunity to ask the chairman in the afternoon, but there was a board decision to do it and that was it. I would not have been in favour.

You were against it.

Mr. Michael Fingleton

Well, I wasn't specifically against it; it was a board decision. And I can't recall the meeting in which it was made and whether I was present or not I don't know; I can't remember, but I would have been personally opposed to it because I had maintained for the previous 37 years it was essential from my point of view that the board would be involved in the lending process.

Okay. It was a small-----

Mr. Michael Fingleton

That was part of our structure, part of the-----

It was a small-----

Mr. Michael Fingleton

----- evaluation of control within the society.

It was a small board, Mr. Fingleton. Do you know who was personally in favour of it?

Mr. Michael Fingleton

I don't know. It is obvious the board made the decision, but I presume it was unanimous, you know.

In your opinion was the relaxation in lending criteria appropriate, given the Financial Regulator's ongoing concerns regarding commercial property lending control and the risk management within the society?

Mr. Michael Fingleton

No, there was never ... sorry, what did you say in the first ... sorry I missed your first sentence.

Was the relaxation in lending criteria-----

Mr. Michael Fingleton

No, there was no relaxation in the lending criteria. The lending criteria was the same, going forward, going through and all the rest of it, and essential to the lending criteria was that each and every loan would be examined on its merits and conditioned accordingly.

But Mr. Fingleton, the board had sight of every loan over €1 million prior to December '07 and after December '07 it didn't. That must be a-----

Mr. Michael Fingleton

I would say the reason why the decision was made, Chairman, or Senator, on reflection was that we had stopped ... effectively stopped lending, stopped new lending. In ... from about September, October on, we were reducing our exposure to the property market and that would be reflected in the board decision. So we weren't doing very much lending whatsoever except to the commitments we had and to protect the security of the assets we already had on our books. So there was little or no business anticipated by the board at that time. So that could explain why it was given solely then to the credit committee.

If I could move on-----

Mr. Michael Fingleton

But again, having said that, the board had to be notified, Senator, of any approval of loans, of the loans.

They had to be notified.

Mr. Michael Fingleton

They had to be notified.

But they didn't have consent over the loans.

Mr. Michael Fingleton

Correct.

Can I move on, Mr. Fingleton, please? You said on page 16 of your written opening statement, "no single bank could have prevented a property bubble". Could one or two banks create a property bubble?

Mr. Michael Fingleton

It depends on the competition. I mean, the reason for my statement, there Senator, in relation that no single society ...

If Irish Nationwide, for example, Senator, decided in 2003, for example, or 2002 or wherever, we're not going to do any more lending ... with the competition in the market, the lending we did not do would be absorbed by the other providers of funds in the market. You'd have to have everybody prevented from or ... or to make the decision not to lend. Do you understand what point I'm making?

I do, but you didn't answer the question.

Mr. Michael Fingleton

Sorry-----

Could one or two banks create a property bubble?

Mr. Michael Fingleton

I don't think so.

They couldn't have.

Mr. Michael Fingleton

I don't think so. Not at all. When you consider that €64 billion was the figure that was put into the banks, Irish banks, isn't that right? And, secondly, the non-Irish banks, I think their ... it is believed that their exposure cost them in the region of €40 billion, so you're talking about €100 billion and that's in relation to eight banks, nine banks, so I don't think two banks would have made any difference. Now, it depends on the banks. If it was some of the big banks, the biggest supplier of funds, then it would have got out into the market and then it would become an issue for the Central Bank and it would become an issue for Government and the Central Bank and maybe through that avenue there may be a pause-----

But, Mr. Fingleton, you quoted-----

Mr. Michael Fingleton

-----and the market would get the message that-----

You've quoted Bank of Scotland Ireland as coming in and chasing business-----

Mr. Michael Fingleton

Yes.

-----reducing the margin-----

Mr. Michael Fingleton

Correct.

-----and you quoted 1% on a number of occasions.

Mr. Michael Fingleton

Yes.

And the perception I took from what you were saying was other banks went chasing them because they were chasing their business.

Mr. Michael Fingleton

Yes, market share, yes.

So again, the question I've asked you is: could one or two or a small number of institutions create a property bubble in a small jurisdiction like ours?

Mr. Michael Fingleton

It would take a lot more than that, unless the regulatory authorities and the Central Bank interfered. And if they did, then the market would fundamentally change, as I've said. It would change and there'd be a new-----

Mr. Michael Fingleton

-----there'd be a new dynamic then within the market once it became public.

Okay. Can I put it to you, Mr. Fingleton, that the expectation is the two institutions that the State will get no money back from are Anglo Irish Bank and INBS?

Mr. Michael Fingleton

I don't agree, Senator. I've already outlined my evaluation of NAMA and what they're going to get back.

Okay, and you don't agree. You don't agree with NAMA discounts?

Mr. Michael Fingleton

No, I don't.

Okay. You ... again, I took the impression you didn't agree with Project Harmony, KPMG.

Mr. Michael Fingleton

Sorry?

Project Harmony?

Mr. Michael Fingleton

No, I didn't say that. I didn't say, that, Senator, I didn't agree with it.

The Nyberg report was critical of INBS. The Nyberg report-----

Mr. Michael Fingleton

Yes, well, the Nyberg report ... if you look at the terms of reference of the Nyberg report, Senator, you will find that it focused exclusively almost on two institutions, Anglo and Irish Nationwide, and they dealt with those two institutions separately in the report. And they amalgamated in their commentary all the other institutions, which, I believe, was totally unfair.

You don't agree with the terms of reference of the Nyberg report?

Mr. Michael Fingleton

No, I don't. They should have dealt with all the institutions separately and individually.

Mr. Fingleton, you seem to be swimming against the tide against a lot of reports and positions that have been accepted for a long period of time now. Are you saying they're all wrong and your interpretation is correct?

Mr. Michael Fingleton

I'm only giving you my views, Senator. I mean, reports that have been made and commentaries in the media and elsewhere, you know, they're not always accurate and they're not always right. Perceptions are perceptions, and, normally, perceptions become facts in the ... in certain climates and in certain circumstances. I'm only giving you my views, which may be not in the public domain up to now, and I haven't had the opportunity of doing it for many reasons.

Were you interviewed by Mr. Nyberg?

Mr. Michael Fingleton

Oh, I was, yes, certainly.

And why then do you think if he interviewed you, why would he not put the facts? I assume you gave him the same information you're giving us.

Mr. Michael Fingleton

I can't remember what I gave but I would have given him the same ... more or less the same information. I think I've given you a lot more than I gave Nyberg. Nyberg was an hour or something of an interview.

But you're saying the Nyberg report in relation to INBS is incorrect.

Mr. Michael Fingleton

No, no, I'm not saying anything. I'm saying, I'm saying that it dealt with the society based on the information it ... that was made available to it by the new management, and it was based primarily on a report done by a firm of accountants that I referred to earlier which, in my view ... I describe it as a flawed document.

A supplementary, Senator, to wrap up.

Okay, just very quickly, in terms of lending policy, Mr. Fingleton, please, were the board aware of all types of lending that would have been made?

Mr. Michael Fingleton

Absolutely.

Okay. In terms of warehousing of loans, were the board ... did the board sanction the warehousing------

Mr. Michael Fingleton

What do you mean "warehousing"?

We won't be going there. No, no, no.

Chairman, that question, I think, is relevant.

Yes, I know. We had a legal briefing yesterday afternoon on this stuff, Senator. Members will be familiar of that. I won't go back into the briefing yesterday afternoon so-----

The question I'm asking is: was the board aware of warehousing of loans?

Okay, no.

Mr. Michael Fingleton

What do you mean "warehousing"? What do you mean?

Sorry Mr. Fingleton, I'm going to have to move on. Next question, Senator, please.

Mr. Michael Fingleton

Thank you, Chairman.

Next question.

Okay. You quoted properties in the UK in your-----

Mr. Michael Fingleton

Sorry?

You quoted properties in the United Kingdom of-----

Mr. Michael Fingleton

I what? Sorry?

You quoted properties?

Mr. Michael Fingleton

Quoted?

Mr. Michael Fingleton

Oh sorry, yes.

-----that the discounts in NAMA were incorrect by multiples.

Mr. Michael Fingleton

That's my opinion.

Your opinion. Why did you not quote properties that would be of little or no value from your time in INBS to balance the conversation?

Mr. Michael Fingleton

I just haven't any information. I haven't got any information on them at this point in time.

Thank you, Chairman.

Deputy Michael McGrath. Ten minutes, Deputy.

Thank you very much, Chair. You're very welcome, Mr. Fingleton. Can I just start by asking you to clarify what you said about the credit committee and your relationship with it? Did you say that you were an ex officio member but you didn't attend to keep yourself at arm's length?

Mr. Michael Fingleton

Correct.

Mr. Michael Fingleton

From 2002 when it was formed to 1 December 2007 when the ... when it was ... when the powers given to the committee changed. Then I felt obliged to sit on that committee.

And then you did attend from 2008 onwards-----

Mr. Michael Fingleton

Correct.

-----during the remainder-----

Mr. Michael Fingleton

When there was little-----

-----of your term.

Mr. Michael Fingleton

-----or no lending-----

Mr. Michael Fingleton

-----except a bit on residential.

And, to your knowledge, was the initial approval of any individual loan given by one person?

Mr. Michael Fingleton

Not at all.

Mr. Michael Fingleton

I mean, even my chairman ... or not my ... the acting chairman at the time, he came on ... he became chairman of the audit committee later on in 2008 and I remember him saying to me that he was very impressed by the discussion of the contribution of the people who attended, and our policy was not just to confine it to the members of the committee. We also brought in, for the sake of efficiency and knowledge and contribution, all the staff that were involved in the lending process in relation to each or that particular loan that was being considered.

So you are disputing the finding in the Deloitte report-----

Mr. Michael Fingleton

The, the-----

-----that in many cases the commercial loan application was approved by only one-----

Mr. Michael Fingleton

The commercial-----

-----member of the committee.

Mr. Michael Fingleton

I don't think it would be possible knowing the structure within the organisation. All the members of the committee were in the same building within a phone call to come to a meeting and to access it. I can't understand those comments and I've ... I spoke to the chairman of that committee and he just is-----

And, equally, page 27 of the Nyberg report references an inspection by the Financial Regulator in 2006 which looked at a 12-month period from May 2005 to May 2006. It looked at the operation of the credit committee. A quorum of three members was only achieved for two of the 27 meetings, and for four of the meetings, only one member was present.

Mr. Michael Fingleton

That's in dispute. I don't think that's accurate, Chairman. That's my view.

Is that not a matter of fact which can be established-----

Mr. Michael Fingleton

It can be-----

-----by examining the minutes of the relevant meetings?

Mr. Michael Fingleton

-----but it's... it was hotly disputed by the chairman of the credit committee at that time.

That's all I'll say. I can't go any further than that.

So, at no stage-----

Mr. Michael Fingleton

And it'd be ... it'd be a surprise to me if that was any ... if that was correct. It would be a great surprise to me because there was absolutely no necessity whatsoever for it to happen - none - knowing the availability of the people who were members of that committee within the organisation and within the same office.

But is it not the case, Mr. Fingleton, that an examination of the documentation which was available to Deloitte, for example, which was available to the Financial Regulator supports the conclusion that on many occasions the credit committee met with one person in attendance?

Mr. Michael Fingleton

I don't think ... I don't think that's true. I really don't. That's my opinion now and I can't ... I can't say otherwise. It's there, it's said and I think, in deference to the chairman of the credit committee, I have to defer on that one.

And, Mr. Fingleton, what about the conclusion of the Central Bank's investigation into INBS in July 2015? I assume you're familiar with that.

Mr. Michael Fingleton

Oh, I am. I'm very familiar with it, Deputy.

Can I put it to you, Mr. Fingleton, that the Central Bank stated at the conclusion of that process "INBS has admitted to having committed multiple breaches of financial services law and regulation, including persistent failure to comply with its own internal policies and procedures during the [period 2004 to 2008]". This was a five-year investigation commenced in 2010, concluded in the summer of 2015. Do you accept that?

Mr. Michael Fingleton

No, I don't.

Mr. Michael Fingleton

I don't, Deputy, whatsoever and I would love to know who comprised ... who was the board that made that admission to the credit team. However, it's hotly in dispute and will be dealt with in the normal process in time. And I can't ... I, obviously, can't discuss it further-----

Okay, can I put it to you, Mr. Fingleton, that-----

Mr. Michael Fingleton

-----but I disagree fundamentally with those allegations.

Right. Well, the Central Bank-----

Mr. Michael Fingleton

The motivation for them.

The Central Bank identified a series of breaches, which were admitted by INBS subsequently, underpinned by evidence of more than a thousand alleged instances of INBS breaching its own policies and procedures relating to commercial lending and credit risk management - more than a thousand alleged breaches, supported by documentation, Mr. Fingleton.

Mr. Michael Fingleton

Deputy, I'm not going to get involved in this. I've already said we dispute them ... strongly would dispute that. And, because of the impending inquiry, I can't get involved in the detail of any allegations that are being made or have been made or will be made in relation to that inquiry, for, obviously, legal purposes.

Yes, well I put it to you that they are findings of a Central Bank report which includes instances-----

Mr. Michael Fingleton

That doesn't ... that doesn't mean, Senator, they can't be disputed and that they're correct.

No. I just want to put them on the record - where no commercial loan application was prepared for certain loans or situations where applications were only prepared after funds had been drawn down by borrowers. They refer to instances where loans were not approved by the board of directors, not recommended or approved by the credit committee, not approved in accordance with Nationwide's urgent credit decision approval procedures and you dispute all of this.

Mr. Michael Fingleton

We'll deal with it at the time, Senator, I'm not going to make any further comment on it.

The personal pension pot of €27.6 million, was that transferred out of Nationwide in early 2007? Are those reports accurate, Mr. Fingleton?

Mr. Michael Fingleton

That's correct, yes. It matured at that time and the board decided to terminate the scheme. A very wise decision.

The pension scheme matured, so the ... as in the investments in it matured?

Mr. Michael Fingleton

The board decided to terminate it and to deal with it ... the trustees-----

And what happened to it then?

Mr. Michael Fingleton

-----and it was then ... under the different structures available to me, I was entitled to take it out of the society and put it into another vehicle.

Another vehicle entirely within your own personal control.

Mr. Michael Fingleton

Yes, which was normal and legitimate at the time.

And what is the annual pension deriving from that pot?

Mr. Michael Fingleton

Sorry, I'm not going to discuss it, Deputy, whatsoever. I've made my comments in relation to the pension. I've explained it and I'm not going to deal with it any further.

And would it be normal for a pension scheme of a building society or a bank, which was for the sole benefit of one individual, to then be transferred entirely into the control and ownership of that individual while they remained an employee?

Mr. Michael Fingleton

It was an option ... after that was done I became ... my employment had terminated on reaching the age of 70 years and I was re-employed by the society, under contract, for a further one year. And the option was open to me to leave it with the society or to take it. Under the legislation introduced by the Government, the option to me was to take it into my own ownership so I choose to take it into my own ownership.

Do you feel that you have been wronged, Mr. Fingleton?

Mr. Michael Fingleton

I feel, Deputy, that I've been misrepresented, seriously.

Mr. Michael Fingleton

In all the comments. I'd say 80% of what has been written about me by certain individuals is totally wrong. 10% might be disputed but 10% might be ... are ... would be totally correct. And that's where I'll leave it. I certainly, most certainly, do.

Feel that you have been wronged?

Mr. Michael Fingleton

Yes.

And the central allegation, Mr. Fingleton, which has been put to you is that you operated Irish Nationwide as a personal fiefdom, that it was your project, you were in control, any decision of any significance was made by you, you called all the shots.

Mr. Michael Fingleton

Totally untrue, and it's evidenced by my continued insistence that the board would be fully involved, since I joined that society, in the approval of loans within the society. No other institution ... no board of any other institution was involved in the approval of loans and-----

And is it your evidence-----

Mr. Michael Fingleton

-----I believe some individuals in institutions had lending power far in excess than anything I'm alleged to have.

And is it your evidence to the inquiry that not a single loan was extended by Irish Nationwide without either the prior approval of the board or the subsequent noting by the board of that loan?

Mr. Michael Fingleton

I have no-----

Generally, as a general question.

My question is very specific, Chairman.

With regard to a specific loan, I'd just be mindful that Mr. Fingleton doesn't go into a specific loan but anything in a general capacity, yes.

Mr. Michael Fingleton

I have no recollection, Chairman ... Deputy, of any loan not complying with whatever the policy of the board was.

And finally, in many instances would the board have rejected the recommendation of the credit committee to provide a loan to a borrower?

Mr. Michael Fingleton

It would happen on occasions but not very often.

But it did happen.

Mr. Michael Fingleton

I recall it happening. It's in the ... I think we came across one in the minutes. I was looking through some recent minutes there recently and I saw one.

Thank you very much, Deputy. Deputy Joe Higgins. Deputy, ten minutes.

Mr. Fingleton, your auditors, KPMG, did a due diligence report, which came to be known as Project Harmony, in 2007. And it found a number of issues regarding the concentration of loans in the higher-risk development sector - or what the report calls the "speculative property investment" - namely: that 41% of total commercial lending was, in this sector, €3.2 billion; that there was a concentration of loans in the higher loan-to-value bands; that 30% of commercial loans had loan-to-value of over 100%; and that there was a concentration in your customer base where 30 commercial customers accounted for 53% of total commercial loan book. This was at the end of 2006. Did your board ever consider or were they concerned that these levels of high concentration and the correlation between them posed a risk to the business model that the society was based on?

Mr. Michael Fingleton

Yes, I can't speak for individual members of the board but it was never discussed, as far as I recall, at any board meeting. And they would have been reassured by the fact that since 1992 to the end of 2007, that there was little or no bad loans within that book. And, furthermore, you've mentioned ... they would also be comforted by the fact that our book was being turned over by .... every three years, and it was relatively low risk in the sense that even their land development loans embraced just planning, mainly - getting the planning and then refinancing it with another institution to take on the big risk, which was the construction risk.

And you yourself had no concern that this very high concentration in speculative development could come crashing down in the event of, you know, property prices falling?

Mr. Michael Fingleton

Well, all that ... we were guided and probably influenced and reassured by all the commentaries of all the institutions that I have mentioned earlier: the Central Bank, the OECD, the IMF, all the economists, from the bank economists and the academics and also the broker economists, and also the demographics that existed both in the UK and Ireland, which were all very positive.

Okay. Mr. Fingleton, the chief executive of NAMA, Mr. McDonagh, said as a comment on the covered banks generally, including Irish Nationwide, "the banks consider[ed] property lending to be almost a one-way bet, notwithstanding the well-established cyclical behaviour of property markets". And the chairman of NAMA, Mr. Daly, on the same lines, said, "the banks were taking the type of risk normally the preserve of private equity ... hedge fund providers without demanding the same level of rigorous analysis". And if I can put to you then the ... in some detail what the Nyberg report, which I am sure you have read in detail, and I quote in relation to INBS, "Loan contracts tended to include profit share agreements, with INBS receiving ... between 25% and 50% of the profit when [the] project was concluded successfully." Nyberg continues:

This business model was, in principle and in practice, risky because of the planning permission risks involved and because of the reliance on the refinancing of borrowers by other banks. These risks were seen by INBS as significantly mitigated by accepting, as borrowers, only developers who had a long and successful history of doing such projects.

And my quote concludes: "The model was in some ways closer to that of a venture capital financier than that of typical banks."

Now if you take those three observations, Mr. Fingleton, essentially amounting to a claim that INBS was more a venture capitalist organisation than a building society, and then if we add further observations about only 30 individuals or entities being responsible for 41% of your total loan book, and these individuals, as you said yourself, had a long relationship with, with you and the society ... I mean, would it be fair to say that it wasn't just a venture capitalist project but a crony capitalist one as well in the methods which you used?

Mr. Fingleton, I'll just allow a bit of time for response as well as it was a long question. Mr. Fingleton.

Mr. Michael Fingleton

Sorry, what's the question?

The question is, Mr. Fingleton-----

Mr. Michael Fingleton

There seemed to be about ten questions there, Deputy. Sorry-----

-----to sum it up briefly, that certain-----

Mr. Michael Fingleton

-----I just lost track.

Many observers, including Nyberg, said that the methods of banks, and including the INBS, resembled more venture ... hedge funds, essentially-----

Mr. Michael Fingleton

Yes, okay.

-----rather than a building society.

Mr. Michael Fingleton

I'm with you.

And the second part of the question was the close relationships, and yourself being very central to that with people you were giving huge amounts of money to, would it be fair to say that it was crony capitalism as well as venture capitalism?

Mr. Michael Fingleton

No, I would disagree. That's a short answer. And I would also disagree, Deputy, with the observations of Nyberg in the saying that lending on land development under the criteria employed by the society in relation to planning ... planning wasn't a risk at all. Planning was well-defined in the UK and here. You knew what planning you would get in relation to loans. You knew, it was established by precedent and all the rest of it. And that was the easy part. The big risk was the construction, and we had disengaged from that almost totally, I think, in the early 2000s. There was little or no risk in land development and that's proven by the fact that we would get our money back in six months or 12 months, whenever the planning came through. We would get our money back and we would have a free run on the construction side financed with another institution, who were very ... I know the institutions involved and they were very anxious to take all the business from us, not just the construction lending.

Mr. Fingleton, isn't it true that you had seen in your long career as well many property busts in many different countries and bank bursts as well? Surely, would you not have been aware of the inherent risk in that type of speculative lending on property?

Mr. Michael Fingleton

Well, I took into consideration ... certainly, as I've said in my opening statement, I went through three of them, where there was a downturn in the property market, but I didn't expect ... or there was no evidence to support, either emanating from the Central Bank, who were charged with the financial stability of the State, or the Department of Finance or anybody else, to suggest that there was any downturn going to emerge, except a soft landing, which would equate to my experience of downturns in the '70s and '80s-----

Mr. Michael Fingleton

-----and early '90s.

Mr. Fingleton, in thejournal.ie, 12 February 2013, there is a quote. Con Power, who sat on the INBS board between 2000 and 2006, noted how there were just six people, including himself, on the board and meetings would normally begin with the chairman asking Fingleton: "Well, Michael, what have you got for us today?", with no agenda and no documents before the board members. That would give a picture, if it was true, of a really autocratic regime. Is that true?

Mr. Michael Fingleton

I absolutely ... totally untrue. I mean, that is untrue. I would dispute that.

Mr. Michael Fingleton

Now, I would defer to Mr. Power in that he was a corporate ... I would accept he was a corporate governance expert and all the rest of it but that was simply not true. Again, the board were the final determinator of all loans and all policies within the organisations.

Finally, Mr. Fingleton, for time-----

Mr. Michael Fingleton

So, it wasn't exclusive ... Michael Fingleton dictating everything and anything that happened within that organisation.

Right. Finally, Chairman. Mr. Fingleton, if demutualisation had happened in the course of up to 2005 or 2006, what would it have meant to the management of INBS in terms of financial gain?

Mr. Michael Fingleton

I don't know. I don't know, Deputy, because it wasn't determined or evaluated at the time. Certainly, the management and the staff would have benefitted. To what extent, I don't know, and they would be entitled to benefit from demutualisation ... or the successful sale of the organisation would have merited some element of compensation to the staff.

Would it not have been much more than that, Mr. Fingleton? Would it not have been tied to the extent of the assets, the loans, the profits?

Mr. Michael Fingleton

No, no. It never was. Nothing was ever attached to the loans, the profits. That ... all bonuses in relation to any individual other than the branch managers, were incentivised to secure targeted home loans ... were based on the performance of the society solely, not on any targets or anything like that.

So do you say then ... do you deny the suggestion that is made in a number of sources-----

You've to wrap up now Deputy.

-----that the drive for-----

Mr. Michael Fingleton

Sorry, where are these made? Where are these allegations made? In relation to?

Let me just state-----

Mr. Michael Fingleton

Sorry, Deputy.

-----state what's said. That ... Nyberg makes it, among others.

Mr. Michael Fingleton

What does he make?

Okay, I'm about to put it to you.

Mr. Michael Fingleton

Sorry.

That the drive for demutualisation was linked to the very high levels of lending, the drive for profits, etc. ... that that's the point that's made.

Mr. Michael Fingleton

Totally untrue, Deputy.

Thank you very much. Deputy Eoghan Murphy. Deputy, ten minutes.

Thank you, Chairman, and thank you, Mr. Fingleton. You are very welcome.

I just want to go back to something that the Chair raised with you earlier on in relation to the NTMA and why they didn't place deposits with your society. And your answer was?

Mr. Michael Fingleton

That our ratings received from the rating agencies wasn't high enough. They would be looking for AAA-----

Mr. Michael Fingleton

-----for to place deposits with the counterparty institutions. We hadn't AAA.

But when Mr. McDonagh was asked that when he was before the committee, he never mentioned the ratings agencies.

Mr. Michael Fingleton

Well I'm mentioning them because that was the reason.

Well, I'll tell you what his reason was, as the NTMA.

Mr. Michael Fingleton

Sorry, yes. Sorry, yes.

Yes. From page 93 of the transcript he said, "We won't place any deposit with INBS. ... They'll look for credit lines from us and we wouldn't give it to them. ... we just couldn't understand the business model"-----

Mr. Michael Fingleton

Sorry?

-----"we just couldn't understand the business model". This is Mr. McDonagh.

Mr. Michael Fingleton

All right.

"We took the view that really it's more trouble than it's worth to place €6 million on deposit with this institution when it really was a very opaque structure." So what do you say to that from the NTMA as to why they wouldn't place deposits?

Mr. Michael Fingleton

That's an opinion. I can't ... I don't agree with it.

It's an opinion.

Mr. Michael Fingleton

Yes.

And you say that they wouldn't do it because the ratings agencies didn't give you AAA.

Mr. Michael Fingleton

Well, that's ... that was my interpretation of why they wouldn't do it.

Where does that interpretation come from?

Mr. Michael Fingleton

It came from ... I remember asking one individual from the Auntie Mae or, sorry, the ... what do you call ... what the ... that institution-----

Mr. Michael Fingleton

Yes, NTMA. Sorry, NTMA, about deposits and he said, "Your ratings are not high enough".

And what was the context of that conversation? You were pursuing a credit line probably.

Mr. Michael Fingleton

Just a casual conversation that ... I had just bumped into this individual and I just mentioned it. That's all.

And were they senior in the organisation? Were they speaking with authority or were they just-----

Mr. Michael Fingleton

Yes, they were senior in the organisation, yes. That was only-----

Can you tell us who you were speaking to?

Mr. Michael Fingleton

I'm not ... I'm not ... I don't know whether I can. Is that, Chairman?

Mr. Michael Fingleton

I can, yes. It was ... it was Dr. Somers, yes.

Dr. Somers. That was the reason that he gave you when you met him but it-----

Mr. Michael Fingleton

That is my recollection that-----

-----but it wasn't an arranged meeting.

Mr. Michael Fingleton

It was only once. There was only the ... the only time that we ... that I mentioned it. I don't believe ... I am not too sure now about treasury ... whether they had sought to put money with or obtain deposits ... I don't know. But that was the one, only one occasion, and that was the answer I got.

This wasn't when you were pursuing a credit line from the NTMA; this was an informal meeting or a-----

Mr. Michael Fingleton

That was years ... it was several years before. I think it was maybe the early 2000s or something like that. It wasn't relatively recently.

Mr. Michael Fingleton

And nothing connected with the opinion given by Mr. McDonagh.

Is it possible that the view of the NTMA might have changed subsequent to that?

Mr. Michael Fingleton

I can't comment on anything NTMA says or does or what their policy was. I can only give you my opinion, and that's all, and what's within my knowledge.

Okay. Even after you were told that by Mr. Somers, you continued to seek credit lines from the NTMA. Is that correct?

Mr. Michael Fingleton

I don't know. I didn't.

Mr. Michael Fingleton

No, I didn't.

Mr. Michael Fingleton

And I wasn't aware that anybody else-----

This basically was €6 million in a credit line.

Mr. Michael Fingleton

I wasn't aware anybody else did either.

Okay. Did you ever raise this issue with anyone in government?

Mr. Michael Fingleton

Not at all. No, no. I understood the organisation. I would have accepted that as, "Grand, no problem", you know? I would have accepted ... I would have understood that they were in the most conservative element of the market and they had to be whiter than Caesar's wife.

Why didn't you have the preferred rating from the ratings agencies?

Mr. Michael Fingleton

We had adequate ratings for our business. We had good ratings, but, apparently, not good enough for them.

For the rating agencies or for the NTMA?

Mr. Michael Fingleton

For their ... for their ... for the NTMA, or them.

How did that compare to other banks or other societies in Ireland at the time?

Mr. Michael Fingleton

I don't know. I don't ... I have no knowledge of any other banks.

But you never pursued it any further with the NTMA, seeking of a credit line.

Mr. Michael Fingleton

Absolutely not. That was just a comment I made; a question asked, an answer I got. That was it.

Mr. Michael Fingleton

And I never raised that issue with anybody ever after connected with NTMA.

Okay. And you refute that statement from Mr. McDonagh about the very opaque structure of the society.

Mr. Michael Fingleton

I don't know what evidence he had. What evidence was he basing it on? I don't know. I would dispute that. It's his opinion. He's free to make his opinion but he must have evidence and I don't know what evidence he was relying on. We had published, at that time, 2007 accounts, I think, and in that context they were ... the auditor had certified them and the controls were in place. The accounts were first class and all the rest of it, no qualifications, and they were excellent-----

Mr. Michael Fingleton

-----to any outside observer. So I don't know why, or what, or why he made those comments. Only he can explain that to you and you had him in here. And I'm sure he did. I can't remember. I wasn't watching his interview.

I'll move on to some of KPMG's work for the society.

Mr. Michael Fingleton

Sure.

And in Vol. 1 of the evidence books, page 112, we're looking at the statutory duty confirmation letters that the KPMG would have to send to the Financial Regulator every year.

Mr. Michael Fingleton

Sure.

There is a series of them in the evidence booklets for 2004, 2005, '06 and '07. What KPMG is noting in this statutory duty confirmation letter is instances of breaches and errors in each of the sectoral returns, prudential returns and large exposure returns. And they also note in that letter to the Financial Regulator that you had already informed the regulator verbally and in writing of these breaches and these errors.

Mr. Michael Fingleton

Sure.

So, just tell me first about your relationship with the Financial Regulator. And what does informing the Financial Regulator verbally of something involve?

Mr. Michael Fingleton

It would be part of our policy always to inform the regulator if we came across any defect in any return we made. Returns are made. There's large volumes of funds. They're in different pockets, different codes, from time to time and errors can be made. And when we come across them, it has been our policy all the time to inform the regulator of them, even the most minute. And most of those referred to or that you're referring to, were not material ... maybe one or two of them, maybe, in final terms.

Your relationship with the regulator?

Mr. Michael Fingleton

My relationship or, sorry, the society's relationship with the regulator was grand, and my own personal relationship was very good. I respected the regulator and I thought he was very good-----

And if there was ever a problem-----

Mr. Michael Fingleton

-----in the manner in which he did his job under the policy he adopted on a principles-based basis.

Could you or would you ever contact him directly in relation to an issue with the society?

Mr. Michael Fingleton

Never. The society ... I heard that evidence being given that people went over the supervisory management to the regulator. We never did, as far as I am aware. I'd be very surprised, very, very surprised.

Never direct contact from you to the regulator?

Mr. Michael Fingleton

I've no recollection of it, unless somebody else has. But I didn't.

Okay. Just in relation then to these errors that you said were not material, in the documentation we see that they're actually ... they're errors that are picked up during an internal review within the society-----

Mr. Michael Fingleton

No, they wouldn't be an internal review. They'd be a ... you're still referring to the returns, are you?

I'm talking about the large exposure returns, say, in March 2004.

Mr. Michael Fingleton

Yes. They would be returns made on aggregates of lending, individuals, you know, and things change over a transitory period. At the 31st, something might be coming in and delayed. For example, a payment might come in and it wouldn't be cleared by the bank, and we discover that we have mis-stated the loan balance of somebody and then we advise the regulator or whoever-----

But this continues to happen-----

Mr. Michael Fingleton

-----in his office would be dealing with it.

It continues to happen in '04, '05, '06, '07-----

Mr. Michael Fingleton

Yes, yes, but-----

In '06, you had to resubmit the September returns twice, the June returns twice, the December return-----

Mr. Michael Fingleton

I don't think it would be any different, Deputy, in relation to any other organisation.

Mr. Michael Fingleton

To be mathematically perfect in assembling information, there would be some errors.

Mr. Michael Fingleton

If you evaluate them, the vast, vast majorities were non-material and they were advised to the regulator as part of our policy by the society, not-----

And they keep on happening, and the Financial Regulator says to you, to the society, that it's concerned with the number of errors reported and it requests the society to outline what controls the society was going to put in place.

Mr. Michael Fingleton

Well-----

So what controls were put in place?

Mr. Michael Fingleton

They were put in place and I think you'll have the opportunity this afternoon of speaking to the financial director who will-----

Okay. Well, I note that the errors continue after this ... from the Financial Regulator in '06.

Mr. Michael Fingleton

Errors will always continue in the context of the manner in which comprehensive detailed information is provided and applied. That's all I'll say.

But they didn't-----

Mr. Michael Fingleton

I'm sure it's not different in any other organisation. But, again, we would have preferred if there wasn't any errors. We're dealing with people who are human and who make mistakes.

That's it. That's all I can say -----

You didn't see them as a systemic weaknesses in the society?

Mr. Michael Fingleton

Sorry?

You didn't see them as systemic weaknesses in the society?

Mr. Michael Fingleton

No, because they were not material.

Final supplementary now, Deputy.

Thank you. Can I just ask then about the final returns or the sectoral returns, which, in each of the years from '04 to '07, you were exceeding the sectoral limits - the 200% of own funds and the 250% of own funds. So, what was the regulator's response to this when that was raised with you?

Mr. Michael Fingleton

Well, I recall - and I think I mentioned in my witness statement - that we discussed or made some proposal, I think, to the regulator in relation to that, that, as far as I recall, the criteria was very lumpy.

Mr. Michael Fingleton

Lumpy in the sense that we looked for more stratification, like to put in home loans ... under construction, you put home loans separately, you put buy-to-lets separately, you put investment properties separately, retail separately and you apply a factor to them or a limit to them, whereas in the ... historically, they were all lumped into one. Retail would be lumped in and then construction would be lumped in or property and construction lumped into one. So we wanted them to stratified and to apply ... We were looking for that and we did ask ... the regulator was to come back to us on it but he never did and even though we sent a reminder-----

Between '04 and '07, he never came back to you?

Mr. Michael Fingleton

No. Well, I think the last reminder we sent to him was about 2004 or 2005, as far as I remember, but that's our position on that.

And the board was satisfied that-----

Mr. Michael Fingleton

So, since that there was never any communication and I believe, like, that he was considering implementing some policy on it. And I note in Honohan's report, which I didn't agree with, where he said it was nearly impossible to ring-fence sectoral limits between institutions as there was too many ways around them but I don't agree with that.

Just sorry, to clarify, the board was satisfied that you were in breach of the limits in those years.

Mr. Michael Fingleton

Well, they probably would be aware of them, as we were, you know, from time to time, but we were looking for clarification for them to be dealt with in a manner that was appropriate and necessary and clearly understood.

Just to clarify finally, you don't agree with the Honohan report either. Is that correct?

Mr. Michael Fingleton

No, I didn't say that-----

Mr. Michael Fingleton

I just... I disagreed-----

That's what I heard-----

Mr. Michael Fingleton

-----with one comment. I disagreed with one comment Honohan made in relation to sectoral limits-----

Mr. Michael Fingleton

That he said the reason that he considered they weren't ... it wasn't feasible to introduce sectoral limits or to implement them or to supervise them was that they could be easily evaded by institutions and I said I didn't agree with that ... that I couldn't see why not, if the regulator choose to do so.

Thank you. Thank you Chair.

Okay, thank you very much. Now we're moving on to Senator Sean Barrett. Senator, ten minutes please.

Thank you, Chairman, and welcome again to Mr. Fingleton. On the internal audits, if I may discuss that with you ... in their 2005 report, KPMG stated:

The existing internal audit function is not best practice. ... In particular it lacks the depth of experience necessary to challenge ... areas of key risk which includes Treasury and Commercial Lending.

And in their management letter in 2008, they stated: "The Society's Internal Audit department needs to build up ... experience and training in order to perform reviews of key risks areas which are currently outsourced to a third party service provider." I think they had concerns in 2004 and I think they had concerns in 1999. So, how would you respond to those critiques?

Mr. Michael Fingleton

Well, I think the internal audit report done by KPMG was a very good one and it was in the context of the original internal auditor leaving the society and engaging in ... with ... or employing a new internal auditor and it was appropriate at the time that we would seek, or the board would seek, the best advice possible in how we could structure or restructure - whatever way you want to put it - the department or the section of the ... pertaining to the internal audit. And they did but they found a lot of positives. They found, Deputy, that we'd a strong audit committee in place. And the audit committee was extremely strong and dealt in detail on reports from the internal audit and, indeed, effectively supervised the internal auditor in his reports and in his activities. And the credit committee was made up of all of the non-executive directors. So they had a full, detailed knowledge of the business ... of the micro-business of the organisation. They said we had strong mandate ... there was a strong mandate for internal audit; they said funding available to enhance the section was available; they said the internal audit used a risk-based methodology; they said an audit manual was in place; they said large exposures were reviewed regularly. The new head of internal audit function was thought very highly of throughout the business and there was an expectation that improvements would occur, as advised by KPMG-----

Could I put on the record-----

Mr. Michael Fingleton

There was an existence of a dedicated training budget and there was a strong team culture within the IA section. That's ... These are positives; it wasn't all negative but we took on board ... the board took on board the recommendations and we implemented them. And we got appropriate staff to do so and there was never an issue about increasing the staff numbers and other resources of that department-----

Now, I have to put on the record as well that they also said, Mr. Fingleton, "Certain members of the [internal audit] team lack[ed] credibility with management." This is not surprising, given that "Only one member of the [internal audit] team has a recognised [internal audit] qualification" and that the internal auditor did not attend crucial committee meetings, including the credit, provisioning and asset liability committees, nor was he included in the circulation of the agenda or minutes of these meetings, effectively leaving him in the dark. So, I mean, they did find faults-----

Mr. Michael Fingleton

Senator, the internal auditor would never attend a credit committee meeting.

What about the qualifications issue?

Mr. Michael Fingleton

They had ... The people that were there ... the internal auditor at the time that was in situ was extremely well qualified and the staff that he had had a lot of experience within that department in dealing with the internal audit as was practice at the time.

Well, how did they find only one member of the internal audit team had a recognised internal audit qualification?

Mr. Michael Fingleton

Yes, but they had practical experience on the ground. Deputy, people get experience from activity and dealing with matters. Qualifications have a place all right but they're not the ultimate in evaluating the ability of any staff member to do their job and do it effectively. If we relied on qualifications of people, then ... okay, thanks.

Could I refer to Vol. 1, at page 43, the letter from the Financial Regulator, dated 8 February. Now, you just said, I think, to Deputy-----

Mr. Michael Fingleton

Sorry, where are you now?

8 February 2008-----

On page 43, Senator, yes?

Page 43, indeed. Thank you Chairman-----

Mr. Michael Fingleton

February 2008. What's that?

You said you ... You were commenting on the regulator, that you respected him, but I have to say what he said-----

Please formally relay it to Mr. Fingleton, there, Senator.

-----in that letter-----

Mr. Michael Fingleton

43 is it?

Mr. Michael Fingleton

In Vol. 1, okay. I'm nearly there.

"The findings of this inspection of INBS calls into question the adequacy of controls and risk management in place in INBS for large commercial property loans and suggest[s] that a significant degree of approval authority rests with a single individual,-----

End of page-----

-----Mr. Fingleton, who ... appears to be the only source of information on some of the large clients."

Mr. Michael Fingleton

Who said? I think I already dealt with that with an earlier answer.

Well, this is not Mr. Neary. This was from ... the-----

Mr. Michael Fingleton

Well, I think, Chair or Deputy, I've dealt with that fairly extensively in a reply to somebody out of the committee - I can't recall - but I would disagree with her.

And have you formally replied?

Mr. Michael Fingleton

I didn't. It wasn't to me, Senator, that that letter was addressed. It was replied to by the chairman, Dr. Walsh.

Could I bring to the attention the resignation of Dr. Con Power? You said that the board discussed all major matters.

Mr. Power resigned because the decision to take legal action against the financial ombudsman was not discussed at the board. You phoned him up from London to try to change his mind in 2006, but he did resign. Why was that decision not taken by the board?

Just be careful of pre-judgment now, Senator, and a question please.

Mr. Michael Fingleton

Sorry, the ... what is the question?

The question is: would it be normal to engage in that kind of legal activity without telling the board members?

Mr. Michael Fingleton

It would be advised to the board. We would ... I would deal with ... I had the authority to deal with all elements within that function in the society, and it was not a materiative function - it was an administrative function, an ongoing administrative function - and we were dealing with the regulator in his capacity as regulator on an ongoing basis. That was it. We got legal advice that we were supposed to get, and also Dr. ... well, I'm not going to get into a dispute with Dr. Power, but Dr. Power was at a meeting when this was discussed by the management and all the management around the table. And secondly, I do not accept that Dr. Power resigned because of that. He resigned because there was a conflict of interest between his appointment as ... as chairman of the ombuds-committee and as a director of the society.

The society lost ... was it €243 million in 2008?

Mr. Michael Fingleton

Sorry?

The society lost-----

Mr. Michael Fingleton

Oh yes. It didn't.

-----€243 million. Is that correct?

Mr. Michael Fingleton

I'm sorry, Chairman, it didn't lose 200 ... there was provisions made of €243 million.

Yes, and what was the-----

Mr. Michael Fingleton

There was no losses. There was no losses realised.

Mr. Michael Fingleton

There was a provision made by the auditors. Sorry, I've interrupted you.

No, you say that the society was solvent in September-----

Mr. Michael Fingleton

Yes.

-----2008, but Goldman Sachs advised that there was no hope of a sale.

Mr. Michael Fingleton

Sorry?

Goldman Sachs said-----

Mr. Michael Fingleton

What has that got to do with liquidity, Senator?

Well, one would imagine that it was saleable if it was ... and there was optimistic ... and Goldman Sachs told you it wasn't.

Mr. Michael Fingleton

It was still saleable, but the market was not there. That's accepted.

Well then it was not saleable.

Mr. Michael Fingleton

That's nothing got to do with liquidity, Senator, nothing whatsoever. If you look at our balance sheet at that date, even the date of the 5th of, whatever it is, the 5 April when the ... those accounts were published, we were-----

So are you disagreeing with Goldman Sachs?

Mr. Michael Fingleton

Senator, I'm just going ... they've said, they gave, they gave an opinion that we wouldn't effect a sale, but Senator that's nothing got to do with liquidity and what was in their balance sheet at that date. And in the balance sheet at that date, there was ... there was adequate liquidity and capital of €1.5 billion.

Did Professor Walsh think-----

Mr. Michael Fingleton

And all ... and can I further add that it reflected on our book that only ... subsequently what happened ... that there was only a provision made of that amount at that time - in 2009 - which didn't reflect any adverse findings in relation to the quality of our book.

Did Professor Walsh share your optimism, because he was in secret talks with ILP at that stage?

Mr. Michael Fingleton

ILP?

Yes, Irish Life and Permanent.

Mr. Michael Fingleton

I cannot comment on, on that because I wasn't aware of them.

Thank you very much, Senator. I'm now going to wrap up with a couple of matters - just a tidy-up on it - and seek further clarification on some earlier questions, and then after which I'll invite the two lead questioners this morning, Mr. Fingleton - Deputy Doherty and Deputy O'Donnell - to conclude before we break. Can I just get clarification on one point, Mr. Fingleton, and it's in regard to an earlier question by Senator O'Keeffe? Can you clarify that the findings made by the Financial Regulator in November 2006, raised by Senator O'Keeffe, were rated? How were they rated? Were they medium priority by the regulator? Were they? What was the rating of them?

Mr. Michael Fingleton

Medium, yes.

Yes. Just to get, it was a medium rating, yes?

Mr. Michael Fingleton

Yes.

Okay. All right. Thank you.

Mr. Michael Fingleton

And a low ... there was some low I think in it as well.

Okay. On the .... another matter ... it's just the ... following ... there'll be two documents coming up on the screen there relating to the credit committee's operational review. The first one relates to December '08. Following the delegation of authority of the credit committee in December 2007, internal audits carried out by two reviews of the operation of the credit committee: one in July 2008 covering the period of January to June 2008, and the other in January 2009 covering the period of July to December 2008. The findings note that the frequency of meetings declined as the year went on, to the point where the ... in the internal audit's opinion, the credit committee is not meeting just ... is not meeting with enough frequency to fulfil its duties, and it's listed there as being of high risk. It's given a rating of 2.4 that the credit committee may not be adhering to its terms of reference of meeting.

Then moving on to the January '09 report, it also notes that several other weaknesses, including one critical issue re the failure to present a facility for approval before drawdown, and that relates ... I think it's coming up on the screen there. It says, when it comes - it's the fourth one down I think - the credit committee minutes may not be adequate and may not represent an accurate description of each meeting. And the other one, once again the credit committee may not be adhering to its terms of reference and so forth. Mr. Fingleton, can I ask you to explain why the credit committee was not functioning properly during this critical period in 2008?

Mr. Michael Fingleton

Chairman, the reason there wasn't any meetings of the credit committee as set down there was there was no loans being issued, simple as that. The credit committee met when it was required to meet. The volume of meetings had no ... has no relationship to anything except the approval of loans and at that time, we weren't lending.

Mr. Fingleton, as chief executive of INBS over a period of 37 years, you had ultimate executive responsibility for the operations and businesses of the society during this period. However, from your evidence here today, you would appear to have excused yourself from many of the key credit decisions during that time. You also dispute the ... many of the findings made in several reports produced by a number of independent parties, such as Deloitte Touche, KPMG, the Financial Regulator and on the governance of the society, and have suggested that there were no real problems with INBS. Could you please explain to the committee as we come to our conclusions today of the session why you believe INBS has ended up costing the Irish taxpayer €5.4 billion and what responsibility you personally bear for this?

Mr. Michael Fingleton

Chairman ... I'm just going to ... I just have ... hold it a minute. Sorry, can you just ask me that again because I have lost your-----

I can. Can you-----

Mr. Michael Fingleton

-----train, yes?

As we come to the end of today's proceedings and-----

Mr. Michael Fingleton

Ah, yes. It's okay. I've got it. All I say is, Chairman, that you've implied that I haven't answered the questions to this inquiry-----

I said that you-----

Mr. Michael Fingleton

-----to the best of my ability.

-----dispute many of the findings made in several reports.

Mr. Michael Fingleton

Yes, yes. You ... I've ... I've-----

You would appear to have excused yourself from many of the key decisions.

Mr. Michael Fingleton

I have ... I have ... I have not excused myself from anything. I have merely answered the questions to the best of my knowledge and given my opinion on the various questions that were asked to me, and that's what I have done. And, secondly, in relation to the second question-----

So can you explain to the committee why you believe that INBS has ended up costing the Irish taxpayer €5.4 billion and what responsibility you bear-----

Mr. Michael Fingleton

Simply-----

-----in regard to this?

Mr. Michael Fingleton

Simply, Chairman, because we failed to reduce our commercial loan book sufficiently, despite having decided ahead of the market - well ahead of the market - to downsize the book in September 2008 in the expectation ... the realistic expectation ... on the basis that over ... around €5 billion of the loans were due to mature in 2008. We failed to achieve that prior to the crisis and we had too much of those loans on our book at the time the crisis happened and that's why we were, or that's why we lost that much money.

Thank you. Deputy Pearse Doherty, five minutes.

Go raibh maith agat. Can you put that last document that you had on the ... on the screen in terms of the internal audit that the Chairperson was just talking to you, the findings?

Do you accept the findings from the internal audit?

Mr. Michael Fingleton

Well, he, he made the findings and that was his findings. I, I don't know whether you have a ... have a report or a commentary or a reaction from the head of commercial lending at the time, I don't know, or the-----

Do you, sorry, there's three significant witnesses-----

Mr. Michael Fingleton

Yes, I accept that he has, he has ... that those reports are his opinion and I have no reason to doubt him-----

Mr. Michael Fingleton

-----but as I've said before ... that there was, in relation to the, the meetings, there was no necessity for a meeting-----

Okay, no, that's fine-----

Mr. Michael Fingleton

-----so, therefore, he was wrong ... he was wrong on that one.

-----we're under the clock. Point 3 there, which is ... a loan for €10 million was advanced without sufficient back-up documentation and without receiving credit committee approval, do you accept that finding? This is an internal audit department review.

Mr. Michael Fingleton

No, we would ... we would ... we would probably ... I can't comment on that because that would be part of the ongoing litigation that that was ... that's in the courts. We would ... it would be disputed, Deputy, but that's ... that's it.

So the internal audit department makes-----

Mr. Michael Fingleton

Sorry?

-----the internal audit department makes that as a significant weakness. The Deloitte ... in the Deloitte report they have ... on page 74 they talk about a loan amount of ... a loan amount was increased by £10 million sterling from £71 million to £81 million with the approval of the manage ... managing director, with only an accompanying memo stating that the £10,125,000 of VAT moneys will repay ... be repaid within three months. It goes on to say it's in breach of the commercial lending policy "as the increased approval can only be given by the Credit Committee" and it says "in this case only the Managing Director [which was you] agreed to the increase".

Mr. Michael Fingleton

I don't ... while that is again in dispute, I, I ... that is not true. I'll ... I'll just make it clear that I would have done it with the approval of two members of the credit committee and only in that context and the materiality of it is, is ... is mentioned there that-----

Okay. Mr. Fingleton, you were given what some have called excessive powers going back to, what, 1994. And, again, in August 1997, in ... an extract from the board minutes say that the ... they are to include the powers to set, vary and alter its interest rates, fees, terms and conditions of all loans, whether secured or unsecured, and on all investment and deposit accounts. It goes on to talk about reviewing settled documentation, legal or otherwise, to initiate legal action and so on, and to make arrangement with individual borrowers, investors and depositors in the normal course of business. The board devolved those powers solely to you.

Mr. Michael Fingleton

They were standard executive powers enjoyed by any CEO in any institution to manage the day-to-day operations of the society-----

But you ... can I clarify ... can I clarify this because the question was put to you by a number of my colleagues on a number of occasions in terms of did you issue a loan without the approval of the board or the credit committee and to my knowledge you've responded to say that you've ... you've only ever done so with the-----

Mr. Michael Fingleton

No-----

-----let me finish, this is an important point-----

Mr. Michael Fingleton

Yes, sorry.

-----you've only ever done so with the approval of the board's policy. But is it not the case, as far back as 1994, you had that authority yourself to actually do this, to vary loans, to change interest rates, to create extensions - that you were acting within the policy of the board-----

Mr. Michael Fingleton

I had ... I had-----

-----but you could do it solely yourself-----

Mr. Michael Fingleton

Oh, yes-----

-----as an individual?

Mr. Michael Fingleton

-----I had power to vary interest rates and it was very useful when Bank of Scotland came in and I started targeting our mature loans and it ... we had even a retention department in ... in the mortgage administration section whereby they would identify requests from borrowers for the ... the deeds of their ... of their ... their home loans and we would, through the managers, contact those borrowers and see were they switching to another ... another provider and we would seek to hold on to the business. And in seeking to hold on to the business, they would evaluate whether we could meet their requirements to reduce the interest on their loans.

You, there was a review-----

Mr. Michael Fingleton

And that decision ... that decision would have to be ultimately approved by me on their recommendation-----

There was a-----

Mr. Michael Fingleton

And that was continuous all through ... since 1999, right through.

Mr. ... Mr. Gerry McGinn, who became your successor, talked about the shoddy and well-below-standard practice in relation to what went on in Nationwide. He talked about it as an "outrage" but he also carried out a review into what was called "celebrity loans". He said that there was nothing untoward in relation to them because the ... powers had been devolved by the board to you which could allow you to have interest-only repayments or moratoriums or reduced rates. So was this ... was there a special category for certain connected people? I think there was reference to sports stars and politicians and some others which Mr. Fingleton gave these celebrity loans to.

Mr. Michael Fingleton

Another ... another, Deputy, another one of the myths. There were people who may be considered as celebrities who got loans but they got them on the basis that they qualified for them in the normal ... in the normal criteria.

So, when Mr. McGinn talks about ... Mr. McGinn talks about the reduced interest rates and so on and exceptional rates, this is-----

Mr. Michael Fingleton

That ... I ... I would like Mr. McGinn to produce one iota of evidence of me unilaterally reducing an interest rate that wasn't recommended to me to do so for competitive reasons by ... by another member of the staff.

Can I finally say or ask you-----

Mr. Michael Fingleton

And also ... talking about Mr. McGinn, he also criticised us for not having enough of meeting rooms, which, of course, being a civil servant, he needed a lot of meeting rooms, and we had eight or nine meeting rooms but they were adequate for our needs when I was in charge of the society.

Okay, Mr. Fingleton, can I ask you finally, you've made the claim that Nationwide was solvent on the night of the guarantee but is it not the case-----

Mr. Michael Fingleton

It's not a claim, it's a fact Sen ... Deputy-----

Mr. Michael Fingleton

-----and it hasn't been disputed by anybody that I have heard or read in this ... in this-----

Well, it actually has ... sorry, with respect, it has been disputed-----

Mr. Michael Fingleton

By whom?

-----in this ... in evidence to this committee.

Mr. Michael Fingleton

By any ... any contributor?

By their claims - and at the minute their claims - in defining the facts also-----

Mr. Michael Fingleton

Yes, okay, it's been ... also been disputed by members of you committee. I accept that.

The question is, is it not the case that you were steering or the institution ... maybe not you, personally, but the institution was on a collision course with ... with a financial iceberg? It was going to happen anyway. You had €4.5 billion on euro medium-term notes due to mature between December 2008 and November 2009. Unless the crisis disappeared, it would be very challenging, if not impossible, to actually refinance those. Was it not the case that you were on this direction anyway, that there was a collision course coming? And is that not the reason, as we've heard in evidence here, that nationalisation legislation that was being prepared by Government was not originated for Anglo Irish Bank, it began for your institution, it began for Irish Nationwide Building Society? We have documents here, reams of them, in terms of 24-point plans as to what the Government would do when the decision would be taken to nationalise Irish Nationwide. All of this exists. Why was there crisis meetings if you believed that everything was so-----

Mr. Michael Fingleton

Of course the CRD committee ... was it CRD ... is that what we're ... would make contingency plans. That was what they did for all institutions-----

No, they didn't. With respect, Mr. Fingleton, they did not have nationalisation legislation for AIB, Bank of Ireland or, indeed-----

Mr. Michael Fingleton

They had it for banks ... for banks generally.

The point I'm making is that in relation to Nationwide ... in relation to Nationwide-----

Deputy, I understand the question needs to be answered.

Nationwide was the first area that was identified as a crisis. This is where the legislation originated and it was amended then for banks.

Mr. Michael Fingleton

They had not ... they had not-----

Is it not the point ... going back to the core issue, is it not the point, given the funding difficulties that you had which you discussed at board minutes - and we have the minutes - about how you were going to try and refinance or repay that €4.5 billion ... given the fact that you were shut out of the markets at that point in time, that it was a ... an accepted ... that this was going ... that insolvency was going to be an issue in the future?

Mr. Michael Fingleton

Deputy ... Deputy, the benefit of hindsight is wonderful but let me remind you that we, in 2008 and prior to the guarantee, had no need to access the ... the wholesale market and I've made that clear earlier. We had sufficient liquidity and perhaps if everybody put their liquidity on the table - of other institutions - we might come out very fairly indeed. And it was all in cash, it wasn't in other instruments where ... some institutions lost a lot of money by not having some of their ... by having their liquidity in those derivatives.

Mr. Fingleton, you did not have enough liquidity to cover what was maturing in the following 11 months.

Mr. Michael Fingleton

Deputy, we had ... we had ... if you look at the accounts of the society in 2010 - remember, 2010 - and we would have ... we had enough cash to deal with it in relation to the evaluation of the loan book at that time.

Well, can I just put on the record this here? The minutes of the meeting actually does not suggest that the liquidity available to the bank would actually cover this. It actually talks about retail deposits wanting to be increased by-----

Mr. Michael Fingleton

The minutes of what meeting?

The minutes of the board of directors of Nationwide on 10 March 2008 deals with this issue, the fact that there was €4.5 billion going to mature. At this point, you're shut out of the markets. It talks about the society continuing to market and promote through its branches and trying to raise €1.4 billion. It talks about trying to squeeze €600 million out of the Isle of Man society. It talks about asset covered funding and trying to secure €800 million from that. It talks about €500 million in mortgage-backed promissory note, which would have been in the future, and it talks about, in terms of your loan book, which you mentioned that matures and rolls over every so years, it talked about only €900 million coming from that in the period of 2009.

Mr. Michael Fingleton

Senator, or Deputy, at the date of the guarantee, the society was solvent.

That's not the question. We're not disputing in terms of a theoretical moment in time-----

Mr. Michael Fingleton

And after-----

The point is is that-----

Mr. Michael Fingleton

And as the market evolved beyond ... even at 2008, in March after the audit by KPMG, we were extremely solvent and had €1.5 billion of capital. I think after the audit of 2010, we still had €1.2 billion in capital and about nearly €4 billion in assets. What we were anticipating was all the possibilities and the contingencies that may or may not arise, as would be prudent for us to do. This was not to say that we had any, any at that time, worry about our liquidity or our solvency. What materialised afterwards - after 2010 and NAMA and all the rest of it and the crash - that took care of all that and then we were insolvent. Certainly at the time of the guarantee and a year later in March 2009, we were very liquid and very solvent and had capital of, let's say, 10.2% on our balance sheet.

Okay. Deputy Kieran O'Donnell.

Mr. Fingleton, can I refer? Are you familiar with the book, Fingers: The Man Who Brought Down Irish Nationwide and Cost us €5.4bn? Are you familiar with that?

Mr. Michael Fingleton

I would prefer not to discuss that book because there's at least 20 libels in it. Be very careful, Deputy.

Well, I will refer to something and you can either answer it or not. On page 254, it speaks about a special account within the society called a No. 3 account-----

Mr. Michael Fingleton

Yes.

-----which consists of Irish Nationwide, yourself and Mr. Purcell, between 2008, jointly controlled. It could make payments without limits and were used for such things as loans to particularly sensitive figures for the settlement of disputes, fast-track mortgages of kind advanced.

Mr. Michael Fingleton

Sorry. Sorry, say that again.

They effectively are saying that you had an account, under the control of yourself and Mr. Purcell, that effectively could fast-track loans without approval from the board.

Mr. Michael Fingleton

Absolutely, totally untrue. That's absolutely and totally untrue and it's defamatory.

Okay. Can I ask you, your pension, when you took it from Irish Nationwide society in 2007, did you seek the approval of the board?

Mr. Michael Fingleton

Sorry?

Did you seek the approval of the board?

Mr. Michael Fingleton

It was the board were fully engaged in it and the trustees. So the board made the decision to terminate the fund at the time and then I took the options that were available to me.

Mr. Michael Fingleton

The board didn't decide the options. I took the options because it was up to me to make the decision.

And why was the decision taken at the time for you, for the fund to go from the society into your own-----

Mr. Michael Fingleton

Well, the board and the trustees determined it was an appropriate time to do so.

Can I ask you, if the guarantee ... you believe that Irish Nationwide was solvent on the night of the guarantee.

Mr. Michael Fingleton

Absolutely.

If the guarantee hadn't been put in place, could Irish Nationwide Building Society have survived without the guarantee?

Mr. Michael Fingleton

On the basis of the increase in the deposit guarantee from €20,000 to €100,000, over 95% of our deposits were within those limits. Therefore, we would have been in a very good position if the guarantee didn't take place that night, maybe to survive better than some of the banks that were guaranteed. On that basis. Our book wouldn't be targeted----

So how do you reconcile that-----

Mr. Michael Fingleton

-----without having the guarantee.

Mr. Fingleton, how do you reconcile that the €5.4 billion of taxpayers' money went into Irish Nationwide?

Mr. Michael Fingleton

I've already explained that ... that at that time, that the four billion materialised was based on the discounts applied by NAMA, which I dispute.

What discounts should have been applied by NAMA?

Mr. Michael Fingleton

I don't know. I don't what discounts but certainly the ones that were applied to us were not accurate in my view.

But the discounts gave rise to about €5 billion of a discount, right.

Mr. Michael Fingleton

That was their opinion.

Yes, but even if it hadn't been that level of a discount-----

Mr. Michael Fingleton

Okay, it could've been €4 billion - that is fine - but it was too much. As I already said before to another member of your inquiry, that was too much.

Therefore, taking out the fact that the discount would have been less, do you-----

Mr. Michael Fingleton

Any loss, Senator, or Deputy, any loss would be too much. Any loss at all would be far too much.

So, your view is that Irish Nationwide did not need a guarantee, was not insolvent-----

Mr. Michael Fingleton

No, no, no. We are saying we were solvent on the night of the guarantee and subsequently.

So when did Irish Nationwide become insolvent? Did it-----

Mr. Michael Fingleton

I'd say ultimately when NAMA decided to crystallise the losses because certainly up to ... In the accounts, and this is the new management now, in the accounts for 2009, which were produced in March or April 2010, the expectation of the losses accruing to Irish Nationwide was, on the book of €8.5 billion, it would fall, having-----

So, do you believe that-----

Mr. Michael Fingleton

Sorry, it would fall to about €5.6 billion or €5.7 billion.

So, do you believe if NAMA wasn't established-----

Mr. Michael Fingleton

That is a big difference from where it ended up at €5.4 billion.

Do you believe that if NAMA hadn't been established, Irish Nationwide would never have become insolvent and would be still standing today?

Mr. Michael Fingleton

I am not saying that at all.

So what are you saying, Mr. Fingleton?

Mr. Michael Fingleton

From once the liquidity crisis hit and the funds dried up, it was inevitable that that would happen. On the basis that there was a closure, a full closure, in the market, that there was no funds available for anything, it would happen.

Do you believe on the night of the guarantee-----

Mr. Michael Fingleton

Whether in the absence of NAMA, it would have meant ... it would have led to the extent of the discounting by NAMA, that's another argument, Deputy.

Two quick questions. Do you believe then on the night of the guarantee, Irish Nationwide had no liquidity problems of any description?

Mr. Michael Fingleton

Well, we had, we had ... You have the Goldman Sachs report there and it was ... I don't think it was appreciated. It certainly wasn't, from the evidence that was given to this inquiry, it wasn't appreciated, even by the officials, because I think maybe the regulator didn't, for regulatory reasons, didn't disclose information, it wasn't appreciated by the people there that we had so much cash.

Mr. Fingleton, do you believe that you knew best? Did you believe that you knew what was best for Irish Nationwide Building Society, as the CEO?

Mr. Michael Fingleton

Oh no, no. I was CEO and I gave my opinion as the CEO and the board gave their opinion and that's it. We did the best we could-----

Do you agree with-----

Mr. Michael Fingleton

----- the same as every other institution did. Nobody, Deputy, conducted their business to achieve the ultimate result that was achieved in-----

Do you believe the corporate structures of operations in Irish Nationwide Building Society during your tenure were adequate?

Mr. Michael Fingleton

I think they were adequate. I don't think they were perfect and I don't think any other institution would claim perfection in their systems but they were adequate for our needs because we were running-----

Just one quick question.

Mr. Michael Fingleton

-----we were running a very restricted type of business.

You said earlier in reply to a previous Deputy that there was no conflicts of interest in any loans that were given in respect of the board or anyone else. How do you explain Mr. David Brophy continuing on the board in 2005 after he became the chief operations officer of Ballymore Properties?

Mr. Michael Fingleton

He declared his interest like anybody will do on any board who are connected with any company that would have borrowings from that institution and there were many directors in many boards who would have had the same conflict of interest.

They would have excused themselves from any decisions that were made in relation to-----

Sorry Chairman, would-----

Mr. Michael Fingleton

And in fact, I think there is a statement made at this committee by, I think, somebody from Ballymore that there was no loans given to Ballymore after Mr. Brophy became CEO of that.

And finally, you made reference earlier that what was written about you that 80% was inaccurate, 10% you disputed and 10% you agreed with. Which of the 10% did you agree with?

Mr. Michael Fingleton

I haven't read that particular ... I haven't cogitated on that but I think that would be fairly accurate. I mean that would be my assessment.

Do you agree with any official report that was issued in respect of Irish Nationwide?

Mr. Michael Fingleton

Oh yes but there is official reports and there is official reports and there is inquiries and there is opinion, Deputy. And I am entitled to disagree if it is my opinion - honest opinion - that I disagree and that's it.

Mr. Fingleton, I am going to bring matters now to a final conclusion. In doing so I would like to give you the opportunity to invite you to make any final comments or thoughts or observations that you might mean to or would like to add as we conclude.

Mr. Michael Fingleton

I'd just like to thank you, Chairman, for the courtesy of this inquiry and the ways it has been conducted and also to each of the members of the inquiry who were fair - tough but fair. That is my only comment.

Thank you, Mr. Fingleton. With that said, I'd like to thank you for your participation today and for your engagement with the inquiry and to now formally excuse you. I will be proposing to suspend the meeting until about 2.30 p.m. or so. If I can maybe just ask members of the committee to hang on for a few moments at the end of this, while the room is being cleared, just to deal with one or two matters and then we will resume with our next session this afternoon with Mr. Michael Walsh. Is that agreed? Agreed.

Sitting suspended at 1.32 p.m. and resumed at 3.04 p.m.

Irish Nationwide Building Society - Mr. Michael Walsh

I now propose as we are back in full quorum, that the committee of inquiry will now resume public session. Is that agreed? And can I ask members and those in the public Gallery to ensure that the mobile devices are switched off? Our focus today is on the Irish Nationwide Building Society, and we continue our hearings this afternoon with Mr. Michael Walsh, former non-executive chairman of INBS. Michael Walsh was a non-executive director of INBS from 1995 and non-executive chairman from 2001 to 2009. Mr. Walsh was also professor of banking and finance at UCD and managing director of the corporate finance business at the stockbroking firm, NCB Group Limited. Mr. Walsh, you are welcome before the committee this afternoon.

Mr. Michael Walsh

Thank you, Chairman.

Before hearing from the witness, I wish to advise the witness that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given.

I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of this inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.

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

The following witness was sworn in by the Clerk to the Committee:
Mr. Michael Walsh, former Non-Executive Chairman, Irish Nationwide Building Society.

Once again, Mr. Walsh, you are welcome before the committee this afternoon and, in doing so, can I invite you to make your opening remarks please?

Mr. Michael Walsh

Thank you, Chairman, members. I know you're pressed for time so I'm not going to repeat my statement in full, but obviously I'm more than happy to cover any aspect of it. As the Chairman has indicated, my career and background is in finance and public service. In 2001, I agreed with the board and the Central Bank to become non-executive chairman. The purpose of my appointment was to help the board oversee a sale of the society under legislation which was agreed by the authorities and which was to be implemented the following year. Accordingly, I expected my role would be relatively short, circa two years. When the authorities failed to deliver that legislation in 2002, the Central Bank and subsequently the Financial Regulator required that I stay in situ until the sale could be completed.

Every single year, the authorities, be they the Central Bank, the regulator, the Department of Finance, the Department of the Environment, and the relative Ministers, promised they would deliver the necessary legislation within the next 12 months. They failed to do so. As a result, instead of the expected two-year term, I actually served as non-executive director and non-executive chairman, in particular, for almost eight years, until I resigned in February 2009. The planned sale of the society is not the focus of this committee. However, the significant, avoidable delay in implementing the necessary legislation is and was very frustrating. Implementing it earlier would have avoided any involvement by the society in the banking crisis. This points to the enormous cost of inaction by the authorities and the policymakers alike, a theme that I will return to.

Chairman, I'd like to put on record my acknowledgement of the massive challenges that the collapse of the Irish banking system has imposed on the Government finances and the citizens of Ireland. Many families have suffered from both the collapse in the property market and the era of austerity that has followed it. Mistakes were made by all financial institutions. Irish Nationwide was no exception. However, in my view, by 2006-2007 it would have been impossible to completely avoid the damage from the global credit crisis. While the damage could have been mitigated, we must recognise that the crisis was global; it was systemic. None of the financial institutions, none of the authorities or the international or domestic economic advisers fully appreciated the significance of the global credit bubble, particularly as it related to property and indeed structured credit. This was equally true in the US, where both of the quasi-Government finance agencies, Fannie Mae and Freddie Mac, failed. The Fed models didn't adequately capture the events and 12 of the top institutions required support.

My greatest regret is that we didn't recognise sooner the convergence of factors that led to this global financial collapse and the devastating series of interrelated knock-on impacts for the Irish property sector, the financial institutions and the public purse. Some of the criticism levied at the Irish financial institutions, including the society, is warranted. That said, I cannot concede all the points made by those who have criticised the society, often without any real understanding of its model and, furthermore, based on 20:20 hindsight.

From the inquiry's perspective, I am deeply concerned that the popular, but erroneous, depiction of the society as being in the poorest financial health of all institutions at the time may hinder both the inquiry and, indeed, the public understanding of the real issues at play.

For example, when the downturn hit, the society had the highest percentage capital of all Irish guaranteed institutions. Equally, at no stage did the society advocate a guarantee for bondholders. Because of the society's liquidity position, the society wasn't reliant on future bond issues.

You have heard from the managing director, later you'll hear from the finance director - the two key executive directors. My perspective is that of a non-executive director and I'd like to focus on a few key areas in my opening remarks: firstly, the society's model; secondly, the society's awareness to the changing environment and its actions in the period from December 2007; thirdly, the regulatory authorities - the interaction between the society and them and their powers; and, finally, I'll turn to liquidity and solvency. I'm going to spend most of my time discussing the society's model, so do not be too concerned if that takes a bit more time.

The society's model was different to that of other institutions but it was carefully considered. Notwithstanding the comments made to date, I believe it was more prudent than that adopted by many of its competitors. Though it may jar with the popular narrative, the society had a prudent financial model. Its loan book was much shorter than others, with many of its loans, particularly in the UK, being for less than 18 months. This was clearly not understood by some of your witnesses. In the absence of the global crisis, the society would have been expected to be able to realise half its commercial book in 2009. The average loan duration in September 2008 was 30 months. Obviously, in perspective, bond issues were typically for five years. Secondly, the society was very different in terms of liquidity. It was a net supplier of funds to the interbank market, both before and after the liquidity squeeze caused by the Reuters story.

On the night of the guarantee the society had over €3 billion of cash on deposit with other banks. Unlike others, the society didn't require emergency liquidity or funding and that position should be contrasted with both ILP and Anglo who, as you've been told on a number of occasions, were both about to run out of funds and, in ILP's case, had been requiring ECB funding for about a year. The society was also different in not competing for unprofitable mortgage business. Again, as a number of witnesses have testified, a small institution competing for this, at best marginal mortgage business, was ultimately going to have too much gearing and too little capital. By way of direct comparison, there was only one other stand-alone building society, EBS. In the period 2003 to 2008, INBS maintained its loan-to-capital ratio always between 10% and 13%. In contrast in EBS, by 2008 that ratio had fallen to just over 3%.

I have just noted - at a balance sheet level - INBS had a strong capital base and its gearing was less than half its peers. Despite what you might think, it had more conservative lending growth rates than many of its competitors. In the five years to the end of 2008, the society had a significantly lower lending growth rate than AIB, than Anglo, than Bank of Scotland Ireland and Ulster if you focus on the combined property, construction and mortgage areas, all of which became highly correlated due to the credit bubble and the crisis.

In summary, Chairman, the society stuck to its strengths, it focused on its key areas of competitive advantage. It didn't seek to turn treasury into a profit centre. There were no exotics, no structured products and money was placed with board-approved institutions. As a result, in early September 2008 the society had sufficient liquidity to meet all its bond repayment obligations through to the beginning of 2010. Indeed, but for the global credit crisis, the society would have been sold in late 2007, probably at a valuation between €1.5 billion and €2 billion.

The society's core business was funding property - its area of expertise. Ultimately, with the gradual decline in property values, by 2010 many of these loans were non-performing. However, as is evident from the NAMA transfers, there was no significant difference between the discounts applied to AIB, to Anglo, to EBS and to the society. In your deliberations, Chairman, you may also want to consider that, for a true comparison and to get a full picture across institutions, you need to examine what would have happened if a policy similar to NAMA had been taken in relation to other categories of loans and not just commercial loans. For example, in 2009 the mark-to-market loss on much of the new mortgage business which was entered by various institutions in 2006 and 2007 ... the loss on that group of loans would have been similar to the levels experienced in commercial property. In other words, about 60%.

The society failed as, with all others, it didn't anticipate the impact of the global credit squeeze sufficiently early. This made the refinancing of its short-duration loans impossible. However, the society wasn't asleep. It did monitor the economic development and took steps to adapt the business model accordingly. The society was the first of all Irish lending institutions to anticipate and respond to the changed market circumstances in late 2007. As non-executive chairman, I believed the Irish banking system was over-exposed and immediate retrenchment was required. The board agreed and in December 2007 the board decided to reverse engines, cancel the trade sale, decided to minimise lending and to build liquidity. Immediately after the board took that decision, my first port of call was the regulator. I was anxious to share both my analysis and the society's actions. In my analysis, the emerging threats to the banking system in Ireland and elsewhere should have caused concern. The society was willingly ceding market share to its direct competitors who were, in many cases, also under the control of the regulator. The decision by the society was taken over nine months before the State guarantee. Months later, the bank ... the Central Bank and the ESRI were still forecasting significant economic growth for 2008 and 2009. Indeed, internationally, in June .... July 2008, sorry, the ECB even raised interest rates. However, despite prompting, the leadership that I felt was required from the regulator never came. I took the opportunity of a meeting, in early May 2008, with the regulator and his senior staff to relay, both orally and in writing, the need for urgent leadership and, indeed, action to save the Irish financial system.

In summary, Chairman, my key messages were, and I quote them directly:

[One,] Leadership is required from the Financial Regulator/Central Bank. Because of the differing competitive positions between the institutions no consensus will be achieved without the leadership of the Financial Regulator/Central Bank.

[The second key message was on similar enough lines] In the absence of intervention, problems are inevitable as the Irish growth story has been funded by the capital markets and these are no longer available to meet redemptions. The sooner the intervention the lower the cost.

To this day, I cannot understand why the authorities did not intervene in the markets before the financial crisis broke months later. The inquiry has heard that the authorities were working on contingency plans but didn't activate those plans until the crisis broke and by then it was too late. Indeed, I was surprised to hear evidence from a senior Department of Finance witness that the Department appears to have welcomed the immediate crisis caused by the false Reuters story as it gave them, finally, the impetus necessary to begin to take action.

I'd like to talk briefly about the society and its relationship with the Central Bank and the regulator. During my time as non-executive chairman, the Central Bank raised routine issues with the society. The board took all issues raised by the Central Bank or the Financial Regulator very seriously and I and the other directors - and one in particular, along with myself - maintained very close relationships with the Central Bank and sought to get management to continually enhance systems. The Central Bank became the society's regulator in 1990. Under the building society legislation, the Central Bank had much more power in relation to building societies than in relation to banks. The legislation specifically conferred a duty on the Central Bank to protect both depositors and to protect the stability of the societies. Commensurate with that duty, the legislation gave the Central Bank the power to do whatever the Central Bank deemed necessary to comply with its duty.

Those powers existed from 1990, and in my experience the Central Bank had no hesitation in using its powers where it deemed necessary. For example, in 2006 the Central Bank-regulator threatened to remove the society’s licence if the society didn't hold an election for a non-executive position on the board. This threat wasn't made to protect depositors. It wasn't made to ensure stability. It was not made in relation to lending. It wasn't made in relation to controls or indeed any prudential issue. This threat was to facilitate an individual who wished once again to go forward as a non-executive board candidate. I believed then - I believe now - that threat was irresponsible, but none the less a clear indication of the powers of the Central Bank and the regulator and its willingness to use them. At no stage after 2004 did the CB-FR seek to take any meaningful action in relation to lending or lending-related issues. On the contrary, the regulator approved a reduction in the society’s deposit ratio in June 2007, which would have facilitated substantial further lending growth if the society, without any prompting, had not decided to reverse engines. In summary, contrary to what some have suggested, from 1990 the Central Bank and the regulator had extensive legal supervisory powers to do whatever it deemed necessary to protect depositors and the stability of the societies. Through their expert inspection teams they had direct access to and detailed knowledge of the inner workings of the society and indeed every institution.

Finally, if I just briefly turn to the liquidity and solvency debate. Within my statement I have dealt with the issues raised by the banking inquiry in relation to liquidity and solvency. The society was solvent in September 2008 and there is contemporaneous e-mail traffic which confirms this. Furthermore, I have attached key minutes of society meetings which took place in March 2009, some time after I had resigned. The minutes of those meetings record the views in March 2009 of the society's auditors, the society's legal advisers. Even more importantly those minutes in particular reference the attitude of the Financial Regulator and the Department of Finance at the time. Whatever the situation in September 2008, by March 2009 the authorities had full detail on each organisation, and in aggregate certainly more than any non-executive director in any one institution. In March 2009, following full consideration, the new INBS board confirmed that the society was solvent. Chairman, members, thank you for your time. As I said earlier, I deeply regret that we didn't foresee the market instability at a much earlier stage, which would have resulted in earlier action by the society and potentially other institutions, and a situation where perhaps at least the society, due to the short duration of its loan book, its high liquidity and strong capital base, could have avoided being a cost to the Irish taxpayer. Thank you.

Thank you very much for your opening statement, Mr. Walsh. If I can invite Senator Susan O'Keeffe to commence questioning. Senator, you have 15 minutes.

Thank you, Chair. Mr. Walsh, on page 9 of your own statement, the witness statement, you list a number of reasons which you believe were the "difficulties which the Society subsequently encountered and the associated losses arose from a combination of factors" and you list those factors - a bubble of cheap credit, hyper-competition, markets freezing, inability to refinance, the property bubble bursting, excess pressure and a concentration of risk in the commercial property sector. And that's where you say, "because the Society loaned funds to a relatively small number of borrowers many of whom were in the commercial property sector the Society was badly affected by the impact of the factors listed above". I'm ... forgive me for being puzzled or surprised that in that list you don't include, if you like, any of the activities at the building society itself, that if you like, you are largely saying that it was external factors that contributed to your problems. I would draw attention in that fact to the Central Bank's own report of 2015, which as you know, investigated the building society between August 2004 and 2008, INBS has admitted multiple failings at several levels of its commercial lending process from operational lending to credit review, its credit provisions and audit committees, all the way to its board of directors. INBS's admitted failings amount to a consistent and at times wholesale disregard for its own policies and procedures. So I'm wondering, Mr. Walsh, why in your list of reasons do you not list, if you like, your ... the failings of INBS along with those other matters?

Mr. Michael Walsh

Well I think, Senator, if I can take the thing at two levels, first of all in relation to that particular thing, I'm not sure who attested to what happened between 2004 and 2008, because I know nobody actually came to talk to me, and I was there during the period of time, so I think we should maybe just park that. I think-----

Before you park it, Mr. Walsh, just for the sake of clarity - we may forget to come back - are you saying that in relation to the Central Bank's, if you like, investigation, which it says was complex and lengthy, that you would park the whole of those findings because you were not directly invited to-----

Mr. Michael Walsh

Well, I mean, I can't comment on something when, you know, somebody, you know, after the period 2004-2008 says "this is the way things were in that time period", and doesn't actually check with the people who were there in 2004-2008. So I-----

So you would have issue with this?

Senator O'Keeffe, leave a bit of time to respond as well now. Mr. Walsh.

Mr. Michael Walsh

Sorry. Absolutely, I take issue. I mean, by definition, there were things that needed to be remedied within the society but, you know, I had continuous contact with the Central Bank and the regulator from the time that I agreed to take on the chairmanship. You know, I would have had a meeting in early 2004 with the top two head people in the regulator at that point in time - it would have been Dr. O'Reilly and Mr. Neary, and both of them confirmed to myself and indeed Dr. Power, who I think was one of the other non-executive directors at the time, that there was nothing as between the regulator and the society, other than normal matters as between a regulated entity and the regulator. Now, you know, I have difficulty reconciling in some senses, you know, those statements there and the statements by Dr. O'Reilly and Mr. Neary in 2004. Were there issues? Absolutely, there were issues. Were they addressed as they arose? Yes, they were. Was the board ever happy with the degree of progress? No board should ever be happy with progress. Boards should always be pushing for more performance.

In that matter though, there was obviously a lot of correspondence, and we have seen some of it between yourselves and the Financial Regulator and the Central Bank in the time that you were chair, and there were criticisms raised going all the way back to 2004. So, are you saying that these criticisms in the Central Bank report don't relate at all to those other criticisms?

Mr. Michael Walsh

Well, sorry, because I wasn't, shall we say, talked to in relation to those and I don't know who was, you know, in the context of it I can't really comment on them but I think, you know, to be clear, and I think in, you know, the pack of papers there, you have provided a copy of a letter from Dr. O'Reilly to myself in 2004, I think December 2004, you know, and that letter would have been addressed very fully by the board. We would have involved both our, you know, external legal advisers, our external financial advisers. We would have actually held special board meetings to actually review it, and indeed I would have responded to every single item in that letter, I think by letter, at the beginning of February 2005.

Well, if we go specifically to Vol. 1, page 43 and 44. It is a letter from the Financial Regulator to the INBS dated 8 February 2008. The Financial Regulator "calls into question the adequacy of controls and risk management in place in INBS for large commercial property loans and suggest[s] that a significant degree of approval authority rests with a single individual, Mr. Fingleton, who also appears to be the only source of information on some of these large clients". What is your view of that observation by the regulator?

Mr. Michael Walsh

Well, I think, first of all I have two observations in relation to it, and if I deal with the first and probably the most important one, this letter arrived, as you say, in February 2008. In December 2007, the day after the board meeting, I went and saw the regulator and his No. 2, and at that meeting I told the regulator and his No. 2 that we were not continuing to lend, other than where we needed to, to preserve existing facilities. So when I got this letter, it was got at a time when the board had already taken a decision to effectively cease lending and to actually build liquidity. Was I happy with this letter? No, I was never happy with a letter like this, and you can be sure that this letter was actually reviewed carefully. Considered responses would have been sent by the board to the regulator.

In the context of the specific situation in relation to Mr. Fingleton, the reality is that the board had a very clear requirement which was up to, I think, the beginning or the middle of December 2007, all loans above €1 million, having been approved and recommended by the credit committee, had to come to the board for approval.

So you are saying, Mr. Walsh, that Mr. Fingleton did not ... was not ... did not appear ... he was not the only source of information on some of these clients and it was not that a degree of approval ... of authority rested with him. You would disagree with that.

Mr. Michael Walsh

Absolutely.

And ... Mr. Fingleton, as you know, was here this morning giving evidence and he said that much of the way in which he had been portrayed over the years, as a man who ran the Irish national building society and that he was the main guy and he gave money here and there and everywhere. What would you say, as the man who was chair for quite a number of those years?

Mr. Michael Walsh

I suppose, to put it in today's, you know, kind of, contemporary world, because, you know, there is this image and aura around the managing director or the former managing director, which is probably hard to relate to at a certain level, but, you know, if you think of him almost as being the Michael O'Leary of the day, you know, both of them very entrepreneurial, very driven, very focused, very much, kind of, building an organisation from scratch, not necessarily cuddly people but, you know, very strong people, very focused ... so I would have said that he was absolutely the face of the society which was valuable from the society's point of view. It built up the perception of the society, its importance, and, you know, all of the coverage that the society got because of his, sort of, image or aura was all effectively beneficial.

In terms of the ... part of the way in which the society operated was it was involved itself with property subsidiaries and had shareholdings in various activities and so on. Whose idea was that and was that supported by the board?

Mr. Michael Walsh

Well, I think you have to, you know, kind of, go back to the very beginning. I mean, the initial permissions to actually get involved in property or property development were in 1992 in Ireland, you know, and that permission was obviously under Central Bank supervision. The second permission was in 1994 when the Central Bank gave permission to the society to acquire sites in London. So, to a degree, once that actually happened, there was a beginning of the development of expertise within the society in relation to that particular sector. Clearly, before, kind of, 1990, the society had done relatively small loans in the context of pubs or farms or whatever, but really, it was under the 1989 Building Societies Act that the society was effectively being encouraged - well, it was obviously before my time but, nonetheless, was being encouraged - to get into housing and housing development, and that was, you know, a facility and power that it actually embraced. By the time-----

But surely not as, you know, taking large stakes in vehicles set up to make profit from commercial property development. That wasn't what was envisaged. How did that come about?

Mr. Michael Walsh

Sorry, the initial structure was very much the society was actually-----

I am just conscious of the clock. I am sorry, Mr. Walsh, it is quite-----

Mr. Michael Walsh

Apologies. But ... you know, sorry, the initial concept was very much, kind of - and, as I say, it was pre-my time - "We will do it ourselves." That evolved into a situation where the society very quickly recognised that the expertise in terms of development was not within the society. You know, the society had expertise in terms of assessing and reviewing but it didn't have expertise in terms of doing the development itself so it actually formed partnerships, you know, different structures at different times. But the initial relationship was ... one of the, I think, people who have actually been involved here in terms of being a witness, which was, you know, Ballymore and Mr. Mulryan, and as, I think, Mr. Mulryan would have explained, you know, at no stage over whatever, kind of, the 25-28 years that he was involved with the society, did the society ever lose a penny; on the contrary, it actually made money. Now you'll see in that particular letter that you referred to, the one from whatever date it is in December of 2004, there is discussion in relation to, I think, joint ventures and, you know, the unwinding of those. And, you know, part of the problem was that, you know, that particular joint venture with Mr. Mulryan, which is blacked out obviously in your sheets, was actually causing distortions in the returns.

When Mr. Richie Boucher was here giving evidence he talked about this meeting on 7 September, that the purpose of the meeting was to discuss potential liquidity support for INBS. Now you say that no such liquidity support - I think you say that in your opening statement - was required, so why was that meeting being held, do you believe, at that point?

Mr. Michael Walsh

I think, you know, first of all, at that particular point, there was no need for liquidity support, but, equally, while there had been the false story run by Reuters on the Friday night-----

(Interruptions).

Mr. Michael Walsh

Yes, absolutely. But, you know, very rightly and very appropriately, I got a call from the Financial Regulator immediately after they became aware of it and, you know, they would have told me about what had actually happened. They sent me on the release, etc. Needless to say, you know, a story like that can actually be extraordinary damaging in terms of any financial institution. I mean, many of you will remember - no, actually, probably won't - but in the mid-----

Mr. Walsh, I'm sorry again to interrupt but I'm just looking at the time, and what I am asking really is the liquidity question at that time for INBS. Is it ... are you stating here that INBS was ... did ... had no liquidity difficulties in September 2008?

Mr. Michael Walsh

I am absolutely stating for the record it had no liquidity difficulties but I think what you're missing though, with respect, is that, you know, a story like that actually causes a massive amount of uncertainty.

No, I'm not missing. I do understand that.

Mr. Michael Walsh

Okay. But, you know, the Financial Regulator was doing absolutely the right thing by saying, "Look, we have to look at contingency.", and I think you'll be aware from the fact that, you know, I mean, months earlier, they had started to look at private sector contingency solutions in the event of something actually going wrong somewhere in the system. So the Financial Regulator was absolutely right. They did exactly what they should have. Now, I think, the reality is - I think you will have heard it from Mr. Burrows - all of the institutions, by September 2008, were suffering from, shall we say, liquidity pressures. The society was unique in the sense it had, for all practical purposes, more liquidity than anybody else. I mean, I think Mr. McDonagh mentioned that the NTMA had something like €5 billion in cash at that point in time. You know, in comparison, the society, even after the problems during September, had €3 billion cash on hand.

But why then when Goldman Sachs met with various members of the Department of Finance ... why then were they saying that for INBS, at your current rate, you would have a liquidity problem within ... your limit was within 11 days but in real danger of acceleration?

Mr. Michael Walsh

Well-----

And also the Government was effectively pulling together a huge operation to rescue INBS - not other institutions but INBS. So how does that square with you saying, "We were liquid"?

Mr. Michael Walsh

I am sorry, I understand that completely. I mean, you probably have seen. There's an e-mail which Mr. McDonagh forwarded to, I think, Mr. Beausang the night, or sorry, the day before the guarantee. In that, you know, Mr. McDonagh's words are more or less - or, sorry, the words in the e-mail, to be precise, are that at this point in time INBS has €3 billion in cash, its outflows are - I think, that day - something like €20 million, and his assessment or the assessment in that e-mail is that we don't have a current problem, we may need to actually do something precautionary for December 2008.

But Moody's, when it was down ... in the downgrade, said that the funding of INBS "is very heavily reliant on financial instruments (circa €7 bn at [the] end of 2007) making it vulnerable to the dislocation in financial markets". So wasn't the fact that you were increasingly reliant on financial instruments ... was that not causing a huge problem for you at that point?

Mr. Michael Walsh

No, because ... I mean, basically, obviously, when I went to the regulator in December 2007, you know, I mean, I laid out precisely what the issues were, what was actually going to be done and how we needed to actually deal with it.

Senator, I need you to wrap up.

Mr. Michael Walsh

Sorry, you know, when I went back again and, you know, reiterated to them in May of 2008, "Look, these are the problems in the system. You've got to wake up and got to deal with them", you know, at that point in time we were continuing to build liquidity. You know, we had contingency facilities, from, I think it was, Danske Bank, at the time but, you know, we were building and we were looking at other avenues. So when we got to the beginning of September 2008, we had sufficient cash to meet all of the bond repayments through to the beginning of 2010. In that context, you know, particularly when you have such a short duration loan book - as I say, if there hadn't been complete dislocation in the markets we would have expected to realise half the loan book over the period of 2009 - so we had, you know, a very viable model at that point in time. Now, obviously, what happened in 2009 and 2010, the markets continued to remain frozen and that gave, unfortunately, all of the impacts that we saw subsequently. But, you know, if you had done a review at the beginning of September in 2008, I think you would have come to the exact same view as Mr. McDonagh was coming to at the end of September 2008, which was, you know, the society has €3 billion in cash, which, as I say, kind of, 60% of the amount that the NTMA had.

The leakages or the withdrawals of cash at that point in time, you know, they would have been higher earlier in September, immediately after the uncertainty caused by the story, but then you had the guarantee raised to €100,000, I think on 20 September, and after that the outflows from the society dropped dramatically.

I think, just to put it in perspective, on I think it was ... what was it ... 29 September, was it the day of the guarantee ... the outflows from Anglo Irish that day were €2,000 million whereas from the society the outflows were €30 million.

A supplementary, quickly.

Yes. Finally, was it appropriate with you, as chair, that by September 2008, 80% of the loan book of INBS was in commercial property and 81% of its land and development exposure was in speculative property activity? That happened under your watch. Was that appropriate?

Mr. Michael Walsh

First of all, you know, the answer to that is "Yes". In 2000, there was an equal split between commercial and residential. We had taken very clear decisions in terms of not pursuing certain markets - i.e. a residential market that was overly competitive and with a very low margin because that was going to destroy the capital base. The society maintained at all stages a very high level of capital. I think, you know, the core books include, you know, Project Harmony. At the end of 2006 the society's solvency ratio was nearly 14% - now that would have been probably twice anybody else's in town.

Thank you, Chair.

Thank you very much. Deputy Joe Higgins. Deputy, 15 minutes.

Mr. Walsh, if we could get on the evidence book - it will come up in front of you there - some of the growth indicators for Irish Nationwide between 1998 up to 2007. It is in front of you now. Over the period 2002 to 2007 in particular, profit before tax increased by 303%, and total assets by 190%. Even the four diagrams there will show what some people might think would be an astonishing exponential growth from 2002 onwards. Do you think that these levels of growth were prudent or sustainable, particularly in view of the growing competition within the Irish lending market at this time?

Mr. Michael Walsh

Well, I think first of all, you know, with the benefit of hindsight, nobody really understood the dangers of the actual kind of degree of growth in terms of the aggregation. But, I think, to put things in perspective the society, you know, in the period say ... well, let's take the five years, the end of '03 to the end of '08, the society lent, in terms of the Irish property market on the commercial side, roughly speaking, €2.5 billion. In the same period, AIB would have lent €30 billion into the same sector and, indeed, Anglo would have lent €30 billion into the same sector. So, you know, the practical reality is the society was growing at a lower rate in terms of these sectors than all of its competitors. It was growing at a lower rate because, you know, it actually was trying to maintain appropriate standards in terms of what it should actually do.

You'll notice if you look at that - and I accept the asset growth is high - but you will notice the level of reserves, which is the accumulated funding. And, you know, that went up by a substantial multiple as well. All of those funds are available to actually meet the situation in relation to any downturn.

But, Mr. Walsh, can I ask you ... you said in retrospect, but may I press you in relation to your own position? I mean, you were not an untutored novice arriving at a board. You're a distinguished academic and you were professor of banking at UCD. What is your academic background, just in very brief terms?

Mr. Michael Walsh

Well-----

For some decades in any case.

Mr. Michael Walsh

For some decades I used to be professor of banking and finance. I have lots of degrees but-----

Can I suggest Mr. Walsh, or ask you why you wouldn't be aware - theoretically but also from practical experience of history - of the dangers here? For example, Professor Honohan, the former Governor of the Central Bank, in an article in the Economic and Social Review, summer 2009 says as follows, "A very simple warning sign used by most regulators to identify a bank exposed to increased risk is rapid balance sheet growth; that an annual real growth rate of 20% is taken as the trigger." And he goes on to say that in the case of INBS, Irish Nationwide crossed the line six out of nine years for an average rate of growth over the nine years of just over 20%. And are you aware of Professor Black who gave evidence to this committee? And I might assume, or you can tell us, that you might have been aware of the crisis in the savings and loans situation in the United States. Now, in view of that experience, Mr. Walsh, if you were aware of it as an academic, why were you not able to see that alarm bells should have been flashing in your head above anybody else in this period when this exponential growth was happening?

Mr. Michael Walsh

I suppose, you know, I would take that at two different levels. First of all obviously, I look back and say, "Why didn't I see it?" I suspect everybody who is in authority in any of the economic bodies now looks back and says "Why didn't they see it?" But the practical reality is that nobody saw it at the time. I think when you look at the savings and loan - and I would be fully aware of the savings and loan's situation - the problem was absolutely, completely different. The context of the savings and loan was they were lending at long-term fixed rates and they had a complete mismatch in terms of their book between the assets and liabilities side.

If I look at the society, the society, as you say, had high growth rates, but it also had twice the capital of most of the other institutions.

But Mr. Walsh, with respect, the society was involved in highly speculative activity. KPMG, its own auditors, referred to, you know, the speculative land developments. And, for example, you got a letter in 2003 from the regulator expressing concern on the growing concentration in property and development land. And then by September 2008, 80% of your loan book was in commercial property, and 81% of its land and development exposure was in speculative property activities.

Mr. Michael Walsh

Well-----

Now should you again, above all, have realised that this was ... that no property boom goes exponentially onwards without collapsing? And by the way, there were people, as you know ... we had evidence here where in 2003, David McWilliams very accurately predicted what was going to happen. I am wondering why, as an academic, you couldn't see this.

Mr. Michael Walsh

I accept actually ... I think Mr. McWilliams was probably one of the few commentators who at that point in time had a view. But, you know, being realistic, that view wasn't one that was shared by most other people. I think it was Professor Honohan who said, "You will always have mavericks. We should listen to mavericks more often, but in practical terms we don't."

I would love to have seen the problems earlier. The reality is we did not see the problems until 2007, but when we saw the problems we actually took action. We went to the regulator, or I went to the regulator, told them what was happening, told them that things needed to be changed. Now the reality is in 2006 - and you've heard from Professor Honohan in his report - there were stability tests done as part of the round-table discussions. And what wasn't disclosed in those stability tests, which is actually in his report, that under the stress test No. 2, 88% of the Irish system collapsed. Now if 88% of the system actually collapses and you don't actually feel as a central bank or regulator that you have a problem on your hands and you need to communicate that to people, then the problem is there.

Now I have tried for the benefit of this committee to actually get more information in relation to those stress tests, because those stress tests are actually terribly important. They are done at a point in time when we'd been coming out of a very positive period. There were no warning signs in terms of overall problems in the domestic economy, in the global economy. So if action had been taken when those signs were there under those stress tests, the country would have been much better off today. The society would have been able to unwind its loan book because of the very short duration.

Mr. Walsh, the Project Harmony, which was a due diligence report that you'd be familiar with in 2007 doing the ... examining the society up to the end of 2006, found a concentration of loans in the higher risk development sector at 41% of total commercial lending. Concentration of loans in higher loan-to-value, 30% of commercial loans had higher than 100% loan-to-value and 30 commercial customers accounting for 53% of the total commercial loan book and 41% of the total loan book. Can I ask you, did the board ever consider or was there a discussion about concern that these levels of concentration and the correlation between them greatly increased the risks to the business model that was being pursued?

Mr. Michael Walsh

By definition, the board was fully aware of these. The board would have commissioned the KPMG Project Harmony vendor due diligence. The board, obviously, would have reviewed that at the time and, indeed, so would the Central Bank and everybody else. Those reports are prepared, as you know, because you want to give a warts-and-all picture of the institution that you are seeking to sell. You know, at that point in time, there was no indication whatsoever of serious concern by any potential buyer in relation to the structure of the society or the model it was actually pursuing.

I think you make the point in relation to high LTVs. I think what you need to recognise is that the nature of the loans were very short in duration in many cases and, as a result of that, they were there with a view to getting planning permission or whatever kind of short-term refinement and that, in itself, enhanced the value of the actual loan. There was proper, or, when I say "proper", there was a detailed review done of the loan books, I think in, probably, kind of, November 2008, before the real collapse, I suppose, took place in 2010. But in 2008, I think it showed that the average LTV across the book was 80% and, you know, if you couple that 80% with the 24% absorption capability the society actually had, the society was actually in an extraordinarily resilient position if it hadn't been for the absolutely phenomenal decline in prices in 2009 and 2010.

Except that you should have known that, by the laws of finance, capital and the way capitalism works, that what goes up comes down, but I think we've explored that somewhat. Can I ask you, moving forward-----

Mr. Michael Walsh

I think though, in fairness Deputy, I think there have been so many reports come out so to say, "this time it's actually different". Nobody, prior to ... certainly from my point of view, I didn't see it being in difficulty until 2007. You know, clearly the Central Bank and the regulator, on the basis of the information they had, should have seen it in 2006. I know Dr. Nyberg says we should have seen it in 2005. The reality is, I wish I'd seen it earlier because we would have been able to avoid, you know, the problem and the costs that subsequently arose.

Mr. Walsh, just on the subject of demutualisation, and that was one of the key reasons why you were brought onto the board, and Nyberg says that the drive to demutualisation was a very important factor in the years that you were there. In your opinion, did the desire of management to maximise the value of Irish Nationwide for demutualisation result in the adoption of poor lending practices and increase the level of risk in the loan portfolio?

Mr. Michael Walsh

No, I wouldn't agree with that. I think, you know, the unfortunate reality is ... I mean I had believed - and I think I included a paper in part of my statement - I had believed really from, for all practical purposes, the early '90s that small institutions like the society, like EBS, like First Active, could not hope to survive in the long term, given the way the markets were evolving. So I was clearly of the view that the society should be sold to a larger institution and, you know, my deep regret, that did not happen. But the only way it could happen was on the basis of legislation. Now, when I agreed to take on the role in 2001, legislation had, supposedly, been agreed by the Central Bank, by the Department of Finance and the Department of the Environment. That legislation should have been implemented then; it wasn't for whatever reason and, unfortunately, the rest is history. Every single year ... I mean, when that didn't happen in 2002, the Central Bank said they were going to try and put it in as part of the 2003 Central Bank Bill. In 2003 they said, "Well, we didn't get it in there but there is a working party now; it's going to get agreement in terms of how things are going to be set up."

So, I believe the society would have been sold much earlier. Clearly, the society was going to continue to run its business properly and efficiently over the time period but I think both the board and the management would have expected that it would have been sold much earlier than that. I think Dr. Nyberg, whoever briefed him, didn't really get a proper understanding. The society was absolutely focused on getting a sale of the society done, obviously at the best price possible at the earliest opportunity, because that's what it believed was right from the point of view of the society, the point of view of the members and the long-term structure of the markets.

Mr. Walsh, just on another issue, towards the end of 2009, according to Mr. Stanley Purcell, who comes later in the afternoon, Ernst and Young began an investigation into legacy issues at INBS. I am quoting from his statement:

I gave [Ernst and Young] every assistance. The investigation ultimately led to the initiation of legal proceedings against the 'old Board' for the losses of the society [...] proceedings represented an attempt by IBRC to make the directors personally liable for the losses of the society. [And] A central plank of the claim was the allegation by the Plaintiffs that the delegation of powers by the Board of the Society to Michael Fingleton was excessive.

Were you involved in this, in these proceedings?

Mr. Michael Walsh

I was, absolutely.

And was there a settlement?

Mr. Michael Walsh

There was.

Can you tell us what the-----

Mr. Michael Walsh

I think the settlement is confidential.

Okay, the details of the settlement may be confidential; the process of it Mr. Walsh may wish to talk about but the details are-----

Yes, well that's what I want, is the process. I mean, Mr. Purcell says that he had to pay to the State a sum of money, which is confidential, but can you tell me the general terms of the settlement, as far as you are concerned?

Mr. Michael Walsh

To be honest, Chairman, I don't think it's appropriate because there is a formal confidentiality agreement around that. You know, that confidentiality agreement is actually there, it is in situ, and, you know, certainly if, you know, shall we say, the appropriate authorities take a decision that we should be released from the confidentiality agreement, that's absolutely fine, but there is a confidentiality clause there and, you know, my understanding is that I have absolutely no right or authority to break that confidentiality clause. But I will rely on guidance from yourself.

That would stand.

Let me just say, Chairman, for a parliamentary inquiry not to be ... If four directors have to make a settlement and one director says that they paid a sum of money to the State as part of the settlement in regard to their governance of Irish Nationwide, and a parliamentary inquiry is not enabled to explore that-----

I'll just clarify the situation. As I said, Deputy, the processes around how the ... how it was arrived at and the exploration of that are one thing but, as members would have been briefed, as they are briefed before each and every one of those sessions, if somebody coming in before this inquiry has signed a confidentiality agreement, and there are other aspects as well as this with the Central Bank and there is section 33AK issues with regard to NAMA and whatever, the witness can't be asked to actually violate that agreement because they would be creating an offence inside in this room and I can't facilitate a situation where I'm actually aiding and abetting somebody to create what could be possibly a criminal act.

Okay, Chair, but the point is if there is a settlement, if at least one person does say, of the four individuals concerned, that they paid a sum of money, it would indicate that there were issues there in relation to the governance during their period.

If you wish to explore that, I will indulge an extra bit of time in that. With regard to the sum, it's a different matter.

That's the point I'm putting to Mr. Walsh.

Mr. Michael Walsh

I understand exactly the point that you are actually putting. The practical reality is ... I don't know if you've ever been involved in civil litigation, but you would be mad to spend your life fighting litigation if there is an opportunity to actually come to some sort of compromise or settlement. And, absolutely, both sides were satisfied that a settlement was appropriate and that was done, obviously without admission of any wrongdoing or otherwise. But, sometimes, you do these things for the purpose of actually moving on with your life and not actually spending all your time kind of fighting an argument which, ultimately, nobody wins, other than the lawyers.

Okay, a short supplementary, Deputy.

Mr. Walsh, finally, two very brief points or questions. Thejournal.ie, in an article on Tuesday, 12 February 2013, said as follows:

Con Power ... , who sat on the INBS board between 2000 and 2006, noted how there were just six people including himself on the board and meetings would normally begin with the chairman asking Fingleton [That's Mr. Michael Fingleton]: “Well Michael, what have you got for us [and that was yourself, the chair] today?” with no agenda and no documents before the board members.

I want to ask you if that's typical of the meetings you chaired. And, second and last point, because of time, in-----

I'll be bringing you back in at the end again, Deputy.

Yes. In the book called Fingers, in relation to Mr. Fingleton, in relation to yourself, they're speculating about your reasons for being on the board, "Whatever his reasoning, [Walsh] Mr. Walsh [that's yourself] would later tell friends that getting involved with a toxic society was his greatest regret in an otherwise distinguished career." Would you just comment on those two last questions, Mr. Walsh?

Mr. Michael Walsh

Thank you. You might have to remind me which is which. First of all, in relation to Dr. Power's comments, I actually can't relate to, you know, certainly, that description of them at all. Every single board meeting had a board pack, it had an agenda and, you know, in many ways, you know, others have criticised us for actually having too big a board pack, too much agenda, etc., so I'm not sure how one can say, you know, there was, shall we say, kind of, no information and the other can say there was too much. I suspect, to be honest, it's a misinterpretation. Con, as you know, is, kind of ... you know ... or can be quite a comical and quizzical figure. So I suspect the question was actually probably, shall we say, tongue-in-cheek addressed to Michael Fingleton, as managing director, rather than myself.

In relation to the other comment as to, you know, my attitude to the society, I would never have used such words or such a description. I got involved because of a particular situation which was ... you know, I had expertise in a certain area, I had undertakings from the Central Bank and various Government Departments as to what was going to happen. Clearly, it didn't happen. Given that it didn't happen, I continued to chair the place in the best fashion that I actually could, with as good a board as I could hope to have had at the time and to continue to look to strengthen all aspects of the society so as to have it in as perfect a condition as possible when it came for actual sale. There is no point in trying to sell anything unless you have a product that is interesting for the buyer and the only way to have something interesting for a buyer is to actually have it as a good business.

Thank you. I'll be bringing you back in again, Deputy Higgins. I just want to clear up one or two items now that the leads are finished before I bring in the other questioners, Mr. Walsh. And one relates to ... on 7 September 2008, Mr. Purcell and two of his colleagues attended a meeting at the Central Bank on behalf of INBS together with representatives from AIB and Bank of Ireland. Mr. Walsh, in his opening ... or, sorry, Mr. Purcell, in his opening statement, refers to this. I assume you're familiar with that text. Were you aware that this meeting had been arranged?

Mr. Michael Walsh

I was aware, Chairman. When I actually talked to the, you know, regulator, on the Friday night after that story, you know, had broken, I would say that from that point on, I would have been in touch with the regulator probably every single day, potentially multiple times during the day, for the month of September. You know, that story ... you know, the potential damage it could have done to the society was just absolutely enormous and, consequently, it was very much, you know, "We have to make sure that we explore every opportunity and all such back-up opportunities that are there."

Okay. And who was actually at the meeting that you can recall if they were representing-----

Mr. Michael Walsh

Well, sorry, I-----

-----INBS and the other banks?

Mr. Michael Walsh

Yes, sorry, I wasn't there myself-----

Mr. Michael Walsh

-----so, you know, I would have heard reports back on it from either Mr. Neary or Mr. Horan-----

Mr. Michael Walsh

-----but I wasn't actually present myself.

Okay. Who requested the meeting, do you know?

Mr. Michael Walsh

Well, I mean, certainly the meeting ... and I would have said it was entirely self ... I think the meeting was actually proposed by the regulator because obviously, you know, I mean, when a story breaks like that ... when I say I presume it was by the regulator, I mean, literally, I was talking to the regulator I would say, you know, 20 minutes, half an hour ... so I would say on that ... sorry, after the story broke. I would say that, in practical terms, you know, we had discussed, really, what needs to happen now in terms of precaution because obviously the society was different to the banks in the sense the society used to open on a Saturday morning, so, you know, there was a danger, effectively, that the story could actually do a lot of damage even on the Saturday and, consequently, you know, the focus really of the Friday night conversation was probably in relation to, kind of, Saturday, making sure that there were contingencies there, no queues and all the rest of the things that you saw with Northern Rock.

I think, the meeting ... the other meeting ... I can't remember was it a Saturday or Sunday but, you know, I am aware of the fact it didn't go well and, you know, certainly the explanation I heard at the time was that, you know, all of the other institutions were actually suffering from the same degree of concern in relation to liquidity as the society. I have to say I hadn't been aware that they were in nearly as bad a situation as subsequently has turned out to be the case.

So your understanding of the purpose of the meeting was what, Mr. Walsh?

Mr. Michael Walsh

Sorry, my understanding of the purpose was to make sure there were contingency plans in place in the event that, you know, there was a severe outflow of funds, you know, as a result of that story and, consequently, you know ... I mean, reality is that the approach ... because I think earlier in the year the Governor had actually approached both of the two pillar banks with a view to, "If there is a problem, will you be there for a private sector solution?" I think what maybe the Governor didn't understand at the time, or maybe none of us really understood, was just how widespread and systemic the problem actually was.

And was there any decision or recommendation as a result of that meeting that you're aware of?

Mr. Michael Walsh

As a result of the-----

Of 7 September meeting?

Mr. Michael Walsh

No. I know coming out of that meeting, you know, both ... I mean, as reported back to me by both sides, if I put it that way, that both AIB and Bank of Ireland determined that they weren't in a position to offer a solution and, consequently-----

What type of solution?

Mr. Michael Walsh

Sorry?

What type of solution?

Mr. Michael Walsh

Well, as a stand-by facility, because, you know, at that point in time, as I say, the society had about €4 billion of cash, you know, on deposit. It, in total, I think had, you know, on the other side, you know, €8 billion of deposits from customers. So potentially, you know, if every single one of those deposits, you know, had been redeemed, you know, there would have been a shortfall in terms of cash-on-hand of about €4 million ... or €4 billion, sorry.

And in that regard, to your knowledge, was any decision or agreement made?

Mr. Michael Walsh

Sorry, absolutely to my knowledge there was no agreement, because the regulator contacted me, you know, by phone, and I was actually in the society on the Sunday evening of whatever date it was - the 7th I guess - asking me to meet with the chairman and the chief executive of Anglo Irish Bank the next day because he had had some discussion with them and, you know, they believed they may be the ones who were in a position to offer a solution.

Mr. Walsh, was Mr. Fingleton a domineering person and did he dominate the board?

Mr. Michael Walsh

I think I'll leave it to yourselves to judge whether I'm easily dominated but I think the practical reality is, you know, he has a strong personality. He'd used that personality to actually build the business from scratch and, you know, like all of those, as I say, the, kind of ... let's say, the Michael O'Learys of the world, you know, they are forceful people. That doesn't mean that the board abdicates responsibility. Just because somebody is a colourful character doesn't mean the board disappears but if I was to ask, I'd suspect, each of you here today - well, with maybe one exception - you know, could you name ten people who actually work for Ryanair, and I don't know how many people work for Ryanair - I suspect thousands and thousands - but I suspect most people could probably only name the one. In the same way, I think when people looked at the society from the outside - I mean, there was a senior executive team, you know, there was a whole network underneath - most people could only identify with one individual.

Sure. And every organisation and structure probably has strong personalities in it but what ... could I maybe put the question to you, Mr. Walsh, did you or any other board members take any steps to, kind of, balance that type of energy that was inside in the room or to counterbalance any level of domination that an individual may have had inside there?

Mr. Michael Walsh

Yes ... sorry, absolutely. I mean, what I can never understand in terms of, you know, shall we say, kind of, some of the coverage that goes out, because there's, kind of, an assertion that, you know, the managing director could do whatever he wanted without any reporting lines, without any restriction. Very clearly, you know, there was a delegation set up in, I think it was 1994 initially before my time. That delegation and the, you know, shall we say, prevention or, you know ... I'm not sure what the right word is, but actually the powers retained to the board, the retention of powers, were clearly documented in 2000 ... sorry, not in 2000, in 1997. In 1997, we had discussion with the Central Bank, you know, the assistant director general at the time, and he laid out what he believed were appropriate reserve powers for the board. Now, the minutes of the board meeting whenever it was in 1997, clearly set out, "This is the delegated authority to the managing director". And then it goes on to say, "However, the board reserves the following powers to itself". And the powers that it reserved to itself were discretion in relation to, you know, anything above a certain threshold had to come to the board.

Mr. Michael Walsh

So, you know, loans above €1 million at all stages had to come to the board; capital expenditure decisions above certain levels had to come to the board; treasury policy had to be approved by the board; the list of people who are actually approved institutions had to be approved by the board. So there was a whole fabric of things that were reserved to the board. I mean, I think what is interesting is, you know, there is a governance report there from KPMG. And, you know, buried at the back of that governance report is a recommended list of reserved powers for boards of directors. And, you know, if you actually go through that - and, you know, I don't want to take your time; you actually have that, I think, as part of your wider documents, but all of the things that were reserved for the Irish Nationwide board were things that would have been recommended by KPMG in their report in - whenever it was - October or November of 2008. Now, many of those powers that KPMG advised should be reserved to the board wouldn't have been relevant in the context of the society, such as the final dividend, but things like the annual report and accounts, circulars to shareholders etc., etc., etc., were all powers that were specifically reserved to the board and always held by the board over the period.

You mentioned earlier that the Financial Regulator had issues and you can discuss ... touched upon with regard to the board's composition. And I think you offered an opinion on that already. Am I correct in that there were five members of the board?

Mr. Michael Walsh

Well, sorry, there were five members of the board for most of the time-----

And two of whom were employees.

Mr. Michael Walsh

Sorry.

Two of whom were employees, yes?

Mr. Michael Walsh

Sorry, yes, sorry. At the time ... I'm sorry, I'm trying to think, because, sorry, there would have been more directors and then due to age factors and others, people had to retire. But, certainly in the period from, say, 2002 to 2008, or, say, early 2008, there would have been five, three non-executive and two executive.

Did you ... were you satisfied with that number or did you ever try to change that or suggest that it would be changed?

Mr. Michael Walsh

Well, I think, Chairman, I'd like to answer that really at two levels. You know, first of all, you know, for companies of its size, I think if you actually look at the Higgs report, you know, which was one of the, kind of, famous reports on these things, a board size of five with, kind of, a majority of three non-executives and two executives was actually deemed appropriate. I mean, I think there has been a lot of debate over time as to what the appropriate board size is and what the appropriate mix is between executive and non-executive, and that's changed.

I think to come to, maybe, the other element of your issues though, by definition, you know, one would have always liked to have, you know, one or two additional board members. And, you know, I think it was probably early 2004, you know, I tried to convince the other board members that, shall we say, we should co-opt a particular individual to the board who should probably remain nameless. But that would enable us to both appoint him and to have, kind of, a larger board. But I couldn't get full agreement to that.

Mr. Michael Walsh

In 2005 we did get agreement from Mr. Brophy to actually join the board and we were very happy to do that. He had very good experience with the Smurfit group, a very good individual and ideal. And when we got agreement from Mr. Brophy, I expected the board size would actually increase to six. And we agreed with the regulator that Mr. Brophy would be co-opted to the board following the 2006 annual general meeting. Unfortunately, there was a problem in the sense that in the ... I think it was February of 2006, Dr. Power, because of a conflict of interest between his role as chairman of the audit committee and vice-chairman of the society, and his chairmanship of the financial ombudsman's council, had to step down due to that potential conflict.

I was very disappointed to lose Dr. Power at the time because he'd actually been a very good non-executive director, a very good chairman of the audit committee, but, nonetheless, when I tried to persuade him to stay, he felt that, you know, as chairman of the financial ombudsman's council, he had a first duty to that role.

Just finally, before I bring in Senator MacSharry there, just with regard to the overall lending strategy and this was an item I raised with Mr. Fingleton this morning, in particular, did anybody on the board ever challenge the practice of taking equity stakes in developments in exchange for 100% funding?

Mr. Michael Walsh

"Challenge" is, I think, probably the wrong word to actually use-----

Mr. Michael Walsh

-----because, you know, that implies, I mean, you know, when you have discussion, you know, you have disagreement, you have argument, but then you come to consensus. You know, there would have been views expressed as to whether or not it was appropriate, but, you know, at the end of the day, you know, there was unanimity within the board.

What was your own view?

Mr. Michael Walsh

My own view, you know, having had the discussion was that they were appropriate.

Okay, thank you. Senator Marc MacSharry. Senator, you have seven minutes.

Thanks very much and thanks, Mr. Walsh, for being here. KPMG, in its view of the society's-----

There's phone interference. Sorry, Senator, back again,

KPMG, in its view of Nationwide's corporate governance structure ... I don't think it's me; we'll put it under here just in case.

Take 3 - KPMG, in its review of Nationwide's corporate governance structure in November 2008, made numerous recommendations for improvement, including the development of strategic objectives, the introduction of formal strategic and financial planning process, documenting of board terms of reference and assessment of director independence. Many of these recommendations could be considered to be basic form of corporate governance considerations. Why were these measures not put in place much sooner by you in your role as chairman?

Mr. Michael Walsh

Well, I think, you know, the reality is first of all corporate governance is actually something that evolves over time. I would have been very happy with the KPMG report. I think it actually set out, you know, a menu of things that could actually be done, should actually be done and, you know, the board would have obviously adopted those. I think you have to recognise though that there is a real danger in corporate governance that it becomes, you know, almost, kind of, a box-ticking exercise where, you know, let's assume that we have terms reference for this, let's assume we check it and, you know, people actually stop thinking. I would say at no stage did the board of Irish Nationwide stop thinking. It may not have always come to the right conclusions, but it, at no stage, stopped being an active board or a focused board. I mean, I think within that series of recommendations - and there are, you know, multiple recommendations there - some of them would have been recommendations that, you know, the society itself would have actually prompted them to do and some of them would have already been in train for implementation.

Equally well, some of the recommendations would have been ones that, you know, one wouldn't have actually agreed with. Now, you know, the problem, being simple about it in the context of that particular report ... that report was completed in November 2008, and while it gave a menu for things to be done going forward, you know, at that point in time the whole issue across all of the Irish financial institutions was working out where they were going in terms of, you know, the global crisis that was actually emerging. So, you know, I would have, maybe in a different environment, spent more time reviewing with KPMG the report and considering it, but, you know, at the time, you know, there was a much greater degree of importance on other-----

And in other directorships that you would have hold - not going into the specific of any of those - would those sort of requirements have existed?

Mr. Michael Walsh

To be honest, you know, all directorships and all boards are actually very different, you know, I mean. Shall we say, in my very early days, I mean, I was on one particular State board, which probably should remain nameless, but, you know, almost the objective, I think, in that particular case was to give the non-executive directors so much information that you wouldn't know where to actually look. I would say in most, you know, commercial boards - and, you know, I've been involved in a wide range of them across a variety of different sectors - you know, the board actually are pretty focused in terms of what are the important things from their point of view. In the society's case-----

Sorry, I don't mean to be interrupting; I get the picture. But let's say I was made a non-executive of the board, I mean, what was the process? "Sure he'll be grand. He'll be sound or here's the terms of reference. These are the memorandums of articles of association. Board meetings start at 10, they finish at 12." Or was it just ... was there a culture of everything is sound, we're making profits, no panic?

Mr. Michael Walsh

Absolutely not. You know, I think, you know and maybe it's probably useful just to, kind of, set out what I would have done. You know, and maybe the best example really is, you know, in terms of, say, the public interest directors. You know, when I would have been made aware from Minister Lenihan of the identity of the two public interest directors, I would have sat down with each of them individually, gone through the society, gone through all of the issues. I would have given them copies of the various reports that were actually around. And, you know, I would have been entirely open to them to actually asking whatever questions or deal with any issues that were actually there.

Now, you know, in the context of, you know, shall we say a board process, you know, I mean, if you're running a board of, kind of, 12 or 14 people, you know, you have a very different requirement for, let's call it, you know, paper tick-box-type exercise just so that everybody comes onto the system, but when you're in a relatively small group, you know, it is a much more, kind of, closely meshed situation. You've much more contact with each individual director than you would have in, say, a large plc-type board.

Okay. Do you feel that the Central Bank and regulator unfairly fingered Irish Nationwide as a misbehaver?

Mr. Michael Walsh

I'm not sure at what point in time you're actually talking about because I think, to me, what is actually obvious is-----

No, we spoke about the letter that had come from the regulator, and Mr. Fingleton earlier on had, kind of, taken issues with the contents of that letter, and you had said, for example, that you were convinced, in your opening statement, that the regulatory leadership that was required was to ensure a broader action across all financial institutions. You said that that leadership never came so, you know, what sort of leadership were you expecting from them? What sort of intervention were you expecting from them? And did you feel that there was a kind of an over-focus on you, for want of a better expression, you being the institution as opposed to you, Michael Walsh, as being: keep an eye on those fellows and everyone else can do what they like?

Mr. Michael Walsh

Well, I mean, certainly from my perspective, you know, every single piece of correspondence from the Central Bank or, subsequently, the Financial Regulator, you know, I would have taken very much to heart and, you know, tried to ensure that absolutely everything was addressed in it. Would I have felt we were being specially, kind of, identified? To a degree I would never have had that view at the time because I would have said at the time, look, you know, because as I say I'd a very open dialogue with these, you know, Central Bank people or regulatory people depending on the time so, you know, I would have understood when they had what I would call, you know, regulatory concerns which they would have expressed as normal and, you know, on a separate basis when they became, shall we say, more seriously concerned. Whenever there was anything of any, shall we say, seriousness, you know, I would always have actually met with them.

Okay. Can I ask you were you on the remuneration committee?

Mr. Michael Walsh

I was chairman of the remuneration committee.

Okay, very good. Considering the absence of terms of reference and assessment of director independence and financial planning process and strategic objectives for the board, is it reaching to assume that there was the same absences of criteria for remuneration?

Mr. Michael Walsh

Well, when people say there were no terms of reference, I mean I actually wrote very clearly to the Central Bank, as it would have been then in 2002, to-----

I don't want to go offline here because what I am trying to get to is, you know, when ye sat down to decide that employee or director X or managing director or everyone else was going to get salary thing, what criteria did you employ? Was it as, kind of, everyone was professional in the same way as ye were made a board of directors and, you know, you didn't really get into the auld corporate governance, to quote yourself, box-ticking exercises? What criteria were used to assess the level of remuneration or bonuses somebody should get?

Mr. Michael Walsh

Well, sorry, to be absolutely clear, and that is why think it is important to go back, I mean, when I set out to the Central Bank, I think it was probably 2002, that, you know, we were setting up a remuneration committee which consisted purely of the non-executive directors and the purpose of that is to actually review and consider the performance of the executive directors.

And would you ever be told, say, look, person A or director B is expecting, kind of, in the ballpark of such and such?

Final question.

I've one very last one and I'm finished.

Mr. Michael Walsh

I mean, first of all, you know, the board would have been very conscious of, you know, what was the remuneration in, you know, other institutions, what was the performance of the society, you know. We were actually making decisions at the end of the year based on the performance, you know.

Would you have felt that ye were outperforming AIB in terms of, kind of, maybe a list of benchmark AIB plus whatever or-----

Mr. Michael Walsh

Well I think you've got to be very careful. I mean, first of all, you know, if you look at AIB, and I don't think we should be going there at all because I think they were rescued in the mid-80s. They nearly went down-----

I agree but you just ... you said that you looked at other institutions' pay.

Senator, I have to ask you to wrap up because we are-----

Yes, it's a very final question. I'll just go off that point now. Can you address-----

Mr. Michael Walsh

Sorry, to be clear, we did benchmark. We even took in, you know, professional, you know, whatever they are, kind of remuneration advisers, at one stage.

Maybe one of the future colleagues that are coming in next could look more into the criteria that we didn't seem to get to there on pay and stuff. Can I just ask you, and again I don't want to take up other people's time, maybe other people will address it-----

Mr. Michael Walsh

Sorry, but, Senator, to be clear, you know, the assessment was on the basis of performance, input, contribution during the year-----

Mr. Michael Walsh

-----and that was something that myself and the other non-executive directors sat down and evaluated at the end of the year. We also looked at the market and where the market remuneration actually was, and made a decision on that basis.

Okay. Can I ask-----

Final question.

Yes, very briefly and we can deal with this in more detail with other colleagues. The NAMA valuations was something that the managing director clearly has an issue with. What's your view of that and do you share his view that they were flawed and what ought they have been?

Mr. Michael Walsh

I, I would love to know what the correct ... I'd love to know what the correct answer actually is, and unfortunately the only way you-----

What you feel is the correct answer.

Senator, I'll have to come back to it if ... very briefly, without interruption, you're way over time and I'm moving on after this. Carry on please, Mr. Walsh.

Mr. Michael Walsh

What I can't reconcile, being very simple ... there was a detailed evaluation done by the board, you know, a year after I actually departed, or over a year after I departed from the society. There was also a detailed evaluation done by the regulator in terms of the capital needs. And on the basis of that and, you know, to use their words, they actually evaluated all of the loans on a cash-flow basis. So here we have a board saying in, I think it was probably, kind of, April 2010, you know, we have evaluated the cash flows associated with every single major loan that we actually have and, you know, for right or wrong due to the concentration in the book that should have been easy to do. They came to a view as to what the necessary write-down was. Now, for some peculiar reason and, you know, I have no idea what it was, the amount of the write-down actually almost doubled between April 2010 and September 2007, or September 2010, sorry, I get my years confused sometimes. Now, I don't know what actually happened over that five-month period for the board to actually agree to accept prices which were effectively 40% below what they had done as valuations. I mean, I have looked, obviously, at the NAMA reports, and if I look at say, tranche 1, I see that the society uniquely accepted a valuation which was below the market value of the underlying properties. I can't understand that, I can't rationalise that but that's what they actually did. I think it is fair to say that I did talk to my successor on one occasion in relation to a particular project, which probably should remain nameless, but it's actually the largest in terms of what's defined as the spec projects, and his view at the time was that they had an offer which was more than double the price they could actually convince NAMA to accept the transfer at. Now, I don't know, but I think the view of the board, and I can understand exactly where they were coming from, was, you know, NAMA had been set up, it was Government policy that everything would be transferred to NAMA, and I suspect that the board saw themselves as price takers but, as I say, I'm not an expert on property, I wasn't there at the time, so it is entirely supposition.

Okay. We could be returning to this with another questioner as well, Mr. Walsh, so I am going to move on. Deputy Doherty, please.

Go raibh maith agat and fáilte chuig an coiste. Can I ask you, in relation to KPMG's corporate governance review in 2008, it states:

Board packs are very detailed and at times lack clarity and structure. For example, there is little market and operational overview and salient financial commentary provided.

Were you satisfied that ... as a board member and as chair of INBS, that you were receiving a full and accurate picture of the financial situation of the society at all times?

Mr. Michael Walsh

Sorry, I was absolutely satisfied. Every single year, you know, the board in the absence of any of the management would have actually met with KPMG as the auditors, and KPMG as the auditors would have confirmed (a) that, you know, they had reviewed everything; i.e. they had reviewed not just the numbers, they had reviewed the correspondence with the regulator, they had reviewed the correspondence with the financial ombudsman, they had reviewed all of the internal audit reports, they had reviewed the compliance documentation with Ita Rogers, the compliance person, and in those circumstances they were confirming to the board that everything was appropriate and unqualified, so I have no issue whatsoever in terms of figures. I think it was, was it June 2008? There was a meeting between KPMG and the regulator, with nobody from the society actually present, and in that meeting KPMG confirmed it was a very simple business, all the numbers were in one place. I think they-----

But KPMG are saying there that there was little market and operational overview and salient financial commentary wasn't being provided to you in the board.

Mr. Michael Walsh

I think there's probably-----

So do you agree with everything KPMG says or just do you dispute that part?

Mr. Michael Walsh

What KPMG are saying there, and I think you possibly misinterpret-----

Mr. Michael Walsh

You know, they're talking about the market and the market background. They're not talking about the society's numbers. And, you know, from time to time, and not on a continuous basis, we were getting, you know, economic commentary on the property markets, etc. But, you know, you have to put this into context ... Irish Nationwide was the institution that actually went to the regulator before everybody else and actually saw where the world was and basically warned the regulator. Now, you know, eight or nine months later somebody was saying, well, you know, you need to be aware of the market, you know. We had actually told, and it has nothing to do with structure of documents or otherwise ... the board was fully aware of what the situation was. And, if I contrast that, say, with you know-----

Okay. That's fine, if you're satisfied that you were fully aware. As to the commercial lending business when it particularly grew, were the levels of impairment and the changes in accounting rules clearly articulated to the board to fully appreciate the risks that your institution was taking?

Mr. Michael Walsh

Sorry, I think if you're talking about the changing in the accounting standards, that was a matter of, you know, discussion both at the board level and, indeed - I can't remember which year it was now - but at the annual general meeting following the change one of the members, who was obviously kind of very financially literate, started to actually ask questions in relation to that. I expressed the view, as chairman of the society, that I didn't think the changes were appropriate but, you know, the changes were the changes. They were the rules and the society had to implement them.

What about the impairments?

Mr. Michael Walsh

Well, you know, my recollection is that the society actually had higher levels of provisions, some of which it actually had to release as a result of that. But, I think, you know, if you actually go forward to ... whatever, kind of ... September of 2008, the society estimated what the worse case was going to be for the 2008 year in relation to impairments or provisions and was absolutely spot on in relation to that. If you contrast that with, say, the other society, the other society, in July of 2008, you know, had estimated-----

We're not interested in the other society at this point in time.

Mr. Michael Walsh

I understand that but I-----

But, your pointing isn't going to help anyone in terms of-----

Mr. Michael Walsh

Sorry, but you're talking about awareness and-----

Mr. Michael Walsh

----in July 2008, the other society estimated that for 2008 they would need provisions of €5 million.

Mr. Michael Walsh

When their accounts were actually published they had provisions of €110 million.

Mr. Michael Walsh

That's the point. Knowledge and-----

And, the provisions that you were providing was .... at 2008, was?

Mr. Michael Walsh

It was actually 5% of the book.

Which was a total of what?

Mr. Michael Walsh

It would've been about €450 million.

€450 million and within, what, 16 months, 12 months it went to €5.4 billion. Would that be correct?

Mr. Michael Walsh

Well, no, it wouldn't be correct but we can come back to that.

Okay. Can I ask you in relation to the Central Bank's findings? This is in relation to your role on the board. It talked about, under its own internal policies ... and it's reviewed 110,000 documents here ... it's not ... it's an intensive investigation and I presume it's based on evidence on looking at the documents. It says, "Under its own internal policies and procedures, INBS was required to provide certain reports relating to commercial lending and credit risk management to its Board of Directors." It goes on to say, "INBS has admitted to [...] internal systemic failure[s]." I want to go through some of these. Reports on exceptions to commercial lending policies, it says that such reports would have given the board an insight into an overview of the extent of commercial lending, which was outside the scope of the lending policy. Did you get those reports between December 2005 and September 2008?

Mr. Michael Walsh

I think one of your other witnesses - I think, in written evidence - set out what the purpose of an exceptions policy is. The purpose of an exceptions policy is to make sure that decisions actually come up the line rather than actually stay down the line. The purpose of an exceptions policy - because these are board policies, they are not enshrined in rules or regulations, Central Bank or society rules ... they are board policies and, so, the purpose of those exception policies is to ensure that if somebody wants to do something which is outside a very sort of defined box then it has to come to the board for approval. Now, you've already heard that, you know, everything above €1 million had to come to the board for approval.

No, that's not an exceptions policy; that was actually a policy that everything above €1 million had to go to the board for approval. An exceptions policy is where it would be an exception to the credit policy of the bank. The question quite clearly-----

Mr. Michael Walsh

But, sorry, you don't understand the exception policy. A policy is actually set down for, let's say, hotels. The maximum kind of debt is going to be, you know, whatever it happens to be in terms of percentage, interest cover, etc. Now, what happens is you have that ... if it doesn't actually comply with that, even if it is, you know, a small loan, it has to come to the board for approval because it's outside the normal lending.

Yes. You still haven't answered my question and it's only the first of a-----

We'll move to the supplementary-----

There are four parts I need to ask you in this here so let's just focus on the question. Under your bank's own policies, exception policies had to come to the board in reports.

Mr. Michael Walsh

Absolutely.

The Central Bank has found-----

Mr. Michael Walsh

No, sorry, the board was looking at every single loan above a certain level.

Yes, and exceptions.

Mr. Michael Walsh

So the board was fully aware of what loans were actually being made.

That's not the question that I'm asking you. In terms of exception policies, it says the Central Bank has found that INBS was required to provide certain reports. It's saying that between December 2005 and September 2008, the reports in exception to commercial policies ... these were one of the findings that was not happening. It said such reports would have given the board insight. So the question I'm asking you is did the board receive these reports in relation to the policies, the exception policies that were taking place within the bank?

Mr. Michael Walsh

But I've said to you ... the board was looking at every single loan. The board had full insight into what loans were actually being made and what they actually involved.

So do you reject this finding of the Central Bank?

Mr. Michael Walsh

Absolutely.

Absolutely. Okay. A-----

Mr. Michael Walsh

I mean the-----

-----quarterly review of commercial lending ... again, within the policy of the bank, the board should have received a quarterly review of commercial lending for five quarters between 2005 and 2008. The review would have given the board information, among other items, on large exposures, sectoral and geographical profile and commercial loan books. Do you accept that in the five quarters between that period, that you did not receive, or the board did not receive reviews on commercial lending?

Mr. Michael Walsh

I mean, the quick answer is I can't actually confirm whether we did or we didn't because I don't remember what happened on a quarter-by-quarter basis.

The results of the annual credit risk stress testing. This would have facilitated the board in accessing INBS ability to withstand potential loan losses.

Mr. Michael Walsh

Sorry, when you come to stress tests, the reality is there were stress tests done in 2006, there were stress tests done again in 2008. And the answer in relation to both of those stress tests is the society passed with flying colours. And the reason it did was because it had a very high level of capital and a very high level of absorption capability.

Okay. The question wasn't that. The question was the ... again the point is that under the internal policies and procedures of Nationwide, the annual credit risk stress testing was required to be presented to the board. The question I had ... as a board member, as a senior member of the board, what were you doing to ensure that that happened, because they have found that this was not happening and this would have facilitated you, if it was happening, to assess better INBS's ability to withstand potential loan losses?

Deputy, we do need a question to wrap up.

The question is ... was ... do you dispute this or were you actually, do you accept this or were you actually receiving the credit risks stress testing annually, as was required?

Mr. Michael Walsh

You know, I mean, what I'm saying to you is that by definition, I cannot remember at this stage, you know, when we got stress tests and when we actually didn't get stress tests. I am equally aware of the fact there wasn't sufficient stress testing done but I'm also telling you that even if every stress test was actually being done on Central Bank guidelines or otherwise, the society would have passed with flying colours. There was a very detailed stress test done externally in 2008. There were internal stress tests done and on Central Bank guidelines in 2006. And in both cases, the society passed without any difficulty.

Deputy, you're over time now.

The last part in this here.

Deputy, you should wrap up.

The report on compliance with geographic concentration risk limits. Again, the Central Bank finds that these reports again in ... contrary to the policies of the institution weren't being provided to the board. Do you accept this finding or not?

Mr. Michael Walsh

No. I mean, the society was fully aware of where, you know, the loans were in terms of geographic-----

The reports ... not being aware. Let's be clear in what we're talking about here. A report was required to be provided to the board of directors on compliance with geographic concentration risk limits. This wasn't about being aware of something, it was about a physical report being distributed to board members that the chair should ... obviously to ensure that the board members were fully aware, as the Central Bank have said, about the risks in terms of concentration, geographic risks and so on in terms of the commercial loan portfolio. Was there reports provided to the board as required within its internal policies and procedures?

Mr. Michael Walsh

I mean, the quick answer is, at this remove, I couldn't tell you. I think you're meeting the finance director later so you can ask him. However, having said that, I think every single person on the board was fully aware of where the society was concentrated. In Ireland it was concentrated-----

Deputy, you're concluded. Just to finish, Mr. Walsh, and we're moving on.

Mr. Michael Walsh

It was concentrated in Dublin and Cork, and in England it was concentrated primarily around London and the south east.

Thank you.

To clarify, an earlier question-----

Deputy, you have to wrap up.

I can take it if you send it up to me as a supplementary towards the end, but I do have to bring your questioning to an end. Senator Sean Barrett.

Thank you, Chairman, and welcome to our visitor this afternoon. Project Harmony - the report notes:

The overall approach to risk assessment would not be described as highly developed given that the Group continues to rely heavily on the Managing Director, does not have sophisticated IT systems and operates across a limited range of products. The modus operandi would be described by management as fit for purpose, particularly given the degree of Board oversight on the lending approval process.

Was that an appropriate structure to have for an advanced institution which had a balance sheet of €16 billion at the end of 2007?

Mr. Michael Walsh

I mean, the quick answer ... yes, it was entirely appropriate. The society actually had a very simple model. You know, it wasn't, you know, a complicated business like, you know, the high street banks - the pillar banks, as we describe them today. It, you know, was, for all practical purposes, a small building society. It wasn't trying to offer complicated products. It was focused on a particular area where it had its expertise. You know, it didn't have a whole series of, kind of, treasury risk issues, which would have been, you know, potentially, kind of, an issue in some situations. You know, it was not trying to develop an esoteric set of products to market to its members. You know, its mortgages were completely plain vanilla. It was very straightforward and very simple. I think the point that KPMG are actually making there, which is a completely valid point, is if the buyer who took over the society wanted to actually build, you know, the equivalent of, you know, a high street bank or a pillar bank, then they would obviously have to change the systems to cater for that. So, while the systems were appropriate for the society, you know, it was clearly recognised that, in the context of an organisation where somebody was going to develop the retail side as opposed to the commercial side, that investment would be required both in the systems and, indeed, in the branch system.

We've had witnesses and with ... in documents about who saw this happening and you said that many people didn't. Well, a number of your colleagues did. Professor Niamh Brennan saw it happening from the board of the Ulster Bank, that there was a property crisis going to happen in Ireland. Morgan Kelly, of course, most famously. Have you discussed with either of them their ability to see that we would end up investigating here a €64 billion bill to the Irish Exchequer?

Mr. Michael Walsh

Well, you know, Professor Brennan I know well, Professor Kelly I don't know. Sorry, but at the time, I think, when Professor Kelly, you know, published his report or his paper, which would have been I think, was it the May-June of 2007 - I can't remember the precise date - you know, I think there would have been a phenomenal amount of comment in relation to his views at the time. And, you know, his views were a legitimate view, I think, in relation to, kind of, house prices and what might actually happen but I think it is fair to say that, you know, he didn't foresee the depth of the problem or the speed of the problem. Obviously, you know, in the context of Professor Brennan, you know, a very capable individual, but I mean I think the reality is that, you know, as I've said earlier, the rate of growth and the continuing growth in property and property lending was actually higher in-----

Sorry, Mr. Walsh, we will be back to you in a moment.

Mr. Michael Walsh

No problem. Sorry, I mean, I think, you know, Professor Brennan will actually tell you, you know, they didn't anticipate, you know, the, kind of, downturn any more than we did. Whatever about her own view, certainly, the reality is, as I think you know, over that period of time, you know, Ulster Bank would have actually grown at a higher rate, a substantially higher rate, than the society and indeed, you know, at a faster rate than EBS and a faster rate than ILP.

And David McWilliams ... in that category also?

Mr. Michael Walsh

Absolutely, I mean, I gave credit to Mr. McWilliams earlier. I think he was the one person who, at an early stage, saw the problems. Obviously, I regret at this stage that I didn't spend more time, you know, kind of, listening to his views or thinking about his views but, you know, the practical reality is I didn't.

You mentioned the stress tests. Were they adequate at all to measure loan-to-value, loan-to-deposit, the massive appreciation of property prices in Ireland in excess of any other jurisdiction that The Economist was publishing the data on?

Were we measuring the wrong thing in stress tests?

Mr. Michael Walsh

I think collectively we actually were, in a sense ... not that we were measuring the wrong thing but we were measuring the wrong magnitude. I mean, it's very clear, as I said to you earlier, the society should have had an absorption capability of about a 45% or 46% decline in property values. Unfortunately, the actual decline in many areas was higher than that.

You mentioned your contacts with the regulator at some stages on a daily basis, but the volumes we have show, for instance, in Vol. 2, 56 recommendations from the regulator to INBS on 20 November 2006, seven more actions required as late as 7 March 2008 and right through the decade - I think it's in Honohan as well - the INBS seemed to be the most difficult of the financial institutions in dealing with the regulator. There are mountains of correspondence about how unsatisfactory they found things.

Mr. Michael Walsh

Yes, and, to be honest, I have found some of that difficult to relate to, obviously because as I said to you earlier, I had pretty continuous contact with the regulator - obviously more continuous at different stages than others - and there were issues that were there and all of the issues that were brought to the attention of the board, directly or indirectly, in relation to the regulator were actually, you know, set out in a work programme and actually addressed to.

Do you think the society was solvent on the night of the guarantee?

Mr. Michael Walsh

I absolutely do and I think, you know, the reality is there is a very clear e-mail which is, as I say, the one that went from - or was forwarded from - Mr. McDonagh to the Department of Finance which sets out very clearly that the society has €3 billion of cash, that the outflows at that point in time were €30 million and that in the context of where they were that night, the society ... there may be a need, I think, in his words - I have them somewhere there in the e-mail - there may be a need to have a contingency plan for December 2008 but equally well, it may not be necessary.

The final one. Did you have secret discussions with ILP - it is mentioned in the Fingers book - unbeknown to Mr. Fingleton, about a sale to ILP?

Mr. Michael Walsh

I think it's probably fair to say that I didn't have secret discussions with anybody without the knowledge of the board and the board would have included, obviously, Mr. Fingleton. In fact, I think it was actually Minister Lenihan - to be honest I can't remember whether it was Minister Lenihan or the regulator - would have actually encouraged all of the institutions to look at all possible combinations to see what could be done.

Thank you very much. Thank you, Chairman.

I have had a request for a short comfort break. We'll do that for five minutes, returning just before 4.55 p.m. if that is agreed. Is that agreed? Agreed. Just in doing so, I would just remind the witness that once he begins giving evidence he should not confer with any person other than his legal team in relation to the evidence or matters that are being discussed before the committee. With that in mind, I suspend the meeting now until 4.55 p.m. and remind the witness that he is still under oath until we resume. Is that agreed? Agreed.

Sitting suspended at 4.48 p.m. and resumed at 5.05 p.m.

We're going back into public session. Sorry for the delay, Mr. Walsh. In doing so, I'll now ask Deputy Eoghan Murphy. Deputy, seven minutes.

Thank you, Chairman, and thank you, Mr. Walsh. You're very welcome. Did you see Brendan McDonagh's evidence to the committee?

Mr. Michael Walsh

I saw some of it; I wouldn't have seen it all.

Because he said that his view on the night of the guarantee was that the society was insolvent - "a broken institution" he called it. So what did you make of that or, if this is the first time you are hearing it, what do you make of that?

Mr. Michael Walsh

I mean, to be blunt about it, I'm absolutely astonished by his evidence, or at least by that statement, because, you know, it was he who actually sent the e-mail to Mr. Beausang in the Department of Finance, effectively, that day, saying the society had €3 billion and that the outflow from the society at that stage was €30 million, so a multiple, because the reality is that once the guarantee level had been increased to €100,000, the outflow from the society in terms of deposits actually went down dramatically. I think in the earlier part, before that increase, there was substantial outflows which would have caused serious concerns in the middle of September. Once, I think it was 20 September that the increase in the guarantee went to €100,000 that largely stopped. As I said, the specific e-mail, which, as I say, was sent from McDonagh to Beausang, says the society has €3 billion, the outflows are €30 million. They are, for all practical purposes, in no immediate need of cash. They may have a need in December and they may not. Now, if somebody is saying they have all the cash they actually require, there is no short-term problem, they have potentially an issue coming up in December but we don't know at this point in time, they may or they may not, I would have said it was pretty much irreconcilable for that and an insolvent situation to be put together. I just can't rationalise it, to be honest.

Okay, just to clarify that, essentially you think that the interaction that you had with the NTMA at the time contradicts the evidence then that Mr. McDonagh gave us in terms of his view at the time.

Mr. Michael Walsh

Sorry, I think I left it up in my bag but, I mean, there is a very specific e-mail which says, you know, and, as I say, this is going from McDonagh to Beausang, saying, "The society has €3 billion in cash and its outflow is €30 million and it has sufficient cash at the moment. We may need to consider a contingency plan for December". So, on any basis, at that point in time, it was absolutely solvent.

Okay, thank you. If I could then move on to the Project Harmony report. From 2003 to 2006 the society's loan book trebles-----

On that note, I'll just ask if Mr. Walsh, at the end of today's proceedings, could furnish the referenced e-mail to the committee.

Mr. Michael Walsh

Sure.

Thank you.

The loan book trebles from €3.4 billion to €10.7 billion, driven mainly by commercial lending, as you know.

Mr. Michael Walsh

Yes.

Yes. Given the facts in the Harmony report and what we have seen about there not being a highly developed approach to risk assessment or a sophisticated information system, I mean, is that growth rate prudent or sustainable?

Mr. Michael Walsh

I think whether it is prudent or sustainable, at the end of the day, are two separate questions. I mean, no loans were actually made which the society didn't deem were actually prudent. Would it have been sustainable going forward? I think the reality is almost certainly no and we all know, with the benefit of hindsight, it wouldn't have been. Clearly, those people who were interested in actually buying the society at the time and I think, you know, you have the names of a number of them, all believed the society was actually a good model and, you know, had good potential.

"Interested in buying the society" but let's look at this idea of prudence. I mean, if they're saying that you do not have a highly developed approach to risk assessment, how can you judge the risk or a prudent decision?

Mr. Michael Walsh

Sorry, how do you define a "highly developed approach" in the context of the type of business the society was actually doing? I mean, the society actually had a very simple business. It didn't need overly sophisticated systems or overly sophisticated tools.

Why would the report note this then? Why would this be picked out an issue?

Mr. Michael Walsh

Because I think, very clearly, because in the event that the society, or whoever acquired the society, was going to diversify into other areas, they would have to consider the investment. I mean, the purpose of these reports is to say, "Look, this is what an organisation actually looks like.

If you're coming in to buy it, this is what we're representing to you. So, if you're going to come in and buy it, to do what it's doing at the moment, that's one thing; if you're coming in to buy it to do something different, then you're going to have to make changes."

Okay. So the relevance of those points, as in Project Harmony, relate to if the buyer decides to diversify out of what you see as a very simple banking function up to that point in time.

Mr. Michael Walsh

Yes, but even KPMG, I think in 2008, described, you know, the operation - sorry, the society - as a very simple business. It was all in the one sort of place, you know, very straightforward. So, yes, it was straightforward and simple. The reality is it was concentrated in property and whether it had been residential property or construction or commercial, you'd have had the exact same writedowns if you decided to mark to market everything in 2009.

Okay. The final area I want to look at in the limited time I have is coming back to the regulator. Because one of the titles ... subheadings in your written statement is "Lost Opportunity". You talk about the society reversing the engines before any other institution. So, when you decided to make that ... when you made that decision in December 2007 and the regulator at the time was doing the five by five, large exposure-large debtor connections in the individual institutions ... so it had some awareness of the liquidity crisis that was developing in Irish banks. But you brought this to the regulator and said, "We're making this decision out of prudence because we're not sure about the next year for Irish banking." And then what happened on the side of the regulator?

Mr. Michael Walsh

I would have said, "Very little." Sorry, I mean, clearly there was correspondence during 2008, and to a degree, I suppose, I always wondered whether it was an element of, you know, shall we say, kind of moving the deck chairs. You know, there was a problem that was actually systemic across the country. I mean, it should have been obvious for over a year, but it was a systemic problem. It wasn't a problem with one institution or some small number of institutions. I mean, those 2006 stress tests were saying 88%. So, by definition, all the pillar banks had to be gone at that point in time. It should have been an extraordinarily worrying situation for any regulator or central bank. Now, very clearly, you know, liquidity was an issue that they were focusing on. I mean, I think we've actually heard that the domestic standing group, you know, was putting in place contingency plans from the beginning of, I think, 2008.

But I kind of can't actually reconcile, you know ... I mean, I went back to the regulator, as you know, in May. There was other correspondence in between but primarily in May. And I said, "Look, you've got to take a leadership role." You know, you had AIB there and with due respects to AIB, they were actually sort of saying, "We can't stop lending because, you know, we'd lose market share." The society was taking a decision, "Look, it may mean we lose market share but this is the right thing to actually do." Now, from the regulator's point of view, they should've seen that if it was the right thing for us to do, it should've been right across the system and yet, you know, you find, I think, there was €3 billion in property and construction lending by AIB during 2008. It just ... I mean, I don't ... and, sorry, I need to be very clear: I do not believe that all of the damage or anything close to all of the damage could've been stopped at that stage. We were-----

Back to you, Deputy.

Mr. Michael Walsh

Sorry. We were too .... you know, at that point in time, you could have mitigated, and I don't even know what you could have done to really kind of sort it out. But the problem was if you really think about it, you get to September 2008, you've employed Merrill Lynch a week before the night of the guarantee and you're asking people who've been there for a week to advise you on the future of the country. We should've never got to that situation.

Thank you. It's just then my final question. So, in your view, did the Financial Regulator ever take that leadership role?

Mr. Michael Walsh

Sorry, I think it's very clear. I mean, you know, you have my written statement in terms of my direct quotes as to what they needed to do. Because from the society's point of view, I mean, it actually was a decision we had taken. We recognised the implications of it but it was also clear that there were competitive pressures still going on around the place. People were trying to actually suggest there was instability around and they were doing that obviously for competitive advantage because if money left the society, it was going to go to one of the larger institutions, but ... or, indeed, Northern Rock, which was actually seen as guaranteed by the UK Government at the time. But the only way you were going to stamp that out or really get ahead of the curve was actually by the regulator - or not necessarily the regulator; the regulator, the Central Bank, the Department of Finance, whoever - actually taking a real role in terms of trying to deal with the crisis.

Thank you, Mr. Walsh. Thank you, Chair.

Thank you. Senator Michael D'Arcy.

Thank you, Chairman. Mr. Walsh, you are welcome. Did you watch Mr. Fingleton's evidence?

Mr. Michael Walsh

Some of it.

Some of it.

I would think you got sight of his opening statement.

Mr. Michael Walsh

Yes, yes.

Mr. Fingleton said that no one bank could prevent the bubble. Did INBS and Anglo create the bubble?

Mr. Michael Walsh

Absolutely not. Certainly ... I can’t answer that question in the context of Anglo but in the context of the society, it had no role in creating the bubble.

Mr. Michael Walsh

None at all.

It didn’t participate in the bubble at all.

Mr. Michael Walsh

Sorry, "participation in" - you know, anybody who was involved in property, by definition, you know, was in some way participating in the bubble. The question you asked was did it create the bubble-----

Create the bubble.

Mr. Michael Walsh

-----and, you know, there was nobody I would say actually sort of saying “Well, there's this minnow over here we have to try and follow them”. You know, clearly, the performance of Anglo, which was very public, very successful, but was actually a very different model to the society. I mean, Anglo was entirely focused on commercial lending from day one. It had no natural deposit base. It was highly dependent on, you know, both the commercial deposit base, it was highly dependent on the interbank market, it was highly dependent on corporate bond issues. So, you know, the society was in a much different situation. It was much more liquid and had much less gearing. I mean, the gearing ratio in Anglo is over twice the level it was in the society. When I talk about gearing, I'm talk about loans to actual capital. So, you know, they were very different. But to go back to your original question is, you know, by definition, no one institution can create a bubble. I think, you know, some institutions have said "Well, we were out there playing follow the leader, we weren’t thinking for ourselves". Certainly, nobody was playing follow the leader with us. The society was, as I say, the minnow. Over the period, you know ... and the worst of the property crisis obviously was in Ireland ... over the period 2003-2008, I think the society lent a total of about €2.5 billion into the Irish market. You know, as I said to you earlier, in 2008 alone AIB actually lent more than that into property and construction.

But, Mr. Walsh, all of the institutions were concerned about market share and not just you but the others have all said that they were prepared to fight for their share of the market. And it also seems to me that, over that period, that it wasn’t just organic - it didn’t just start and be created - that there was a plan in place going back to demographics, and Mr. Fingleton touched upon it earlier, of the late ’70s ... that children born in the late ’70s would require loans and housing from the noughties onwards. Your ... the institution that you chaired was ... cost the most in terms of the money that was State required and you're saying to me that no one institution can create a bubble.

Mr. Michael Walsh

Well, sorry, absolutely, I'm saying no one institution created a bubble. I think the reality is, you know, if you look at market shares, you know, first of all in total market share, obviously, you know, basically Anglo increased its market share and AIB and Bank of Ireland decreased. But if you were to actually look at it in terms of ... instead of kind of the total lending, if you were to look at it in terms of, kind of, property and construction, you'll find that, you know, the two big lenders into property and construction in this country were AIB and Anglo. Bank of Ireland is less than half of either of those.

If I could move on please, on page 8 of your opening statement you made what I find an astonishing statement, Mr. Walsh. At the top of the page, first paragraph, you know, you speak about the Central Bank-Financial Regulator and you say:

Contrary to some of the evidence that has been given to [the] Inquiry the [Central Bank-Financial Regulator] was far from toothless and where it had an issue, it was my experience that it had no hesitation in using its powers, albeit not always, in my view, in a sensible fashion. One such instance is when the [Central Bank-Financial Regulator] approved a reduction in the Society’s deposit ratio in June ['07] which would have facilitated substantial lending growth, had the Society not subsequently decided on its own initiative to curtail lending.

Is that not your job and the chair of the board and the executive of the institution in question, INBS, to curtail lending in a prudent manner?

Mr. Michael Walsh

It is absolutely the job of the board to make that decision.

Are you suggesting there that the Financial Regulator and the Central Bank should have put in those deposit ratios to force you to curtail lending?

Mr. Michael Walsh

Well, no, what I'm actually saying is, first of all, and to be absolutely clear, you're perfectly right; it is absolutely the board's decision as to what it should actually do-----

Mr. Michael Walsh

Sorry?

Mr. Michael Walsh

With lending or, indeed, with the business. I mean, subject to, obviously, kind of, appropriate ratios, prudence, etc.

Well, I ... I suppose what I'm trying to pursue here-----

Mr. Michael Walsh

No. Sorry, I understand what you are trying to pursue, but I want to actually give you ... for the balanced answer. You know, if Central Bank or the Financial Regulator, in terms of looking at the total market, was of the view that the market was becoming unstable, then it should not have done anything which would have facilitated additional lending by any institution or by all of the institutions. Second thing I am saying to you is if the Financial Regulator or, indeed, the Central Bank had serious concerns in relation to the lending, lending practices or the governance, then instead of actually approving something which would facilitate additional lending, they should have actually rejected it. So, what I'm saying to you is, two actions: if they believed there was instability in the market they should absolutely not have actually allowed it and, secondly, if they believed the society wasn't being properly run, if its lending policies weren't sensible or if its lending decisions weren't sensible, then they should not have done anything to facilitate growth. They should have been saying the opposite.

Okay, but can you just clarify for me, please, who has primary responsibility in relation to lending? Who should have curtailed lending?

Mr. Michael Walsh

Sorry, as I have already said, primary responsibility, obviously lies with the board, and the board was the group that took the decision.

Mr. Michael Walsh

Having taken the decision, it went to the regulator and said, "Look, we've taken a decision and this is why we have actually taken it". But we were taking it because of our perception of what the domestic and global banking market was like.

If I could just move on-----

Watch your time there, Senator.

Yes, just ... just a bit of time there, please, Chairman. Page 19, you state, B5, paragraph 2, "The primary objective of the Society from the day I became Non-Executive Chairman was a successful sale of the Society to a larger institution." Now, Mr. Fingleton, in previous evidence, said that that wasn't the primary objective of the institution. Could you tell me if the sale had gone through during the tenure ... your tenure as chairman, would you have benefited? Would the board have benefited financially from the sale of the institution?

Mr. Michael Walsh

No. I mean ... very definitely, there was always a kind of a separation. You had, kind of, executive and non-executive directors and it would have been inappropriate for the non-executive directors to be beneficiaries. Management, I want to say management - the two executive directors, you know - and all of the management within the society would have expected to benefit and that would have been appropriate.

Okay, could you bring up Vol 1, page 68 and 69, in relation to the Deloitte commercial and residential lending review, May '08, please? The society reviewed its commercial and residential lending policies and I am speaking about the change of the policy, Mr. Walsh, in relation to the credit committee approval for all loans over €1 million were presented to the board. Subsequent to the change, the board's approval was no longer required. Why was this decision made and who initiated the proposal to change that decision, to change that process, in December '07?

Mr. Michael Walsh

The initiative to change it was actually something that came from the executive, obviously.

Sorry - the executive?

Mr. Michael Walsh

The executive. The executive director, sorry.

Not ... not the board? I think ... if I ... I think that was ... that wasn't said this morning.

Mr. Michael Walsh

Well, all that I can say is my recollection-----

Mr. Michael Walsh

We are dealing with ... whatever ... eight-nine years ago. But my recollection is it was-----

But sorry, Mr. Walsh, it's a very important-----

Mr. Michael Walsh

No, sorry, I understand that.

Mr. Michael Walsh

Sorry, I understand it is important and, you know, I think we should actually, deal with it----

Mr. Michael Walsh

-----but, I mean, I have to say my recollection is it was a proposal that came from the executive.

By the executive.

Mr. Michael Walsh

Yes. Now, you know-----

Was it Mr. Fingleton?

Mr. Michael Walsh

I actually believe it was the finance director who put the proposal to the board.

Mr. Michael Walsh

Mr. Purcell.

Mr. Michael Walsh

Because it would have been typically his role as part of being finance director to actually put the draft of policies together.

And can you clarify for me, please, would he have put that without the knowledge of Mr. Fingleton?

Mr. Michael Walsh

I ... I mean ... truth is you'd have to ask the two of them. I would be ... well, I'll answer-----

I have asked him and I will ask Mr. Purcell afterwards and I am asking you would it be likely Mr. Purcell would bring that to the board without the knowledge of Mr. Fingleton?

Mr. Michael Walsh

Well, I mean, personally I'd be surprised, but I don't actually know.

Okay. You'd be surprised.

Mr. Michael Walsh

But, you know, I think ... sorry, just maybe to put it in context, there is a danger always, in particular to that one item, that people kind of misunderstand. What the society had actually being doing was requiring that the board actually take every single decision.

When I say, take every single decision ... probably a slight exaggeration, but, nonetheless, there was a view around at that point in time that actually that wasn't appropriate and that really what boards should be doing is being notified. So, it is not that they are not aware of what is actually happening but that they don't actually make the decisions. Now at that point in time I think if you looked at most other institutions, boards were actually being notified above certain thresholds but boards weren't actually taking decisions and that was the view that was taken as being appropriate.

Wrap up now, Senator.

In your opinion, was the relaxation in the lending criteria appropriate, particularly given the Financial Regulator's ongoing concerns regarding commercial property, lending control and risk management within the society?

Mr. Michael Walsh

I suppose the truth is I don't actually believe that the criteria or the decision making actually changed over the time period. Every single loan that was made, that certainly any one that I was aware of, was always made on the basis of proper consideration. We had a very simple view. We were there, we were trying to make money which would effectively be there for the benefit of members of the society, to strengthen the society and keep it, you know, developing.

Okay, thank you very much, Senator. Deputy Kieran O'Donnell, seven minutes, Deputy.

Mr. Walsh, Vol. 2, page 57 and 66, which are the credit committee's ... there were reviews done by the internal audit ... and it speaks about two reviews, one in July and one in December ... sorry, in January, respectively, two six month periods in '08.

Mr. Michael Walsh

Yes.

The committee is ... the conclusion really that arises is that the committee is not meeting with enough frequency to fulfil all its duties. We had Mr. Fingleton in this morning and he said he had the delegated powers from the board that he could approve and grant loans without prior approval of the board. Is that correct?

Mr. Michael Walsh

There was a situation where ... and I think it is actually referenced in the Project Harmony, if there were exceptional circumstances and a decision needed to be made shall we say, kind of, some weeks before a board meeting, as opposed to, you know, right before, then he had discretion provided, he had, I think, sign of from ... I can't remember was it one or two other people.

How frequently did this happen, Mr. Walsh?

Mr. Michael Walsh

Well, certainly, as far as I am aware, very seldom. You know, in the Project Harmony, it is actually stated as being very rare.

You were chair of the board for nearly a ten-year period so during your tenure?

Mr. Michael Walsh

During my tenure I don't think I was aware of any time where shall we say, a decision had been made and money had been advanced before it came to the board.

And do you believe that you were independent of the board ... independent of the CEO ... or was the board just rubber-stamping his decisions and loans?

Mr. Michael Walsh

Personally, I would say I was completely independent. I was very conscious of the need for independence. I never borrowed a penny from the society. I never was dependent on the remuneration in any fashion, I wasn't part of the social circle of either Mr. Fingleton or, indeed, any of the other non-executive directors so, you know, I certainly preserved my independence. I believe the other non-executive directors preserved their independence.

Did you have a discomfort with the fact that you'd Mr. David Brody ... Brophy ... was brought onto the board in '05 and in 2007 he became chief operations officer with Ballymore Properties which were the single biggest client that Irish Nationwide had ... that he remained on as a director? Did you have a concern with conflict of interest in that?

Mr. Michael Walsh

I mean, let's be absolutely clear. Mr. Brophy joined, as you say, or was approved to join the board in, I think, probably October or November of 2005. He was an excellent appointment with great experience in Smurfit. In, whatever it was, August 2007 he was invited ... I gather he'd been introduced to Ballymore by Dr. Smurfit and he was invited to become ... I am not sure whether it was chief executive or COO of Ballymore. The board was fully conscious of its relationship with Ballymore and the potential conflicts of interest that that could give rise to.

So the board actually met without Mr. Brophy actually being present and discussed what actions had to be taken to ensure that, you know, that conflict of interest didn't emerge. The board resolved that, you know ... I'm sorry, I should say this was cleared with the regulator at the time but the board actually resolved that obviously he shouldn't be present for or participate in any lending decisions that related to Ballymore and, indeed, where there was potentially a competitive element, that he should not be party to anything. When I determined in December of 2007, some three months later, that the society needed to reverse directions, I got absolute and complete support from Mr. Brophy, despite the fact that that might not have been in the interests of Ballymore.

Can I go back? Your own background, Mr. Walsh ... how did it come about that you were invited to become the chair of the board of Irish Nationwide Building Society in 2001?

Mr. Michael Walsh

I suppose, you know, I think, as a number of people have alluded to, you know, for better or worse, I was, kind of, an academic who was interested in markets and market structures, you know, back in-----

And were you working in academia at the time?

Mr. Michael Walsh

No, no, sorry. I need to give you a kind of brief bit of history to be honest. So, you know, what actually happened then, I think probably one of the last, you know, or almost a transition piece of work that I had actually done, having looked at the, kind of, financial markets and where they were actually going was, I suppose, I would have had a view that, you know, the building societies were effectively going to get into difficulty, you know, because effectively from, roughly speaking, the mid-'80s, the main banks were coming into the traditional mortgage market. So I would've done a lot of work for the building societies, in total, in advance of the 1989 legislation. And then, you know, there was consideration given, I suppose, in '92 or '93 to possibly kind of merging the society with some larger entity, which ultimately was, kind of, one of the GE subsidiaries, though not at the time. And, you know, I did a paper for the board of Irish Nationwide. At the time I took a view. I would have had a very good relationship with the Central Bank at that stage. You know, the Governor of the Central Bank, Maurice O'Connell, was somebody that I would've known well, I would've worked closely with him during the time that I was advising the ... really the Department of Finance, in relation to the sale of Irish Life or, more precisely, the flotation of Irish Life. So, you know, I would've-----

And what were the circumstances that you came about? What post were you in? What was your job prior-----

Mr. Michael Walsh

Oh, I'm sorry.

-----to going onto the board of ... becoming chair of Irish Nationwide?

Mr. Michael Walsh

I mean, basically I had been, you know, through, kind of, well really from, whatever, kind of, 1986 on, when I left I left academia, I'd been involved in various types of corporate finance advisory ... so, you know, mergers and acquisitions, sales of companies, etc.

Who were you working with at the time?

Mr. Michael Walsh

I was working with NCB Stockbrokers or NCB Corporate Finance. Sorry, this was originally.

And in 2001 who were you working with?

Mr. Michael Walsh

Well, I mean, basically, sorry, I've continued to work with Dermot Desmond in different aspects since, you know, 1986.

And what were they ... just out of interest, what were the ... how did it arise that you were invited to become chair of the board?

Mr. Michael Walsh

I mean, I was approached by the board of Irish Nationwide.

Were you approached by Mr. Fingleton?

Mr. Michael Walsh

I was approached by Mr. Fingleton.

That was the CEO at the time.

Mr. Michael Walsh

That was the CEO at the time.

To be ... and that was in 2001.

Mr. Michael Walsh

No, sorry, that would have been '95.

So you went on the board in-----

Mr. Michael Walsh

Sorry, I became a non-executive director of the society in '95.

So you were a non-executive director from 1995 until 2000.

Mr. Michael Walsh

2001, yes.

2001. And how did you come about to become chair thereafter?

Mr. Michael Walsh

Well, basically the board collectively, you know, asked me to consider taking on the role.

So did you come on the board in 1995 in terms of advance of demutualisation or was it demutualisation from becoming chair?

Mr. Michael Walsh

No. I would say ... well, sorry, I mean, I had believed, obviously, from, you know, kind of, the late '80s and the early '90s, that there was a need for the society actually to be sold into a larger institution. You know, I didn't actually go away from that view and, you know, potentially, I wouldn't be sure but, you know, that may have been part of the reason they invited me onto the board.

And can I ... just two quick questions. What ... who would have been ... when ye were looking to demutualise ... two quick questions, why didn't you demutualise like other bodies where they demutualised, sorry, they went for the five-year period? Why did ye push so hard so that ye could demutualise overnight and who was the intended ... who would you have seen as your intended purchaser ... as a takeover ... to buy out Irish Nationwide Building Society at the time?

Mr. Michael Walsh

I mean, if I could separate the thing into, kind of, two components. You know, as I say, you know, the first time, you know, I got involved in doing a report for the society when I wasn't involved with it at all, you know, the proposed acquirer was effectively, you know, kind of the GE Woodchester-type grouping. And, indeed, you know, when ultimately, you know, the society became available for sale in 2007, you know, they became, you know, one of the potential buyers, you know, second time around.

You know, obviously there were approaches over the years but the practical reality is that nothing could be done because of, you know, the legislation of the structure in the absence of the Central Bank or the regulator deciding to exercise its discretion. You know, I mean, my view was that ... pretty clear and it is on the record, you know, my view was that the legislation should have been implemented in 2001 or 2002; it wasn't. My view post that was, you know, look, if the legislation is not going to be passed for whatever reason then you - the Central Bank - have discretion here, we should move on and actually do it. And, I mean, I remember the discussions at the time. It was, kind of, "Look, we don't believe there is, you know, any particular problem with the society. We don't think there is any question of stability. We do not think there is any question. We would only use that if we felt there was a problem and, therefore, we want you to await for normal legislation."

To answer your other question, which is, why didn't you just go the, let us call it the Irish Permanent route, the reality is, and I think you'd have heard from Mr. McCarthy, you know, First Active went what I would describe as the Irish Permanent route and, you know, discovered that it really wasn't a viable model for all sorts of different reasons. In the context of the society, the society was even smaller than First Active, I mean, substantially smaller than First Active. My view is that if the society had gone out, it would not have really captured any sort of shareholder demand or shareholder interest and it would have been potentially destabilising so I would have thought it was an absolute mistake to actually go out as a small institution into the markets. I think the right thing ... sorry, I mean, if you did that, okay, you know, you'd be there, you're quoted in five years' time but, you know, the uncertainty that you are creating for that five-year vacuum, you know, doesn't make any sense at all from, you know, a direction point of view or otherwise.

Two very quick questions.

Deputy, wrap up please.

Yes. The pension ... the €27.5 million pension fund of Mr. Fingleton. In 2007, where did the decision come about? Was that a proposal put forward by Mr. Fingleton to the board? Did ye consider it and why did you agree to allow it to be moved off-balance sheet and into the ... under the personal control of Mr. Fingleton?

Mr. Michael Walsh

First of all, I take it at a number of different levels because at the beginning of 2007, the society was expecting to actually complete its sale and one of the areas that is always problematic in any of these sales is valuation of pensions and pension liabilities. So here we had a situation where, you know, at the beginning of 2007, my recollection is that we got a proposal from the managing director, as was his right, to enable him to actually take, you know, the money from something that was directly on the balance sheet of the society or in a fund, as I say, noted on the balance sheet into an independently managed situation. From the society's point of view, it actually made complete sense. You know, if there was an actuarial liability there of whatever magnitude it happened to be then transferring, you know, the risks associated with that onto another individual made perfect sense. You know, I mean-----

That's fine.

Just a very tiny question. You've a background in banking. You're a seasoned individual in terms of finance. You were 14 years on the board of Irish Nationwide Building Society. During your tenure as chairman of the board, the commercial loan book went from €3 billion up to nearly €9 billion - the commercial loan book alone. At the end, €5.4 billion of taxpayers' money ended up going into Irish Nationwide Building Society. Do you accept that it was the costliest bailout of any Irish financial institution since the foundation of the State?

Mr. Michael Walsh

I think, Deputy, there are a number of things I would dispute within that, you know, and let's park the model for a second.

Do you dispute the €5.4 billion?

Mr. Michael Walsh

Sorry, absolutely. You know, I actually can't rationalise where some of the numbers have come from, I mean, I am not sure whose background is finance or accounting or whatever. But if I take the numbers of the society in very simple terms, you know, the gross loans from the society in the commercial area were about €8.7 billion.

Mr. Michael Walsh

Billion, yes. The own funds in the society at the time were about €1.5 billion, which leaves you with €7.2 billion.

That loan book was transferred to NAMA for €3.4 billion. So if you take those numbers, you are left with the maximum amount that the society could have cost, is €3.8 billion. Now any loss - and I should make this absolutely clear - any loss-----

You're assuming that the mortgage residential loan book has made no loss.

Mr. Michael Walsh

Well, sorry, first of all, I should say, absolutely, I am making an approximate assumption on that, which, obviously, is not correct.

Mr. Michael Walsh

But there are also balancing factors. The deposit book was there; it was actually sold. There was a liquidity-----

A deposit book does not bring about losses - profit or losses.

Mr. Michael Walsh

Sorry, it does bring about gains.

Very little, but go on.

Mr. Michael Walsh

Well, sorry, that actually depends and it depends on what was actually transferred. Secondly, there was a liquidity management exercise done of approximately whatever, you know, €300 million. But, all that being said, whatever the number - and there was a number there and nobody doubts that - no number is actually acceptable. I think the other factor that you need to take into account - but, as I say, no number is acceptable - is what was actually realised subsequently in the context of, you know, the loans that were transferred across to NAMA. I don't know the answer to that; I can only surmise. But, you know, as I said to you before, you know, in 2010 in April, you know, the board confirmed that they had done a very detailed analysis and come up with a valuation. Less than six months later they effectively, you know, reduced the value of those ... or accepted a value for those loans of-----

Finally, Mr. Walsh-----

Deputy, you have to finish. I'm not bringing in any more after this.

I will finish on this. The Department of Justice budget - this is an important point - the Department of Justice budget is €5 billion a year.

Is this your question, Deputy?

Yes. The question I want to ask is: what do you say to all the mortgage holders?

That's it.

No, but ultimately €5 billion ... you are disputing the €5 billion.

Mr. Michael Walsh

Sorry-----

The taxpayer has borne that to date.

Mr. Michael Walsh

Sorry, Deputy, to be absolutely clear, I have said in absolutely unambiguous terms that not a penny is acceptable, right? I have deep regrets that I didn't foresee the problems in terms of the global markets, in terms of liquidity, coming at least a year earlier where we could have avoided any problems. But you asked me in terms of, you know, the size of the actual deficit, and I'm pointing out to you that under any reasonable assessment the deficit could not have been that high. So I do not know what accounting games are going on. You are all ... a number of you are accountants. You can actually go back through the thing, but I mean, the simple reality is there were two sets of loans on those books there. There were the loans that were transferred to NAMA and there was the residential book. There was nothing else that would cause risk.

Thank you. Deputy John Paul Phelan.

Thank you, Chairman. Good afternoon, Dr. Walsh. I have a long initial question. I would ask you to bear with me, maybe. It concerns a number of quotations from the booklets that you would have been provided with. The first one is from Vol. 2, page 93, the KPMG report on review of the effectiveness of the internal audit function, "The existing internal audit function is not best practice ... In particular it lacks the depth of experience necessary to challenge the areas of key risk which include Treasury and Commercial Lending."

And then in Vol. 1, at page 163, I think, there is a letter from the regulator. It says that "the Society's internal audit department needs to build up its experience and training in order to perform reviews of key risk areas which are currently outsourced to a third party service provider." And then similar concerns are raised in a letter from the regulator in 2004. That is at Vol. 1, page 171, I think. The quote is, "The level of resources in this area are deemed to be inadequate ... The FSR has concerns with regard to the level of expertise and experience which exists in the IA function."

The Financial Regulator also expressed concerns in 2007 echoing, I suppose, their earlier expressed concerns. Can you explain how in this period, which stretches over exclusively - it's five years when you would have been the chairman of Irish Nationwide - that no apparent success at least appears to have occurred in addressing the issues that were raised by your external auditor, KPMG, and the Financial Regulator with regard to the internal audit function of the building society?

Mr. Walsh.

Mr. Michael Walsh

Thank you. I think, first of all, there were concerns about the internal audit, you know, going way back, which is why all of the non-executive directors actually participated in the audit committee. There was a letter, which is part of the books there, I think, on 9 December 2004, which actually specifically raises questions in relation to internal audit and actually requires that the society actually outsource the internal audit. What did the society do when it got that letter? Obviously, it reviewed it - reviewed it with the board, reviewed it with the executive, also reviewed it with KPMG. Based on the work that the society did with KPMG in 2005, the society actually developed a risk metrics, audit risk programme and also a, shall we say, decision matrix in terms of what work would be done internally and what work would actually be outsourced. I think the concern, you know, with Dr. O'Reilly in 2004 initially was that he was concerned that the individual that the society decided to appoint as the internal auditor didn't have enough background or experience, despite that fact that, I think, he had worked with PwC or Craigs or whatever it was in those days for about six years.

My time is short, and I'm not trying to cut across you, but, in 2008, KPMG were still raising this concern. You referenced 2004 and actions that you said took place. They're in 2008, in their management, are raising more or less the same concerns about building up the experience in the internal audit function.

Mr. Michael Walsh

Sorry, is this 2008 or-----

Well, 2004 was the first one. In 2005, actually the report by KPMG on the effectiveness of internal audit and in 2008 their management letter from KPMG, again on the internal audit department within the building society.

Mr. Michael Walsh

But I mean, to be absolutely clear, it was the society who actually got the internal audit review done in whatever it was, kind of, January or February of 2005, and it was KPMG who actually did that and KPMG worked with the society to determine what was the appropriate way forward. KPMG agreed certain things would be outsourced and certain things would be retained inside, and they took the view that the internal auditor at the time was somebody who was capable of actually doing the job and doing it very well. That discussion went on and, basically, from a situation where the regulator wanted everything outsourced, you know, the regulator ultimately agreed - and when I say "the regulator", Dr. O'Reilly agreed with the process and the way the society was carrying it forward.

Then, how do you explain the 2008 management letter?

Mr. Michael Walsh

Absolutely. When you come to 2008, you'll see that there is actually a reversal of directions because the reversal of directions is, you know, "We want you to build more expertise internally." So, we started out with a situation where the regulator says, "Everything should go external," and then, we, as a board, say, "Well, we have to develop the team and the management; you know, we have to focus on the things-----"

I don't think ... I think you're misrepresenting it slightly. I don't think they said that everything should go ... I mean, they were identifying a shortcoming which they felt could be addressed by an external solution more so than completely externalising it.

Mr. Michael Walsh

In 2004, sorry, they wanted a simple external contract and, in fact, I don't know whether it's in the documents there or not, but there is ... actually, that letter, effectively on, whatever it is, 9 December, and then there is another letter which comes from an individual in the regulator's office, I think about 10 January or 12 January, saying, "Has the society contracted out its internal function yet?" And, you know, needless to say, the society actually hadn't. The society was reviewing its response to Dr. O'Reilly's letter and doing it properly and professionally and coming up with what the society viewed as actually being appropriate. Now, I would have to go on and say that, you know, there is a lot of innuendo in some senses about the internal auditor. The internal auditor ... and, sorry, I don't mean from yourself, but just in the ether ... he was a very good individual who actually developed continuously over the years and, you know, as I said, there was a new board that came in for all practical purposes in early 2009. That internal auditor continued with the society as the head of internal audit for another, I think roughly, three years, until he decided to move to the UK.

Can I ask, and this is my final question, I just want to reference that book again, Tom Lyons and Richard Curran, Fingers: The Man who Brought down Irish Nationwide, the prologue, page 11, there's one quote I want to put to you.

Are you familiar with the book, Mr. Walsh?

Mr. Michael Walsh

No.

Okay. He's not.

Well, I'll put the quote to you anyway, as I think the quote is a general kind of ... I just want your comment on it. "It exposes for the first time the way in which Fingleton was allowed to operate at will around the board table of Irish Nationwide, despite the society being chaired by an eminent professor of banking and being regularly micro-managed by the state's banking watchdog." And we've seen, and others have referenced, letters from the regulator. Many might argue - and this is what I want to put to you - that you, effectively, you or your status as a leading academic in terms of banking, that it provided cover, if you like, for some practices that were identified by the regulator over a period of six or seven years, most of which you were chairman of the board of the bank, which identified serious corporate governance issues within the bank, which didn't appear over that six or seven period ever to have been successfully addressed. How would you respond?

Mr. Michael Walsh

I mean, first of all, obviously I don't accept the quote or the prologue or whatever, but if I'm trying to sell a book I'm going to write sensational things. If I actually look more realistically at things, you know, who did the regulator or the Central Bank or the Department of Finance choose to become the first chairman of the financial ombudsman's council? They took somebody who was actually the vice chairman of the society. Now, are you seriously trying to tell me that if the Central Bank or the regulator or the Department of Finance has serious concerns about the board or the governance within Irish Nationwide, that they would have appointed such a person as chairman?

Sorry, we've identified, more than any other institution over the period that we're investigating, letters from the regulator, specifically the first point in most of them was corporate governance issues, particularly focused, in fairness, around the role of the chief executive or the managing director, whatever he was called at different times, not specifically the chairman, but I think the point you're making is inaccurate in that sense.

Mr. Michael Walsh

No, because if you actually-----

No judgment. You can ask but just-----

Mr. Michael Walsh

Sorry, but if you were-----

-----be mindful of being judgmental, Deputy.

Mr. Michael Walsh

If you were looking at what were they looking for in terms of corporate governance, they were looking for two things. They were looking for additional-----

Mr. Michael Walsh

-----non-executive directors.

Mr. Michael Walsh

And they were looking for, you know, what I would describe as a chief operating officer, right. In terms of the non-executive directors, quite frankly, the conduct of the Central Bank and the regulator made it virtually impossible to attract people. It was only in, you know, kind of 2008, really, that it was possible because sort of game playing that had been going on at the annual general meeting for years, which the Central Bank could have cut out, decided not to cut out, made it ridiculously difficult to actually get people to join the board. I mean, who ... I mean, you're all used to elections, but the reality is within the business community, why would I put my name or reputation on the line to actually go into what was effectively a complete bunfight at an annual general meeting in terms of who would actually get elected? I mean if you go back and look at the conduct of those meetings, what was actually being required to be proposed, I mean, basically some of the proposals that were being required to be considered were to actually loosen lending standards.

And what about the second half of their concerns around the chief executive-----

Mr. Michael Walsh

The second half of their concerns. You know, obviously, you know, we had sought to appoint what I'll describe as a chief operating officer in kind of late-2001 and I brought him in ... when I say "I", you know, the society had actually brought him in on the basis of the fact that, you know, "The society is likely to be sold, you know, in the next year because we're expecting the legislation, so we're going to take you on and actually give you a kind of a contract that protects you."

Unfortunately, for many reasons we probably don't need to go into here but that's a decision for yourselves, that appointment didn't actually work out. Ultimately, there were requirements being imposed which the board couldn't accept. Consequently, the board had to decide then "How do we go forward?" And there were two ways to go forward. One was to actually try to strengthen the management team around in terms of depth or, two, was to try and actually generate a new focal point. My view at the time was you would ideally like to have got both. On the other hand, you cannot impose a single individual into an organisation and consequently, given that you can't impose, you're better off actually building the management team, or the engine room of the place.

Well, can you bring-----

Thank you, Deputy.

Would you be able to say what those requirements ... you said there were ... you didn't want to get into too much detail. What were the requirements that proved a stumbling block?

Mr. Michael Walsh

I'm not sure ... sorry, because in some ways-----

Sorry, I don't-----

Mr. Michael Walsh

-----the behaviour of the individual was not behaviour that I would have found appropriate.

Sorry, I didn't realise what you were ... that is fair enough.

Mr. Michael Walsh

Sorry, Chairman-----

Do you need a break?

Mr. Michael Walsh

No. I just ... "appropriate" is a terrible word to use because that has all sorts of connotations. May I completely withdraw that?

Mr. Michael Walsh

I was looking for what I would describe as kind of control systems that no board could accept.

Okay. Thank you very much. Deputy Michael McGrath.

Mr. Walsh, you are very welcome. Can I start by asking you about KPMG's annual statutory duty confirmation letters to the Financial Regulator for each of the years 2004 to 2007, inclusive? And they are in the booklets in Vol 1. And they note instances of breaches and errors in each of the sectoral returns, prudential returns and large exposures reports made by INBS to the regulator. Can I ask why, in your opinion, did these breaches occur and these errors? In your view, in view of the fact that the breaches occurred repeatedly over a number of years, were they indicative of systemic weaknesses in the control and reporting environment within INBS?

Mr. Michael Walsh

First of all, I think from the board's point of view it was a matter of extreme frustration that every single year there were issues that arose in terms of the reporting. And the board was clearly never happy with that. Equally well the board revisited that pretty much on an annual basis, particularly in relation to the LEx column - sorry, not the LEx column, the LEx report, sorry - because, you know, it was something that was obviously very important. And consequently there were new systems put in place, new control systems put in place. I would have to say that I would have thought round 2006 that we were getting the issue under control. But the reality is that a lot of them re-arose again in 2007, and again that from a board point of view was clearly unacceptable.

Now, having said all that, it was the society who actually identified each of the issues. And I suspect it was a mixture of the society and the regulator because there seemed to be - obviously it was an executive function, I wasn't close to it - but it seemed to be pretty much kind of continuous interaction between the society and the regulator in relation to that. But I think every year, I mean, what gave me comfort, as a board member, a member of the audit committee or the chairman, was the fact that every year KPMG confirmed to the board that the society had already identified the issues, had already reported them to the regulator.

Sure, but you accepted that there were repeated regulatory breaches, which the auditor-----

Mr. Michael Walsh

I accept-----

-----had to report.

Mr. Michael Walsh

Sorry, whether they were regulatory breaches or not, I am not sure, but certainly there were errors in those reports. They shouldn't have occurred; they did occur. They were of various magnitudes and KPMG felt at the time ... they were of the view that they should actually report them. I am not sure from some discussion I had with a KPMG partner whether all organisations did the same thing where they had already identified and reported them to the regulator.

Mr. Michael Walsh

But KPMG felt they had a duty and obviously we were completely supportive of them undertaking that duty.

Okay. Earlier today Senator O'Keeffe raised with you the Central Bank investigation which concluded in just July of this year. You didn't really engage in respect of that report because you said you weren't interviewed. Is that right? You weren't ... your views were not sought.

Mr. Michael Walsh

I frankly find it extraordinary that you can have an organisation who admits ... or which admits to, you know, a pile of issues between a period of 2004 and 2008 and the people who confirm that are people weren't there at the time. Therefore, you have to say they have simply gone on a documentary basis of some sort. Now, for anybody to come to conclusions without actually at least interviewing the people who were around at the time, I find quite extraordinary.

But that aside do you contest the substance of the findings?

Mr. Michael Walsh

To be honest, I haven't been through the substance of the findings and I've heard of some of them obviously. So, I would need to go through each and every one of them. Obviously, I think the people ... I think you've heard from the managing director, or the former managing director. I think he believes that he can contest every single one of the issues.

Mr. Michael Walsh

Whether you can or can't, I can't comment.

Well, you might have seen the exchange I had with Mr. Fingleton earlier on and the published statement by the Central Bank in July went through the seven different headings where breaches were identified, including the initial loan application stage, loan approval, taking of security, the role of the credit committee, and it goes on to say these breaches, admitted by INBS, are underpinned by evidence of more than 1,000 alleged instances of INBS breaching its own policies and procedures relating to commercial lending and credit risk management. How do you respond to that?

Mr. Michael Walsh

Sorry, well, I mean, first of all, I can't respond because, you know, without actually going through the evidence properly and going to see who did they actually talk to, who confirmed that these things actually occurred ... I mean, if you got a group of people in 2011 or 2012 or 2013 or, indeed, 2015-----

Mr. Michael Walsh

-----to confirm all of these things then, you know, they're going purely on the documents as they exist at this point in time.

So when they cite instances where there were no commercial loan applications prepared, where the situation is where applications were only prepared after the funds had been drawn down, you would never have encountered anything like that?

Mr. Michael Walsh

But ... Deputy, how could I have? You only-----

Well, I don't know. You tell me.

Mr. Michael Walsh

Well, sorry, as a non-executive director you're only going to see the documentation that comes to the board. You're not going to come ... see something that hasn't come to the board.

Right, but you would have a board pack and you would have minutes of the various meetings. Presumably, you would be entitled to ask for any document that you wished to see and which you felt was necessary to perform your duties as director.

Mr. Michael Walsh

Absolutely, yes.

Some of the contents of that Central Bank statement are extraordinary, and I would just put it to you, Mr. Walsh, that elements of it at least are backed up by the contents of the core book list that we have. I mean, if we look at the Deloitte report, for example, of May 2008, Vol. 1, page 51 ... or 71, in terms of the overall booklet, "No Credit Committee approval was present on a number of reviewed files [...] In many cases the Commercial Loan Application was approved by only one member of the Credit Committee, while at least two members are required under the terms of reference". Page 73, "In a number of instances no Board approval could be located [...] for loans which, according to the lending policy in operation [...], would have required Board approval." So, I mean, the Central Bank report didn't just appear out of nowhere from thin air. I mean there are-----

Mr. Michael Walsh

Sorry-----

-----evidence in the booklets of-----

Mr. Michael Walsh

Sorry-----

-----these issues.

Mr. Michael Walsh

But you've got to be careful in the context of, you know, were these material issues or were they actually normal issues. You know, I think you've heard from every single institution that there were what I would describe as, kind of, "back-office problems" from time to time. Now, you know, should they have occurred? Absolutely no they shouldn't have occurred, but if you go to Project Harmony, Project Harmony which, you know, was there to actually do a detailed review of the society for the purpose of a sale, you know, it identified in that, I think, one loan which actually hadn't been approved. Now, I have no idea what actually happened between the time that KPMG were doing Project Harmony and where we are today because, you know, there are two almost unrecognisable institutions.

In your experience as chairperson of the building society, was there ever a situation that you came across, or that you would have been informed of, where a credit committee meeting took place with one person present?

Mr. Michael Walsh

I think, you know ... which is exactly why the society was very focused in terms of ... you know, when I say the society, the non-executive directors were very focused on internal audit because the internal audit programme actually gave us a chance to get into, you know, the detail of what was actually happening in some of the areas. There was clearly unacceptable behaviour in some areas and, you know, in each occasion that was identified remedies were actually put in place. So, you know, from a non-executive point of view, what you actually do is you go out there, you try to identify where are the problems, where are the issues, where are the risks-----

But just on that specific one.

Mr. Michael Walsh

-----having-----

You're giving a general answer to a specific question-----

Mr. Michael Walsh

No, I'm ... I'm giving you a-----

-----which was about ... did the credit committee ever meet with one person present? Mr. Fingleton said it didn't. Can you answer: did it or not?

Mr. Michael Walsh

I can't answer that because, obviously, the credit committee was, you know, a function of the executive. What I can tell you is that any loan that came to the board always the question was asked, "Has it been approved by the credit committee?", and the answer was always "Yes". Now, it is clear from some of the internal audit reports - and they were the internal audit reports actually done by the society's internal auditor, you know, obviously Deloitte did some reviews as well, but the society's own internal auditor reviewed these things and actually considered them.

Where the non-executive directors, you know, met with, as part of the audit committee work, the internal auditor and identified these issues, clearly there were remedies actually put in place and clearly there were undertakings from management.

Right. Do you accept the conclusions of the Nyberg report in respect of the building society?

Mr. Michael Walsh

Well, I think in fairness to Dr. Nyberg, his report was very good but there were lots of conclusions.

Where he says, for example, the MD "had been given extraordinary powers by the board [...] many staff reported directly to him." He refers to when the board formally delegated powers "for the practical, effective and efficient management, promotion and development of the bank to the MD", that it was very unusual that that would be done "given its vague and general formulation [...] not immediately apparent what the limits to this empowerment were." He makes a number of criticisms about the credit committee, the lack of a risk committee, the membership of the credit committee, for example, and a whole series of areas.

Mr. Michael Walsh

But, sorry, if we actually start with the key thing, which is, you know, where was the power within the society, what was the delegation, I have always, kind of, grappled with how the misunderstanding took place in the beginning because it almost developed a folklore about it, you know. Everybody seems to have, kind of, page 1 of the minutes, which basically says, you know, "These are the powers delegated". Nobody seems to have been given page 2, which says, "These are the reservation of powers to the board". Now, I don't know why. Obviously, there was a, kind of, probably, kind of, new management without the institutional recollection or history. But the simple reality is ... from all the time I was there, as chairman, there was very clear powers reserved to the board, there were clear authority levels and, from a board point of view, they were there, required and nobody had permission to actually go round them.

And do you accept that the board had ultimate responsibility for the running of the building society?

Mr. Michael Walsh

In any company, the board has ultimate responsibility for it.

Thank you, Deputy. I'm going to move to wrap things up. I just have one question to ask that remains outstanding. I'll just wrap up with another question and then I'll invite the two final ... the leads in finally, Mr. Walsh, after which if there's any closing comments or remarks that you want to make yourself.

Mr. Walsh, did the level and tone of engagement with the Financial Regulator over the period of 2002 to 2008 cause any concerns at board level? And I'll just go through just a sample of this. March 2008, a letter from the regulator. These are all section 33AK documents, so they won't be coming up on the screen. Corporate governance arrangements in the society - this is on the first page of it. Moving on to the next page - I'm just going to give an aggregate of these, okay - concerns raised related to the growth in the commercial loan book. Then going on to 2004, another letter from the Financial Regulator - the Financial Services Regulator - stressed the need for an increase in the size of the board. The same report goes on ... the Financial Services Regulator "had concerns for some time with regard to the level of expertise and experience within INBS's Internal Audit function." It then goes on as well with regard to the regulatory follow-up and capital adequacy requirements "a significant shift in the nature and risk profile of INBS's business, particularly in the last couple of years. INBS has moved from being a predominantly and broadly based residential mortgage lender to a commercial property lender." And, then, going on to a ... even as far back as April 2002, another letter from the Central Bank talks about corporate governance once more, talks about the audit committee, seven meetings scheduled were adjourned due to pressure of time. Also, "There are no terms of reference in place for the committee." ... that's the ALCO committee. Concerns with regard, again, to commercial lending "that a substantial number of loans represented 100% loan to value[s].". That's in the commercial lending. In home loans, "There was no evidence of stress testing on five of the files examined." The same correspondence again talks about "There has been a lack of progress made in implementing a risk-based methodology." Then, returning back to 2006, another letter from the Financial Regulator, it talks about "The Society should demonstrate how it [has] satisfied the Internal Audit function" or:

The Society should demonstrate how it is satisfied the Internal Audit function now has the expertise to perform its audit of [treasuries]. The Society should consider requesting an external audit [form] to oversee the Treasury Audit.

It then talks about minutes of close out meetings with auditors and auditees, "The Head of [the] Internal Audit advised that [no] audit close out meetings [were] minuted."

And Irish Nationwide, again it talks about the inspectors noting that while some basic information in relation to Irish Nationwide Limited is contained in certain monthly reports, such as inflows and outflows, and in the management of accounts, there appears to be no specific discussions of its activities during the period reviewed by the inspectors. This relates to minutes between May 2005 and April 2006.

Once again - I'll just conclude, there are more pages I could be going through - the terms of reference ... this is to do with the credit committee. The terms of reference of the credit committee on page 2 need to be amended as they state that the committee can approve exposures up to €500,000. However, it is noted that the amounts approved were up to €635,000 and the inspectors were informed that the terms of reference to the credit committee were being amended accordingly.

Mr. Walsh, were the changes proposed at board level to address these concerns of the regulator ... were the changes actually made?

Mr. Michael Walsh

Were changes made? Absolutely. Changes were made, changes were ongoing. I mean, you know, obviously you've gone through a very long list of things.

Believe you me, that's just-----

Mr. Michael Walsh

Just a sample.

It was salt and pepper on a big dish.

Mr. Michael Walsh

I understand the phrasing, etc. but if we come back and actually get down into the issues in more detail you get a very different sort of picture. Because I think we've talked about corporate governance and, really, the two areas of corporate governance were a bigger board and what I would describe as kind of a chief operating officer type situation. You know, the board couldn't increase during a period of time for various different reasons. As I think I may or may not have mentioned, the board would have always welcomed additional people. You know, the board got permission from the regulator to actually approach Mr. Barron, former director general of the Central Bank, to come on the board. Now, if one really believes that you are going to invite the Central Bank or the regulator on to the board in situations where they're not happy or you're not happy, or trying to keep anything from them, that would absolutely not be the case. The society ran with absolute and complete transparency with the Central Bank, with the regulator, and always had a good relationship. I mean, it was very disappointing when Mr. Barron decided he wasn't going to come on to the board but that was his choice. The practical reality is if we were trying to fight against the regulator or the Central Bank, we wouldn't have done it. And just to put the thing in context, when Dr. Power resigned, the regulator got in touch to thank him for all his work and efforts. When I resigned, they did the same. So people are beginning to rewrite the history for whatever purposes.

Mr. Walsh, this is my wrap-up question to you and then I'll invite Senator O'Keeffe and Deputy Higgins to come in. Mr. Walsh, this inquiry, in preparing for its public hearings, gathered hundreds of thousands of documents. For today's hearings regarding INBS, documents from the Financial Regulator's office consistently and repetitively over many years expressed concerns regarding corporate governance, senior management resources, lending expertise appropriate to your business strategy, issues on regulatory reporting and control, lack of experience in the quality of internal auditor resources and so on and so forth. Having listened to your contribution today, is it your opinion here today that these documents are consistently and repetitively wrong?

Mr. Michael Walsh

Absolutely not. I mean, from the society's point of view and from the board's point of view, if you get correspondence from the regulator, you actually see it as a menu that you are going to actually use almost as a checklist for things that are going to be done. Now, you don't take it absolutely on the basis of they're 100% right, you're 100% wrong. That's not the way life actually works. You know, there were practical difficulties in some areas and, you know, where there were practical difficulties, you'd actually end up discussing them with ... in my case, I would've primarily been ... kind of, Maurice O'Connell in the early days, or Dr. Reilly or Mr. Neary in the later days. But you would actually recognise what needed to be done, what could be done. You also had to recognise where the society was at any point in time. I mean, I think there was one particular letter that came in, was it March 2007, which was all about, you know, you need to increase your board and your management. Now, you know, in March 2007, where was the society? It was actually in the process of being sold. It was in discussion with, amongst others, GE and, you know, Hypo, but there were a number of other people as well ... probably haven't been mentioned yet and probably shouldn't be.

If you're in the business of actually selling the society over the next number of months you're not going to put in place new directors or new management, because the first thing that's going to happen once the acquisition is completed, the person or the company who actually buys the society is going to make their own decisions on who should be on the board, who should be the executive, who should be at whatever level it happens to be. And to try and actually bring people in, in a framework where you're doing that, is actually completely counterproductive.

Senator O'Keeffe.

Thank you. I'd just like to follow on. The Financial Regulator first, well, wrote to you in December '04 noting its concerns about resources at senior level and so on. Are you saying ... you've just given us the explanation as to why nobody might have been added in 2007, because there were negotiations with banks. Are you saying now that that was the same in 2004 and this was a consistent state of being for the organisation? I mean, it sounds like an extraordinary, convenient situation not to be able to appoint anyone, because the Financial Regulator kept asking you to do something about it.

Mr. Michael Walsh

Well, sorry, that's actually not borne out by the facts.

The facts are that you didn't, that the resources were not put in.

Mr. Michael Walsh

Sorry, no, the facts are, and if you look at the - I can't remember which of your core books it's actually in - but if you look at the response which, I think, is roughly speaking kind of 20 pages, I think the beginning of ... is it February 2005 ... there is a list of the appointments that have actually been made in, kind of, a very recent time period and it was across all facets of the society. There was credit risk ... I can't remember precisely what they were, but I think there is a list of four or five actual individuals who'd been appointed. And, that's why I go back to, you know, there's a real danger that everybody sort of says, you know, this was a one-person organisation. Now, within my statement I've actually given you an organisation diagram there and that actually identifies the different areas that are there, the different actual people involved, the size of the teams involved. I don't remember offhand what the size of the different teams are, but I mean the reality is there was a process of continuous recruitment. Now, what there wasn't was new appointments to the board and what there wasn't was a chief operating officer.

And no head of commercial lending either-----

Mr. Michael Walsh

Well, sorry, I think-----

-----according to the regulator.

Mr. Michael Walsh

-----the reality is that what actually happened in, you know, just in terms of the timing of that, there was an individual identified who had agreed to come on board and-----

I know, but the point is that ... the point is that the regulator was still concerned about that in March 2008. Can I ask you, the Building Societies Act of 1989, as far as I understand it, says that the retirement age of any director is 70, so how ... what did you do that you didn't have a succession situation when Mr. Fingleton turned 70 and he then ended up staying in the job, but with some re-arrangement so that he wouldn't breach the Act? Is that correct or not?

Mr. Michael Walsh

Well, sorry, no it's actually slightly more complicated than that. First of all, I think-----

Well, under the circumstances, if you can just tell us how did it happen that he stayed on when the Building Societies Act-----

Mr. Michael Walsh

I was about to, right. I mean, to be absolutely clear, first of all, as I say everybody expected, including myself, including the regulator, the society would be sold in 2007. It was abundantly clear that, you know, the society would not be sold once you hit the beginnings of the global liquidity crisis. The next day, when I actually went to the regulator in whatever date it was in December of 2007, I said, "Look, the society is not going to be sold. In that context, we need to actually increase the management team, increase the actual board."

I'm sorry, Mr. Walsh, the question I'm asking relates specifically to Mr. Fingleton. Why was he still there after the age of 70?

Mr. Michael Walsh

Sorry, the reason he was still there after the age of 70 was because the board took a decision - the regulator agreed with the decision - that we were reversing engines, we were going to prudently try to reduce the book and in that circumstance you decide who is the best person to actually lead and drive that. Now, you have met him. You know his strengths, his weaknesses. In that context, you know, I was of the view, the board was of the view and the regulator was of the view-----

Mr. Michael Walsh

-----that he was the right person to actually lead it. Now, equally well, immediately after that, the board sought to identify other individuals who would come in. There were two individuals identified in March and unfortunately one of them actually opted out because of the fact that you had the run on Anglo----

In the time we've left, Mr. Walsh, I'm grateful to you for that answer, and that's sufficient. I just want to go back, if I may, to the Central Bank of Ireland-----

That's it now, Senator. I'm wrapping up.

-----report that we referred to earlier. Can I just be clear? You said, I think, to me, in the opening question, that you had not been interviewed by the Central Bank in relation to that report that they published in 2015. Yes or no?

Mr. Michael Walsh

No. Sorry, I haven't been.

Time, Senator. Just a bit of time now.

You weren't. That's what you said to me earlier today. Yes.

Now, according to their own documentation, they say they had over 100,000 documents - I think it was 105,000 documents - that they used in order to derive these findings and they interviewed 21 people. I am just trying to clarify from what you said, I think to Deputy McGrath - are you suggesting somehow that, first of all, you didn't read the findings yourself, which, even that they relate to the time you were there; and secondly, are you saying that you believe that those people that were interviewed somehow had some other agenda or that they were people who were not there at the time because your response to him was not clear?

Mr. Michael Walsh

Well, to be absolutely clear, I have no idea who they actually interviewed in coming to those conclusions. If you think about it from my point of view, as a board member, I doubt if I saw 105,000 documents in all the time I was there.

So, you don't ... you're saying you don't ... you've no idea, therefore, have you read it?

Mr. Michael Walsh

No, I haven't read it.

Can I ask you why you haven't read it?

Mr. Michael Walsh

Because I took a view that, you know, I'm coming to the inquiry here, I would get a pile of questions at the inquiry. I hadn't actually thought that, you know, an ongoing investigation would be the subject of the discussion and consequently-----

But it concluded in July, Mr. Walsh.

Mr. Michael Walsh

Well, I gather it is not entirely concluded.

Oh. Okay. Can I just ... I do have one more clarification. We understood from the Central Bank that it was concluded. You were disputing the €5.4 billion figure earlier on, I think with Deputy ... I can't remember who it was with-----

Mr. Michael Walsh

Deputy O'Donnell.

Yes, Deputy O'Donnell. Is that not the amount that was contributed by Government as new capital to INBS and to IBRC in respect of obligations after the write-downs? So, is that not where the figure came from?

Mr. Michael Walsh

Well, I mean the real issue is ... sorry, if you want to talk about the actual cost, which I think is what Deputy O'Donnell was-----

The cost to the taxpayer is recognised as being €5.4 billion and you disputed that.

Mr. Michael Walsh

Sorry, yes absolutely I disputed that because I think no matter how you actually do the figures, you can't get to that number. Now, you know, that means that ultimately there has to be a surplus, which actually comes back to the taxpayer. How that surplus comes back, whether it's part of the gain that the Central Bank has actually reported separately in terms of the promissory notes or what the situation is, I couldn't tell you, but I mean ... as I say, the society was very simple. It had two books - it had a commercial loan book and it had a residential loan book. We know precisely what happened to the commercial loan book, irrespective of how we actually argue or justify or believe in the NAMA transfers. So, that gives you a situation where, if you assume all the NAMA transfers are correct and NAMA made no money in relation to those loans after they were transferred, then you end up with a figure of around €3.8 billion plus, as Deputy O'Donnell said, whatever the losses were on the residential book. Now, I don't know what the losses were on that. I know some of the book was actually sold at a premium to Bank of Ireland. I am sure some of it was actually sold at a loss elsewhere. It'd depend on the timing of the sale of those books as to what would have actually happened. Equally well, as I indicated to Deputy O'Donnell, there was a liquidity management exercise which saved, roughly speaking, €0.3 billion and then whatever was made, if anything, on the sale of the deposit book.

Chair, it may be necessary after the hearing to get a clarification from Mr. Walsh in relation to these figures because it does seem-----

Chairman, can I make reference-----

Yes-----

It seems extraordinary that there is such a dispute between what is recognised and what-----

Can we bring up page 125 of Vol. 1-----

It really is quite-----

Can you turn off the phone there as well because it's-----

125 in Vol. 1. Page 125. This'll provide clarity. This is directly from NAMA and NAMA says €8.7 billion of loans were transferred from Irish Nationwide; consideration paid was €3.4 billion; that gives a loss of €5.3 billion. Now, 5.3 is very, very near 5.4 so I think the figures that you're quoting, Mr. Walsh, are not accurate.

Mr. Michael Walsh

No, sorry, I think the figures that you're quoting don't fully take into account-----

On the figures, just call the figures as you see them-----

Well, if you go to page 125 and you look at the table there, it says-----

Mr. Michael Walsh

Sorry, there's absolutely no argument about that table. I mean, basically it shows that the society had a 61% haircut. It transferred a loan balance of €8.7 billion and consideration was received by the society of €3.4 billion. What that table doesn't tell you, because it is actually the NAMA experience in relation ... it doesn't tell you about the €1.5 billion of own funds that were actually there.

But there may have been other liabilities, Mr. Walsh.

Mr. Michael Walsh

But the only other potential liabilities were the residential loan book-----

With due respect, Mr. Walsh, you said it was €3.8 billion to NAMA. It's actually €5.3 billion of a loss experienced in the NAMA haircut, so I think if-----

Mr. Michael Walsh

Absolutely, but you have to reduce ... sorry, if you're trying to actually look at what the aggregate figure is, you have to reduce that figure in terms of cost by the reserves the society actually had at that point in time, which is the €1.5 billion.

Yes, but equally you had €3.6 billion of home loans involved, which-----

Mr. Michael Walsh

Well, I am sorry-----

Sorry, I do not wish to argue the point but I think-----

Mr. Michael Walsh

First of all, there weren't €3.6 billion of home loans.

Well, of other loans.

Mr. Michael Walsh

There was roughly €2-----

Mr. Michael Walsh

There was roughly €2 billion of home loans.

Well, there was €12 billion of loans in total. There was about €8.5 billion of commercial loans.

Mr. Michael Walsh

I would be pretty sure the figure is €2.2 billion, but to be honest I couldn't-----

Deputy Higgins. Then we'll close out.

Mr. Walsh, I've just one issue I want to put briefly to you, and it's based on the book Fingers: The Man Who Brought Down Irish Nationwide and Cost Us €5.4 Bn by Tom Lyons and Richard Curran. It says that on 22 September 2008, that you met Mr. David Doyle, the then Secretary General of the Department of Finance. Did that meeting take place?

Mr. Michael Walsh

No. Sorry, to be clear I met David Doyle on one occasion ... sorry, during the month of September. And I met him ... I would say it ... sorry, I am guessing ... probably around 15 or 16 September, or maybe slightly later, and I met him in the company of the managing director. Now it was a strange meeting, but nonetheless, you know, the three of us were actually in the room together. There was no-----

The managing director being Mr. Fingleton.

Mr. Michael Walsh

Yes.

Did the ... is the following then accurate or not? I quote:

Walsh [you, Mr. Walsh] made his strongest argument in favour of a merger with Anglo Irish. This was the plan he had already privately discussed with its chief executive, Seán FitzPatrick, a close friend for twenty years. Anglo Irish, Walsh said, already knew many of Irish Nationwide's clients and had the expertise to manage them. However, the bank would need a state guarantee to protect it from any negative consequences. 'In effect, the State will have to guarantee Anglo at the same time.' He warned [that is you].

Finally:

In short, Walsh was arguing that in order to save Irish Nationwide the state should take on the much heavier burden of rescuing Anglo Irish. Having completely failed to prevent the society going mad during the boom, Walsh was now proposing that the state should be prepared to accept every risk taken not only by Irish Nationwide but also by Anglo Irish. It was catastrophic advice, capable of bankrupting the entire country.

Is this factual?

Mr. Michael Walsh

It is completely non-factual. What actually happened, and you know I have actually touched on it already, on the Sunday evening of 7 September I got a phone call from Con Horan. As I say, I was in the society that evening because of the situation and the fragility of the markets. Basically, I was meeting at that time with Goldman Sachs and the clear direction from the regulator was that I should organise to meet with Anglo Irish. That was a direction that I got. When I say "direction", it was a phone conversation; it wasn't a written direction, obviously. Basically, the reason he was telling me to do that was because they had been looking at a contingency plan, as you know, with AIB and Bank of Ireland that hadn't operated. Apparently, Anglo had contacted the regulator to say that they might represent a solution. I was slightly surprised, but nonetheless the regulator wanted me to meet them. I accordingly organised to meet them the next morning. Having met them, I did a briefing paper for the regulator setting out the options as I saw them at that point in time. I met the regulator, discussed that options paper. I then revised and adjusted that at the regulator's request and submitted it to the Department of Finance. That paper is in the public domain. It was released I think at some stage as part of some of - I think - the disclosures in relation to the month of September and the night of the guarantee. I did not advocate the merger with Anglo. I certainly didn't advocate any situation where, shall we say, the State would take on the combined liability. That is a complete misrepresentation of the situation. What I actually advocated was that the society would continue as an independent entity with whatever changes the Government obviously wanted to make and to continue to operate the policy it had adopted the previous December, which was to wind down the society in a gradual and controlled fashion, which was what I felt was best for the society and best from a national point of view.

Anglo had a different agenda clearly. They wanted to be seen as the people who were rescuing the system because they had a belief that if they were seen to take over the society that they would be viewed as being systemic. They were very different to Nationwide; they didn't have depositors. You know, we had, I think, 180,000 depositors made up of residential, business as well as the commercial. They were purely commercial. We obviously had a large deposit book; they didn't have the deposit book. We had a large amount of liquidity; they were out of cash.

Okay, thank you, Mr. Walsh.

Thank you very much. I'm going to bring this session to a conclusion but, in doing so, Mr. Walsh is there anything by means of closing remark or further comment or additional information you might like to add?

Mr. Michael Walsh

Chairman, yes, thank you and thank you, members. You know, just to reiterate, I do deeply regret the events that occurred and their impact on Ireland but I think the purpose of this committee is for you to actually consider what to do going forward. Key groups in Ireland saw the problems or foresaw the problems that were coming about. The stress tests in the Central Bank, you had the NTMA expressing views, even Irish Nationwide was expressing a view in December '07. The domestic standing group started working in January 2008 to actually generate solutions, possible solutions, etc. But as everybody here now knows, we ended up in September 2008 without really a clear view of where we were actually going. And I think, Chairman, you've got to consider what would have happened if we avoided the growth that took place in 2007, even if we only saw the problems at the end of 2006.

As a minimum, there'd have been €70 billion less money lent into the Irish market. I think there was about 100,000 additional mortgages taken out, so additional families actually probably in negative equity today. Given the results of the stress tests, you would have required every institution, or should have required every institution, to get more capital. I think you've heard from the former Attorney General, there was no bank resolution legislation actually in place. That could have been put in place. It could have helped Europe in place, whatever. Now, who knows if that action had been taken at the end of 2006 how much less damage could have been done? And I think that in terms of your recommendations, what you have to think about is how do you actually remove the silo mentality that exists. I think one of your witnesses said we weren't prepared to share information until September - it took the Reuters story. I have no idea what the correct solution is but you have to recognise that there would be a very different situation if, at the end of 2006, you had brought together the key players in the public sector and the private sector and actually tried to find out what was the best thing to do for the country.

So I think, in terms of you framing your views, your recommendations, you have to think about that. I said I deeply regret I didn't see the problems much earlier. If I had, hopefully, I would have taken the right decisions earlier but I didn't. I apologise unreservedly for that but I think if we want to avoid the same problems occurring again, you've got to think about how you actually avoid that, sort of, silo-type thinking. Thank you.

Okay Mr. Walsh, thank you very much for your participation this evening and this afternoon with the inquiry and I'll move to formally excuse you in just a moment. I would be asking members just to stay on for a few moments because I just need to deal with some time management issues with the remainder of the evening and so forth. So with that said, I want to thank you again, Mr. Walsh, for your participation with your engagement with the inquiry today. You are now formally excused and I suspend for a few moments so the committee can just go into private session to deal with other matters.

The joint committee went into private session at 6.33 p.m. Sitting suspended at 7 p.m. and resumed in public session at 7.30 p.m.

Irish Nationwide Building Society - Mr. John Stanley Purcell

With that said, I am now going to call the session back into ... or the inquiry back into public session. Is that agreed? And to deal with session 3 of today’s hearings with Mr. John Stanley Purcell, former finance director and secretary of Irish Nationwide Building Society.

The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? Our focus today is on the Irish Nationwide Building Society and we continue our hearings this evening with Mr. John Stanley Purcell, former finance director and secretary of INBS. Mr. Purcell joined Irish Nationwide as financial controller in 1986. He was appointed secretary of INBS in May 1999 and was appointed to the board of INBS in December 1994 as an executive director. He is now retired. Mr. Purcell, you are very welcome before the committee this evening.

Mr. John Stanley Purcell

Thank you, Chairman.

Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you're directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence.

You are directed that only evidence connected with the subject matter of these proceedings is to be given.

I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room and for those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents that are so displayed.

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

Mr. John Stanley Purcell

Thank you.

The following witness was sworn in by the Clerk to the Committee:
Mr. John Stanley Purcell, former Finance Director and Secretary, Irish Nationwide Building Society.

Once again, Mr. Purcell, thank you very much for your attendance at the committee here this evening and apologies for the delay that we are actually starting. And if I can now invite you to make your opening remarks to the committee, please.

Mr. John Stanley Purcell

Thank you, Chairman. I wish to begin by thanking the committee for inviting me to attend to give evidence at the inquiry. I also wanted to express my sincere regret to everyone who suffered as a result of the demise of INBS.

My role in INBS was very diverse and I was engaged in a wide variety of functions on a daily basis. Whilst I was heavily involved in reporting, treasury, retail deposits, IT systems and compliance, I was not involved in the lending function outside my role on the board.

Up to the crisis, INBS was successful. Profits increased year on year and the society grew accordingly. During the period leading up to the crash, much of the focus of the society and a huge amount of my time was taken up with demutualisation. The members hoped to gain a windfall profit from the demutualisation and sale of the society and the board worked extremely hard to put the apparatus in place for demutualisation. This involved the production, in 2007, by KPMG of a vendor's due diligence report which provided a detailed snapshot of INBS at that time. The report was provided to the Central Bank.

The strategy of the society, including demutualisation, developed over a long period of time. In terms of lending, as time progressed it became apparent that the residential market was overly competitive and margins were diminishing. Tracker mortgages, which INBS did not market, were commonplace. During the years 2004 to 2007, INBS, AIB, Anglo Irish, Bank of Ireland, Bank of Scotland, EBS, Permanent TSB and Ulster Bank lent heavily in the commercial-residential sectors. All of the institutions suffered extraordinary losses as a result of that lending. A combination of the availability of funding, low interest rates, increased competition, Government policy - including tax incentives for development - and rising property prices caused a surge in lending.

INBS's strategy was to increase lending in the UK. The UK property market did not collapse in the same way as the Irish market and the London market improved in the aftermath of the economic crisis. Over 50% of the loan book which transferred to NAMA related to assets outside Ireland. Consequently, I believe that the INBS assets transferred to NAMA were significantly undervalued.

INBS developed a strategy over time which involved lending to clients who had a proven track record.

Towards the end of 2007, it became clear that liquidity was tightening. The board decided to cease new lending in December 2007 when other institutions continued to lend anew, and this was the right strategy at that time.

By September 2008, INBS's liquidity was coming under pressure due to a credit rating downgrade and an inaccurate report on INBS by Reuters. The regulator arranged, at short notice, a meeting on Sunday, 7 September 2008 with AIB and BOI to discuss the possibility of the provision by AIB and BOI of a standby facility for INBS. INBS's liquidity on 7 September was about €3.5 billion and information was provided to the meeting at short notice on liquidity, funding liabilities and the maturity of funding liabilities. The meeting concluded without any agreement to progress the provision of a standby facility. Had the matter progressed, any additional information required not brought to the "at short notice meeting" would have been provided.

Towards the end of 2009, Ernst and Young began an investigation into legacy issues at INBS. I gave Ernst and Young every assistance required. The investigation ultimately led to the initiation of legal proceedings against the "old board" for the losses of the society. IBRC and INBS formally accepted in the pleadings in the proceedings that there was no dishonesty whatsoever on my part.

The proceedings represented an attempt by IBRC to make the directors personally liable for the losses of the society. A central plank of the claim was the allegation by the plaintiffs that the delegation of powers by the board of the society to Michael Fingleton was excessive. On legal advice, I joined the Central Bank to the proceedings as a third party because they had approved the delegation of powers to Mr. Fingleton.

Given the extraordinary magnitude of the claim - for up to €6 billion - I entered into a confidential settlement with the special liquidators after a mediation process. The terms of the settlement are confidential. I can say that the settlement involved no admission of liability on my part. I paid a sum personally to the plaintiffs for the benefit of the State.

Separately, the E and Y investigation led to administrative sanctions proceedings being initiated against me by the Central Bank as far back as 2011. A notice of inquiry was issued on 9 July 2015 and I would ask the committee to be cognisant of the fact that I am the subject of that inquiry, pursuant to which punitive sanctions could be imposed on me by the Central Bank. I really can’t understand how the Central Bank can purport to investigate me in relation to events for which they bear responsibility. That is the subject of legal proceedings.

I am not aware of any civil proceedings or any administrative sanctions having been initiated against the management of any other bank or building society as a result of the crash. I can't see how there is any benefit to the public in INBS being investigated and pursued on the double, when institutions which subsist have not been the subject of any serious investigation, inquiry or proceedings.

I will now address areas I have been asked to consider.

Financial reporting and accounting rules. INBS’s financial reporting system was designed to meet regulatory and management information needs. The system was developed over the years to accommodate new accounting standards and additional reporting requirements.

The new accounting standards reduced INBS's loan loss provisions in 2005, and resulted in low provisioning while the property market remained strong. In addition, the solvency ratio was boosted by unrealised surpluses in good economic times and then reduced sharply in the downturn.

INBS's business model was commercial and residential property lending to experienced people in Ireland and the UK. The model evolved over time due to competitive pressures and lower margins in the residential lending market. INBS's loan book was concentrated and significant amounts of new lending was repeat business with existing customers.

INBS was funded in equal amounts from customer accounts and the wholesale market. INBS's treasury function was operated in a risk-averse manner with the emphasis on maintaining safe, readily available liquid assets. The funds raised on the wholesale market extended the maturity profile of borrowings. INBS sought to eliminate interest rate and exchange rate risk through swap agreements.

INBS had sought to enhance the effectiveness of internal audit by recruiting more staff, together with training and improvements to internal audit systems. KPMG carried out a report on internal audit in 2005. KPMG also produced a strategic performance review of internal audit in 2008. INBS engaged Deloitte to carry out internal audits on the IT function, treasury and commercial lending. Internal audit had a direct reporting line to the chair of the audit committee. The internal auditor met non-executive directors without executives being present. Internal audit had a documented internal audit charter which set out the purpose of internal audit, the scope of internal audit work, reporting lines, responsibility, standards and authority. Internal audit had a documented internal audit policies and procedures manual. That, Chairman, concludes my address.

Thank you very much, Mr. Purcell, for your opening comments and if I can commence questioning and in doing so invite Senator Marc MacSharry.

Thanks very much and welcome, Mr. Purcell. Sorry for delaying you earlier. INBS's annual report for 2007 shows that over the period '02 to '07, profit before tax increased by 303% and total assets by 190%. Do you think that these levels of growth were prudent or sustainable in the context of the level of competition in the Irish lending market during this period?

Mr. John Stanley Purcell

Well, during that period there was a great expansion in lending in all institutions in the Irish market. Some institutions may well have expanded more than Irish Nationwide. Irish Nationwide's expansion in that period was also ... resulted from lending in the UK, where we lent to experienced people, mainly in the London market. I think at that time, it was not considered unusual, although it was fairly strong growth.

In your opinion, did this growth... was this growth influenced by the wish to add value at demutualisation and the potential windfall that that could bring to members and staff on it?

Mr. John Stanley Purcell

Well, we weren't lending purely because it would increase demutualisation dividend to members. I mean, the lending was done because there was good lending opportunities to be availed of.

Did this in your opinion lead to levels ... these growth levels? Did it lead to ... did it affect credit quality and lending standards in any way to your mind?

Mr. John Stanley Purcell

I had no reason to believe that credit quality was affected and I think actually, looking at the figures, that our lending in 2007 was slightly less than 2006, our new lending.

In a letter dated February 2008 regarding the inspection of commercial property lending exposures, the Financial Regulator "calls into question the adequacy of controls and risk management in place in INBS for large commercial property loans and suggest[s] that a significant degree of approval authority rests with a single individual, Mr Fingleton, who also appears to be the only source of information on some of these large clients."

That quotation will be provided in documentation given to you, Mr. Purcell. Senator?

Sorry, it's on Vol.1, page 43 and 44 but I've quoted it for you anyway. Could you provide your view on the Financial Regulator's statement on what I've just said and did you agree?

Mr. John Stanley Purcell

Mr. Fingleton was head of lending and Mr. Fingleton spent a lot of his time working with the senior commercial lenders. He was involved in the lending. He kept in contact with large clients. He would have seen that as a major part of his function in Irish Nationwide. I think information was available from sources as well as him.

Was he the one-stop-shop in terms of underwriting and decision-making?

Mr. John Stanley Purcell

No, no, no. There was a department there. There was a head of commercial lending Ireland. There was a head of commercial lending UK, and there was a number of underwriters and there was processes in place. I think those processes are set out in one of the Deloitte reports that you may have.

Do you believe that the degree of approval authority outlined by the Financial Regulator in that letter was appropriate?

Mr. John Stanley Purcell

Sorry, the degree of-----

Do you believe ... do you think that the degree of approval authority outlined in the letter that I quoted was appropriate?

Mr. John Stanley Purcell

I mean, are you referring to the fact that loans of up to ... over €1 million came to the board?

No, I will just quote you that section again. "INBS [this is a portion of it] INBS ... the adequacy of controls and risk management in place in INBS for large commercial property loans and suggest that a significant degree of approval authority rests with a single individual [as opposed to a department or heads of credit, or whatever], Mr. Fingleton, who [it goes on to say] also appears to be the only source of information on some of these large clients." Do you think that degree of approval authority, as I've just outlined, is appropriate, or was appropriate?

Mr. John Stanley Purcell

Well, I think the approval authority was in the context of that loans were underwritten in the department by the commercial lenders and that loans of €1 million and more came to the board.

Did loans ever, above €1 million, go to the board and be declined in your time on the board?

Mr. John Stanley Purcell

There was loans declined and there was loans sent back that wouldn't ... they were sent back because, maybe, they might go ahead some time but they were sent back for more-----

And without getting into any specific loans, can you recite any ... well, can you recall any occasions where, for example, as managing director or CEO, that lending was coming with the recommendation of the head of lending, the managing director, but that the board felt, "No"?

Mr. John Stanley Purcell

I think there was the odd case, but I can't-----

Mr. John Stanley Purcell

There were cases, but I do recall that there would have been a lot of loans talked about that, you know, who were not brought to the board, for a whole lot of reasons.

And, occasionally, on the over €1 million scenario, the credit committee, with the managing ... the head of lending, could take a decision if there was an urgency to do it for corporate reasons or whatever, and then it would go to the board at the earliest possibility, Mr. Fingleton was telling us earlier. Can you recall any instances that that happened? And, in all of the instances where that may have happened, were any of those odd occasions where the board declined it sent back?

Mr. John Stanley Purcell

I can't recall that a loan that was treated in that way was declined by the board, but I do recall occasions where a loan came and there was reasons why it may have had to be approved prior to it going to the board.

And just again, to the extent that you can remember, where these exceptional circumstances existed, where something had to be done urgently so that two members of the credit committee, plus a managing director, took the decision, and then the board had to be informed, was there always unanimity? Was this a rubber-stamping exercise?

Mr. John Stanley Purcell

Ah no, no. The loan-----

Mr. John Stanley Purcell

Sorry, sorry.

Sorry, I don't want to lead you either.

Mr. John Stanley Purcell

No, no.

Was this a matter of form, the managing director, the head of lending, lent "X" last week. There was nobody around; it wasn't quick enough to have a meeting; so, "Is that agreed? We all agree." Or, was there anybody who said, "No, like, I don't agree, like"?

Mr. John Stanley Purcell

I don't recall that happening, but where a loan came like that, it would discussed in the normal way, along with the reasons why it had to be paid out.

Would it have been better if such circumstances didn't go, that there didn't be an exceptional circumstance?

Mr. John Stanley Purcell

Yes, it would have been better. It should-----

It would have been better. Okay. Good. Can I ask, during the period 2003 to 2006 the society's loan book trebled from €3.4 billion to €10.7 billion, in your opinion, was the growth rate prudent and sustainable, particularly in light of the acknowledged fact, it seems, that the society did not have either "a highly developed approach to risk assessment or a sophisticated management information system"?

Mr. John Stanley Purcell

Well-----

The Project Harmony report, that's what I'm quoting there.

Mr. John Stanley Purcell

Yes. Yes. Well, what we were doing was, we were doing loans, repeat business with people we knew. There had been an increased level of lending. The market was fairly active, so we were more or less repeating the same business as we had done all along.

If you were a good bet in the past with Irish Nationwide, did you skip the processes of underwriting for future loans?

Mr. John Stanley Purcell

No, the loan went through the normal process.

No matter how good you were in the past.

Mr. John Stanley Purcell

Yes.

So if it took B, as a new customer coming in, three months to get assessed for X loan, then if I, equally, had been a customer for 20 years and paid back all my loans and I was coming for another loan, it still took three months.

Mr. John Stanley Purcell

It meant the same processes applied.

Okay. The Nyberg report states:

INBS’s overarching driver [and I touched on this earlier with you] was demutualisation and sale. This was frequently expressed by management, the Board and INBS members and was expected to result in a cash windfall for all parties. As the value of INBS would dictate the size of the windfall, it is noteworthy that the bank’s most significant growth spurt was during the years leading up to the expected demutualisation.

And that’s page 24 of the Nyberg report. In your opinion, did the desire on the part of management to maximise the value of INBS result in the adoption of poorer lending practices or more lax lending practices, or did it lead specifically to the growth in the UK?

Mr. John Stanley Purcell

No, I don’t think the growth in the UK was a result of trying to improve the situation after demutualisation. As I said earlier, the level of new loans fell in 2007.

The Project Harmony report states:

The overall approach to risk assessment would not be described as highly developed given that the group continues to rely heavily on the managing director, does not have sophisticated IT systems and operates across a limited range of products. The modus operandi would be described by management as fit for purpose, particularly given the degree of board oversight on the lending approval process.

Can you explain why you consider, and if you do, such a modus operandi to be fit for purpose for a financial institution with a balance sheet of €16 billion in size by the end of 2007?

Mr. John Stanley Purcell

Well, I mean, we were continually improving our systems as our loans increased over the years. The ... we were adopting new systems to deal with Basel and we were also conscious of producing information that would be needed in the event of a demutualisation. So we were improving systems but the basic loan model was still there.

Earlier we heard from Mr. Walsh, the then chairman ... and following a KPMG report recommending that a series of improvements needed to be made such as on the whole area of corporate governance and there were a number of them including the independence ... to assure the independence of directors and to ensure that the board in terms of reference and so on and we put it to him that, “Why had you not, as chairman, introduced these things much earlier?” I think we were talking about a period now of 2008, if I recall correctly. He used words like, “Well, you know, corporate governances can be somewhat of a box ticking exercise and so on.” Can I ask, in your time on the board ... I mean, you know, those recommendations by KPMG at the time, you know, would hardly have been pioneering new ground in terms of the expectations of how corporate governance would be taken, or how serious it would be taken by a company with a balance sheet so large. Did you have a sense at the time that, look, this whole thing is loose; I mean-----

Mr. John Stanley Purcell

No, I didn’t-----

-----look, everything is going well so-----

Mr. John Stanley Purcell

No, I didn’t have a sense-----

-----there’s no need to fix anything?

Mr. John Stanley Purcell

-----that everything was loose. But, you know, when those recommendations were made, I mean, they were probably setting out best practice, having looked at a range of reports that it mentions in it. And some of the things they mention about conflicts of interests, I mean, we were handling those under terms of the Building Societies Act and our own rules. So some of the recommendations would involve maybe more documenting of what we were doing already, say, in areas like conflicts of interest.

Did you ever know about the existence of a No. 3 account that was specifically for-----

Mr. John Stanley Purcell

Yes.

What was it for?

Mr. John Stanley Purcell

Well, it was an account that was there before I started in 1987 and it was an account that the signature on it was my predecessor and then me and the managing director. And there was also a number of other people who could act as signatories on that account.

And what was it for?

Mr. John Stanley Purcell

It generally was for non-standard payments.

Mr. John Stanley Purcell

And maybe payments that would ... regarded as confidential.

Political donations?

Mr. John Stanley Purcell

No. The main ones I remember, and it would be ... stuff like maybe settlements in legal disputes.

Mr. John Stanley Purcell

Yes ... maybe ... sometimes maybe if something came in ... you know ... you might want to pay it back to somebody and ... it was just stuff that you didn't run through the normal system. But everything that was on that account was fully documented. There was, I think, in the period from the start of the euro to the time I left there were only about 60 cheques written.

Was it ever ... on those 60 occasions ever to give anybody a dig out, for want of a better expression?

Mr. John Stanley Purcell

No. Some of the payments were just routine stuff, say maybe came into a wrong account and I was moving it around.

Okay. In a letter dated March 2008, regarding the inspection of commercial property lending exposures, the Financial Regulator states the following under the heading "Credit Risk Management":

The Financial Regulator has raised issues relating to INBS' risk profile and credit risk management over a number of years. Our letter of 9 December 2004 set out our concerns regarding the significant shift in the nature and risk profile of INBS' business towards commercial property lending.

In the same letter the Financial Regulator continues to outline similar concerns raised in '06, '07 and '08. Can you provide an insight into the INBS board considerations of the Financial Regulator's inspections and why no apparent effort was made to address the concerns to the satisfaction of the regulator of the years?

Mr. John Stanley Purcell

Well, when ... well Deputy, when the regulator wrote a letter or met us about any issue, I mean the matter was taken very seriously. Any letters to, say, the chairman or the managing director were given to board members and they were discussed at the board and depending on the issues all the matters were responded to and where we had to do things, you know, we carried out our response and our rectification of any matter to the best manner possible.

So, to your mind, any issues raised were dealt with to the fullest extent. Is that correct?

Mr. John Stanley Purcell

We responded fully and-----

Okay. Just two-----

Mr. John Stanley Purcell

-----dealt with stuff as we could.

Just on that, and two very final questions, and we'll have covered all of that ground then, Chairman. You mentioned in your report, and I am conscious that I don't want to get into a particular area and the Chairman will stop me if I am going offside, you mentioned that your view as to why other financial institutions weren't the subject of investigations in the Central Bank. Can I ask how are you certain that there are no investigations into other financial institutions?

Mr. John Stanley Purcell

As far as I'm aware there are none.

And how would you be?

Mr. John Stanley Purcell

Well, just being cognisant of what's in the press and stuff like that.

I know, but I mean you yourself weren't cognisant until 9 July or thereabouts so how would you be cognisant about other financial institutions?

Mr. John Stanley Purcell

Well, the particular matter of 9 July there was something on that going back, and I think I said it in my statement, back to-----

Okay. So just to be clear, to the best of your knowledge but you don't know.

Mr. John Stanley Purcell

Yes.

Okay. Very finally, do you feel, and I asked this of Mr. Walsh as well, do you feel that throughout your career in INBS that there has been an unfair focus by the regulator and Central Bank on the INBS and its activity?

Mr. John Stanley Purcell

Well throughout my career there, the way I regard it as the regulator would correspond with us, would meet with us and issues would be raised, and we would deal with them as best we could. I wouldn't ... I wasn't aware of, say, regulator dealings with other people so I wouldn't regard, you know, as being excessively unfair. It was just part of their job. They dealt with the thing properly and we tried to respond in a professional way.

But you have said in your statement maybe you're less than enamoured with activities since.

Mr. John Stanley Purcell

Oh well that's since, but in the time I was there, I mean, I said in my statement there that, I mean, I ... there was an issue with IBRC, INBS and then-----

Again, without getting into the specifics of Central Bank, regulator, Government, this inquiry or anybody else, do you have a sense or do you feel a sense, Mr. Fingleton said he felt wronged, do you feel that in some way INBS are the patsy, the fall guy for everybody else?

Mr. John Stanley Purcell

Well, I suppose INBS and Anglo, as the institutions which no longer exist, probably resonate with people in regard to the crash.

Do you see that as fair and accurate? I am finished then, Chairman.

Mr. John Stanley Purcell

I don't see it fully fair, no.

Would you care to expand upon that or is that sufficient?

Mr. John Stanley Purcell

Well, I mean, other people had losses as well. I mean there was a ... yes, it was in the documentation ... there was a NAMA ... a report from NAMA ... an extract from the NAMA annual report, which showed the discount. The discount on the loans taken over from Anglo-Irish Nationwide wasn't all that much difference from, say, AIB and EBS.

Okay. Thank you. Senator Michael D'Arcy. Senator.

Mr. Purcell, you're welcome. During the period '01 to '03, INBS increased its level of commercial lending by over 60%. This was a source of concern for the regulator that the society did not have the appropriate skill sets or controls to place ... in place to effectively manage this level of exposure and this level of increase. By September '08, 80% of INBS's loan book was in commercial property and 81% of its land and exposure was in speculative property activities. Do you think this was an appropriate lending strategy for INBS as a building society?

Mr. John Stanley Purcell

Well, INBS at that stage, although it was a building society, was moving towards seeking to have legislation that would allow it demutualise and engage in trade sale. So, it wasn't the sort of a situation whereby for years we were always going to be a pure mutual. We were moving in certain direction. We were in a market that was very competitive. I think as people have referred earlier, that the home loans market got very competitive in 1999 and it had been competitive before that. Banks, both foreign and domestic, were vying strongly for residential business. INBS had moved gradually away from dependency on residential so we were in the commercial market. We had worked with clients over a number years. Many of those had expanded with the market and we had expanded with them. So, at the time, there was probably a surge in lending generally anyway from what was before. So, we were a part of that.

Was it appropriate?

Mr. John Stanley Purcell

I feel it was not inappropriate in the circumstances.

It was "not inappropriate".

Mr. John Stanley Purcell

Well, no. It was proper lending.

And the level of growth ... Mr. Bill Black - I am not sure if you heard it - when he attended here some months ago said that anything over 20% was dangerous per annum growth.

Mr. John Stanley Purcell

Yes, I heard that mentioned. Yes.

A lot of institutions were pushing closer to 30%.

Mr. John Stanley Purcell

Yes. At the time, generally, it wasn't felt that that was excessive.

Did you feel it was excessive?

Mr. John Stanley Purcell

No, I didn't feel it was excessive.

Were you aware of the risks that were attached to that level of growth?

Mr. John Stanley Purcell

Yes, I was aware that, obviously, the society was growing and that it involved us in challenges, obviously, in funding the society and the requirements of keeping within certain ratios. So, I was aware of that.

Did you keep within those ratios?

Mr. John Stanley Purcell

Generally, we did, yes. Occasionally, there might have been a slip but-----

The land and development sectors ratios?

Mr. John Stanley Purcell

Oh, no. The sectoral ... there was breaches of the sectoral limits over the years.

Mr. John Stanley Purcell

Well, I think INBS, and from what I understand a lot ... as well as other institutions ... that those ratios were exceeded somewhat over a period of time.

And did you understand that they were not guidelines?

Mr. John Stanley Purcell

Yes, and there was correspondence with the Central Bank about it.

And you still proceeded to exceed them.

Mr. John Stanley Purcell

Well, we had discussions with them about it. I think the discussions were maybe that they might be done on a different basis and that maybe there was something that should have been revised but the thing just petered out.

Was that a sufficient way to do business?

Mr. John Stanley Purcell

Well, we were probably restricted in keeping to sectoral limits because those sectoral limits were probably devised for full service banks that would be lending to all areas of an economy and that would be in every business. By our very nature, we were focused on property.

Mr. Purcell, if we could bring up the document, Vol. 1, page 125, the NAMA annual report please? The NAMA discount or the famous or infamous haircut. INBS, the institution you represented, amounted to 61%, the highest of all institutions. Could you offer an explanation why INBS was the highest?

Mr. John Stanley Purcell

Well I think we shared the 61% with Anglo. Well, I mean, I didn't take part in the work that was engaged in while those loans were being transferred. I left around that time so I don't have any insight into the thought processes and why those loans attracted that discount rate, so I can't comment on exactly why-----

Were you ... were you surprised at the discount, the extent of it?

Mr. John Stanley Purcell

I was. I was surprised and I felt that, as I said there, that the UK loans were somewhat undervalued. And I felt that maybe from, you know, things I heard later and that, a lot of those loans were repaid in full, despite a large discount.

Mr. Purcell, KPMG's annual statutory duty confirmation letters to the Financial Regulator for each of the years '04, '05, '06 and '07 note instances of breaches and errors in each sectoral return, prudential returns and large exposure reports made by INBS to the regulator. Why did these breaches and errors occur?

Mr. John Stanley Purcell

Well, when we were preparing those reports, I mean, we took every care to make sure there was no errors. Generally, they were prepared by a competent person, reviewed by another and subject to further review. We were conscious that we were at all times trying to do everything perfectly as regards regulatory returns and we were disappointed whenever any error occurred. Now some of the errors were larger, some of them were smaller. But the errors occurred because we'd a fairly tight timetable. After we had done the returns we continued checking and a lot of that checking would have brought up something that was not found earlier, and we would immediately adjust the return and we would inform the regulator of every mistake, every adjustment, every error, be it large or small. Some of the errors occurred due to mistakes, maybe a coding error in loans which we copped when we did further checking. Some of them were ... there was a lot of volume, maybe, happening and something slipped through or else there was some classification that wasn't clear and that we maybe went to the regulator or the regulator went to us about it. But we did take every precaution to ensure that they were done to the highest standard, and it was disappointing for me and the people working with me who were doing those returns that errors occurred. But it wasn't for the want of effort, changing systems and reviews.

Mr. Purcell, those errors occurred, re-occurred, over a number of years.

Mr. John Stanley Purcell

They did. I, that is correct, Deputy, they did and as I said, I was very disappointed at the time. And I think there is a mention there in the ... I think it's either 2.6, item 2.6 in the KPMG management letter of 2008, where there is a response to the fact that those errors occurred.

And were the systems just incapable of rectifying the matter?

Mr. John Stanley Purcell

No, we changed systems. We brought in additional checking. All I can say is that some errors kept ... persisted. But some of those errors were small; some of them were caught by us but we reported every error, be it large or small, immediately, and I think KPMG acknowledge that in the letter.

In the 2005 report, the review of effectiveness of internal audit, KPMG stated the existing internal audit ... this is Vol. 2, page 93, Chair:

The existing internal audit function is not [the] best practice. ... In particular it lacks the depth of experience necessary to challenge the areas of key risk, which includes Treasury and Commercial Lending.

In the 2008 management letter, KPMG stated, "the Society's Internal Audit department needs to build up its experience and training in order to perform reviews of key risk areas which are currently outsourced to a third party service provider".

Similar concerns were raised in '04, with the Financial Regulator concluding:

The level of resources in this area are deemed to be inadequate ... The FSR has concerns with regard to the level of expertise and experience which exists in the IA function.

The Financial Regulator concerns expressed in '07 echo this sentiment. Can you explain why no apparent effort was made to address the concerns raised by both your auditors and the Financial Regulator over a period ... over a number of years?

Mr. John Stanley Purcell

In 2004 we arranged with KPMG to commission a report on the effectiveness of our internal audit. We were conscious that work had to be done. We had a new acting internal auditor and we were conscious that we needed to review that area, and we asked KPMG to produce a report and to work with us. And KPMG produced that report. As a result of it, there was ... they were involved in mentoring the internal auditor. They also conducted workshops with the internal audit committee and the ... we would have increased the staffing level, we would've increased training internal audit and we would've purchased systems for them. In addition to that, we brought in Deloitte to do a number of audits there - treasury, IT and commercial lending. So we were working, during that time, to bring internal audit to a higher level.

Chairman, if you could go to Vol. 1, page 31. I'll just move on, Mr. Purcell. In KPMG's corporate governance review in '08 it states:

Board packs are very detailed and at times lack clarity and structure. For example, there is little market and operational overview and salient financial commentary provided.

Were you satisfied, as a member of the board of INBS, you were receiving a full and accurate picture of the financial situation of the society at all times?

Mr. John Stanley Purcell

Well, there was a detailed set of accounts provided to every board meeting and, generally, when the accounts were considered by the directors, I would be asked for comments on them. Sometimes I was able to maybe put a paper in about something beforehand but generally I gave a verbal report on the accounts. There was a lot of information provided to the board and the board pack grew over the years because what would happen is somebody would say, "Well, you know, I want a report on something" ... "Well, you know, do it every quarter, do it every month." So there was a sort of a growth in it that people were used to. They didn't ... sometimes didn't want me to excise reports, you know, they wanted it left there and maybe, after a while, there was a lot of stuff there. But the board members were able to work through it, and probably it was a good recommendation at the time that the thing be looked at again.

As the commercial lending business, in particular, grew, were the levels of impairment and the changes in accounting rules clearly articulated to the board, to fully appreciate the risk?

Mr. John Stanley Purcell

The levels of impairment were, yes. Sorry, is this the new rules as well?

Mr. John Stanley Purcell

Yes. The introduction of IFRS, I think it was around 2005, it resulted in us writing back. I think we had a bad debts provision of about €100 million and under those rules we had to write much ... much of that back.

Mr. Purcell, the INBS section of the Nyberg report, did you read that?

Mr. John Stanley Purcell

I did.

Were you surprised at the content of that?

Mr. John Stanley Purcell

Well, I can't say. I mean, I read it, kind of, a while back and ... I see what was said there, yes.

Did you agree with it?

Mr. John Stanley Purcell

Probably not with everything. But he probably made some points, yes.

In the main, did you agree with it? Was it accurate of the institution that you served in?

Mr. John Stanley Purcell

I thought, you know, I thought it was a bit hard on certain areas. I thought, maybe, you know, it regarded our lending in a poorer light than actually was the case.

Mr. Purcell, if you could just clarify a matter. Have you seen or heard Mr. Fingleton's and Mr. Walsh's evidence earlier today?

Mr. John Stanley Purcell

I've heard some of it - not all of it but I heard some of it.

If I could just clarify, please, because I put both ... this question to both gentlemen earlier today.

I am speaking in relation to the change of lending policy in December '07 where the board previously had approval of €1 million-plus loans and subsequent to that the board no longer had approval of it, that it went to the board ... the commercial loan applications ... the board no longer required consent. You are aware of that?

Mr. John Stanley Purcell

Yes.

Mr. Fingleton certainly seemed to indicate that was a board matter and Mr. Walsh indicated that it came from the executive. Could I ask you your understanding of whether it came from the board or from the executive?

Mr. John Stanley Purcell

I think at that time the question of having the credit committee approve loans and that the loans then would be notified to the board ... It was discussed at the board and, I mean, it was a board decision to do it that way and I think the proposal came from ... it probably came from myself. You know, this is my best recollection. I was discussing the matter with the internal auditor and I think we concluded that the way Irish Nationwide was doing it wasn’t the way everyone else was doing it and that maybe ... it was time, maybe, to change the system. And it was a good time to do it because we weren’t lending anew, we were trying to cut back on lending. If there was lending, it ... there wouldn’t be much; it would be in relation to maybe stuff already committed and that it would be done on low volumes and that maybe it was moving towards the practice that was used in other institutions.

Could you clarify then, Mr. Purcell, was it a decision by the executive, accepted by the board?

Mr. John Stanley Purcell

Well, it was a proposal by the executive, I’d put it that way, that would have been brought to the board and would have been discussed and agreed. There was probably a good bit of discussion about it.

Was Mr. Fingleton in agreement with that prior to it going to the board?

Mr. John Stanley Purcell

At this stage I mean, I would regard it, maybe ... After a lot of discussion, it was a unanimous decision but ... that’s my best recollection

And again, to conclude, Mr. Purcell, please, the relaxation in the lending criteria, was that appropriate given the Financial Regulator’s ongoing concerns in relation to commercial property lending and the risk management within the society?

Mr. John Stanley Purcell

Well, in relation to having the credit committee approve loans, I think it was appropriate because the board would still be notified of the loans, we would still review them ... especially, you know, for a long while after we would look at them. It was also at a time where lending was decreasing and we were moving towards, maybe, a practice that was more normal with other banks.

Thank you very much. Okay. I now invite Deputy Kieran O’Donnell. Deputy.

Thanks, Chairman. Welcome, it being such a late hour, Mr. Purcell. Mr. Purcell, can I just clarify a number of points? Mr. Fingleton occupied the role as both CEO and head of lending. Am I correct?

Mr. John Stanley Purcell

That's correct.

A dual role. Would every single loan be ... end up on Mr. Fingleton’s desk?

Mr. John Stanley Purcell

I wouldn’t think so, no. No, not every loan would end up on his desk at all. No, loans would be dealt with by the department. They would probably wind up on the desk of the head of commercial lending or people who worked with him.

When would they ... What would be the level at which loans would end up on Mr. Fingleton’s desk?

Mr. John Stanley Purcell

Now, I think he would have been in contact with the commercial lenders. I don’t know when ... I think ... if there was loans that they felt he had an input in, they may well have-----

And you made reference earlier that 50% of the loans that went into NAMA were outside of Ireland.

Mr. John Stanley Purcell

Yes, I think so. Yes.

How many of those would have been with Irish developers?

Mr. John Stanley Purcell

There would have been an amount with Irish developers in London-----

Mr. John Stanley Purcell

I wouldn’t say ... I’d say a good lot but not the majority. They would be ... the developers that we ... the Irish developers that we dealt with in London, there would be people that we were dealing with for a long time. Some of them were probably more versed in London than Dublin so they would have been at home in both markets.

And can I ask you, in your role as financial controller of Irish Nationwide Building Society, do you believe on the night of the guarantee that Irish Nationwide Building Society was solvent?

Mr. John Stanley Purcell

Yes, I do.

And what do you base your assessment on that, considering that €5.4 billion of taxpayers’ money ended up, to date, going into Irish Nationwide Building Society?

Mr. John Stanley Purcell

I believe ... and probably my belief was borne out by subsequent events ... I mean, we had a very detailed audit at the end of 2008 on the accounts.

We also ... we had a solvency certificate which involved a good bit of work, both legal and by accountancy. The review of impaired loans in early 2009 was extensive. It involved the provisioning committee a lot of time ... a lot of meetings. KPMG spent a lot of time with it. I think it even delayed the production of our accounts, there was so much work done on the area.

Is your basic contention, along with the two previous witnesses from Irish Nationwide Building Society, Mr. Fingleton and Mr. Walsh, that the haircut that was applied to the NAMA loans, you believe was excessive?

Mr. John Stanley Purcell

I believe it was excessive. To the extent of its excessiveness, I mean I'm ... you know, I don't have-----

And what do you believe the discount should have been? It was 61%. What do you feel would've been a reasonable discount?

Mr. John Stanley Purcell

I find it hard to give a figure, but I feel that the ... especially loans in London ... a lot of those loans turned out to actually pay back the full amount.

And can you just elaborate on ... were you facing a funding cliff in 2009? You had roughly about €2.3 billion, my understanding is, of debt to be rolled over in 2009.

Mr. John Stanley Purcell

That's correct. I think there was ... there was a figure of that nature, yes.

And effectively, I think, €1 billion of that was due in May '09. How were you set up to deal with that funding cliff?

Mr. John Stanley Purcell

Well, in 2008 we had reduced our loan book considerably. We had raised a lot of money on ... from retail deposits. We had brought in a mortgage-backed promissory note programme. We were working on its securitisation. And, in September, even though things were very fraught, there was an increase in the deposit guarantee amount around 20 September. So we were looking at the credit crunch probably would persist for a while, but people's perspective wasn't that it would go for as long and as deep. So we expected that we would be able to return to the markets in 2009.

And did ... so do you believe ... well, first of all, two quick questions. Do you believe that Irish Nationwide Building Society needed the blanket guarantee to be covered by it? And do you believe if that guarantee wasn't there ... do you believe ... and NAMA wasn't put in place ... do you believe Irish Nationwide would be operating today?

Mr. John Stanley Purcell

It's very hard to be definitive about that, but what I would say is that it would depend on how the world markets ... how the money markets went after September; it would depend on whether the credit crunch ameliorated; it would depend on a whole load of factors. But where we were at the end of September was we did have a good amount of liquidity. We had probably over €3 billion. When the deposit protection scheme was increased, it did reduce outflows. I mean I think that's mentioned in some reports as well. So it was hard to know what way things were going. I mean, things could've turned well in October. Things could have-----

But you were looking for fair weather.

Mr. John Stanley Purcell

Well, yes, we were looking for a situation whereby there would be an increase in stability and there would be less worry and less turbulence in the market.

You weren't, as such, set up for a ... for shocks.

Mr. John Stanley Purcell

Well, we were ... I mean, if the-----

-----making a statement.

Sorry, were you set up for shocks?

Mr. John Stanley Purcell

We were set up that we could, let's say, exist for a while longer in ... in a very fraught market. If the market returned to a more stable situation, we felt we could maybe raise money on the wholesale again.

Okay. Thank you, Chairman.

Thank you very much, Deputy O'Donnell. Deputy Michael McGrath.

Thank you very much, Chair. Good evening, Mr. Purcell.

Mr. John Stanley Purcell

Good evening, Deputy.

Can I start by asking you ... that following the delegation of authority to the credit committee in December 2007 ... as you know, internal audit carried out two reviews of the operation of the credit committee and the evidence is in the core booklets, Vol. 2. One review in July 2008 covering the period of January to June '08 and the second in January '09 covering the period July to December 2008. And the internal audit's findings note that the frequency of meetings declined as the year went on to the point where, in the opinion of internal audit, the credit committee is not meeting with enough frequency to fulfil all of its duties.

Can you comment on that? Is that just a function of the reduction in lending activity at that time or is it indicative of a weakness in the systems at INBS?

Mr. John Stanley Purcell

Well, a factor would have been the reduction in lending activity, yes, because our new lending was curtailed very significantly after December 2007 so that would have been a function, so-----

So is the primary reason that they didn’t really have a purpose to meet?

Mr. John Stanley Purcell

I would reckon there was less business and they weren’t meeting as often.

Okay. And is it your view that the credit committee was functioning properly during that key period throughout 2008 and was ... or was it indicative of further weaknesses?

Mr. John Stanley Purcell

Well, as far as I was aware, it was functioning correctly but I mean I’m cognisant that certain recommendations were made by internal audit.

Okay, can I take you Mr. Purcell to the meeting on 7 September 2008 with the regulator, which you say was organised at short notice and you reference it in page 3 of your witness statement? Can you confirm who attended that meeting? I take it that AIB and Bank of Ireland were represented.

Mr. John Stanley Purcell

Yes.

And were you accompanied on behalf of INBS?

Mr. John Stanley Purcell

I was at that meeting along with our treasurer and our financial controller.

Okay, and the meeting was organised by the Financial Regulator?

Mr. John Stanley Purcell

Yes, I got a phone call, I think I got it from our chairman, late on Friday ... or late on Saturday night-----

Mr. John Stanley Purcell

-----to say they would be meeting probably sometime 11 or 12 o’clock on Sunday and that we would be meeting AIB and Bank of Ireland and I think it was to discuss the question of them providing us with a standby facility.

And this was on foot of the report carried by Reuters?

Mr. John Stanley Purcell

Well, it was -----

Is that what raised concerns?

Mr. John Stanley Purcell

Yes, I think the Central Bank were acting in the light of that report and they were looking at the idea that maybe Bank of Ireland and AIB could provide us with a standby facility.

Okay, can you just inform the committee the nature of that Reuters report at the time? What did it say?

Mr. John Stanley Purcell

Well, the Reuters report in essence said that INBS was making accommodation with its creditors, which wasn't true. In other words-----

How did you interpret that? What did that mean, "making accommodation"?

Mr. John Stanley Purcell

It meant that we would be ... we were talking to people who fund us asking them to come to some arrangement of some nature.

And it was untrue?

Mr. John Stanley Purcell

It was totally untrue, and Reuters admitted it later.

And did you ever discover the provenance of that report?

Mr. John Stanley Purcell

No.

Okay, and so was the underlying purpose of the meeting on 7 September not valid?

Mr. John Stanley Purcell

Well, I mean the fact that-----

Or were there funding pressures facing INBS as well?

Mr. John Stanley Purcell

The Reuters report was utterly unhelpful. I mean, it created a sense of unease and it was going to result in withdrawals so I mean, the regulator was taking precautions and one of the precautions was to see could a standby facility be arranged.

A liquidity support from the Bank of Ireland.

Mr. John Stanley Purcell

A backstop as they call it.

Okay, and did AIB and Bank of Ireland indicate a willingness to provide such a backup at that meeting? I know no decision was reached but-----

Mr. John Stanley Purcell

No, they didn't indicate a willingness.

Is it because it didn't get that far?

Mr. John Stanley Purcell

Well, we had a discussion. I can't remember all the details, but there was three of us there and the meeting just petered out.

Okay, and you weren't asked to provide any further documentation or anything like that?

Mr. John Stanley Purcell

No.

Can I ask, Mr. Purcell ... this issue of demutualisation has come up several times today and the expected change in the legislation and this seemed to be the whole strategy really for INBS was to prepare it for demutualisation and a trade sale but, financially, what would that have meant for executives and for directors of INBS? Were there bonus arrangements in place in the event of it happening or was it members were going to benefit? How ... what would the financial implications have been?

Mr. John Stanley Purcell

The financial implications ... sorry, Deputy, the financial implications is that there would be a windfall for members; in other words, their shares would be bought by whoever bought us and that they would receive an amount of money, just in the same way as people in Irish Permanent did in the early '90s and somewhat later in First National. So the members and the borrowing members would have received an amount of money.

What would directors have stood to ... to gain?

Mr. John Stanley Purcell

There was nothing agreed that directors would gain anything in particular.

But it could have formed part of the commercial arrangement with a trade buyer.

Mr. John Stanley Purcell

It could. It could have. It would depend on a number of factors.

And likely would have. I would imagine that it likely would have formed some aspect of a commercial arrangement if one was entered into.

Mr. John Stanley Purcell

It would have been discussed and probably would have, yes.

So there may have been a financial incentive in place or the prospect of one. It wasn't nailed down but there may have been the prospect of one if a successful demutualisation and trade sale of INBS had ... had been executed.

Mr. John Stanley Purcell

Yes, there was a prospect that it would benefit staff, as I think it might have also done in the other demutualisations.

Okay. You were also company secretary. What role did that involve? What specific responsibilities did you have, as secretary, which were additional to your role as finance director?

Mr. John Stanley Purcell

I was responsible for-----

Mr. John Stanley Purcell

For returns, yes. There was a lot of returns to be done under the Building Societies Act on an ongoing basis.

Okay and were you a member of any other ... any internal committees within the building society?

Mr. John Stanley Purcell

I was a member of the assets and liabilities committee.

What did that do?

Mr. John Stanley Purcell

Well, the main focus of the assets and liabilities committee was the liquidity position of the society, its funding and its managing the mix and the maturities of borrowings raised, and also dealing with stuff like hedge effectiveness, interest rate risk, currency risk - all issues to do with the funding and the liquidity position.

Okay, and finally-----

Mr. John Stanley Purcell

We also looked at things that were there as well, like the share-deposit ratio. That was something always on our agenda.

Finally, Mr. Purcell, and given the length of time you spent at INBS, you're probably best placed to answer this question. In your view, looking back now, did Michael Fingleton have excessive influence and control over the operation of INBS?

Mr. John Stanley Purcell

Well, Michael Fingleton was a very focused managing director. He worked extremely hard. He was very interested in demutualisation. He was very keen to sell the society. He felt that was the best outcome for the society. He also was very involved in the lending and he was very ... he had ... he was very knowledgeable about lending. It was mentioned earlier about economic reports at board. He would be very familiar with the position as regards the economy, the lending market. He was ... he was a strong, focused managing director.

But from a governance point of view, do you believe that he had too much influence and control over the organisation?

Mr. John Stanley Purcell

His control was subject to the board and he consulted with the board and at every board meeting he made reports on his activities.

Okay, thank you.

Thank you, Deputy McGrath. Senator Susan O'Keeffe.

Thanks, Chair. Mr. Purcell, in the Project Harmony report, it would show that the society had a concentration of loans in the higher risk development sector, a concentration of loans in the higher loan-to-value bands, a concentration in its customer base - the top 30 commercial customers, for example, accounted for 53% of the total commercial loan book - and a concentration in sources of supplemental arrangement fees, representing 48% of profit in 2006. Indeed, 73% of those fees came from just nine customers. Did the board ever consider or did they become concerned or did they discuss those levels of concentrations and the correlation between them and whether or not they could increase the risk to the society's business model?

Mr. John Stanley Purcell

The board were aware of the concentration. The large exposures report would be produced and it would be a board document. The board were also aware of the nature of our business, that we, Irish Nationwide, had repeat business with experienced developers. During my time there the board would have met some of the borrowers and the board was sort of satisfied with the people we were dealing with and the business we were dealing with.

So, in saying that you were satisfied, therefore you were saying you were not concerned. Is that correct?

Mr. John Stanley Purcell

We always, you know, monitoring stuff.

Sorry, concerned as in-----

Mr. John Stanley Purcell

No, we were not, no-----

-----as in being anxious-----

Mr. John Stanley Purcell

Yes.

----rather than-----

Mr. John Stanley Purcell

No, we weren't concerned at that level. We felt the business was good.

You felt the business was good and that the model was-----

Mr. John Stanley Purcell

The model was working, yes. It was a good model to go into demutualisation with, as described in ... in Harmony.

The Ernst and Young investigation suggests that Michael Fingleton was given special powers in 1981, and again renewed in 1994 and again in 1997, that allowed him and him alone to set and alter interest rates and fees if he so pleased and to make arrangements with individuals. Is that correct to your knowledge, given the time that you were there?

Mr. John Stanley Purcell

Yes, those powers were used by him in a practical way. He would have used them, maybe if, let's say we were under pressure and we might lose a loan, he would maybe make a decision that we would have to maybe reduce a rate. He would make other decisions in relation to loan matters.

So he did have those powers. Is it at all the case that he ever used those powers in a less than practical way? In a way that was not, I am not suggesting for personal gain, I am talking about, you know, for ... to do a favour for someone, to be good to somebody?

Mr. John Stanley Purcell

No, I am not aware of any instances of that.

You are not aware. Is it also the case that the reporting structure was such that there were 12 people reporting to Mr. Fingleton as the boss, rather than a more pyramid structure where, as you go up, you have fewer people at the top? Is that correct?

Mr. John Stanley Purcell

I can't remember whether it was the number - there was a number of people reporting to him. It is set out in the organisation chart in the Project Harmony document.

Can you clarify why a lot of savings would have been tied up in term deposits in Isle of Man accounts? Would that be normal procedure? I refer here to the fact that, at a time when the society was under a lot of pressure coming in to September 2008, savers would have had to break their terms in order to withdraw if they were concerned about the state. Why was the Isle of Man used in that way?

Mr. John Stanley Purcell

Well, the Isle of Man was ... would market products that would appeal to the people that they felt would put deposits with us and term deposits were a product that was successful for the Isle of Man. People, say for example, were interested in putting a deposit with you for a year because they got a rate they felt was happy - they were happy with.

So INBS would manage that on ... if I was coming to you, you would manage that for me in the Isle of Man. Is that-----

Mr. John Stanley Purcell

The Isle of Man, mainly, role was basically source sterling deposits.

Okay. And so how much ... would there have been considerable business in that?

Mr. John Stanley Purcell

I think the numbers are maybe just between €1 billion and €2 billion.

And were you the only building society offering that particular?

Mr. John Stanley Purcell

Well, there was a lot of competition in the Isle of Man. I mean-----

Mr. John Stanley Purcell

I think Irish Permanent had an operation there and at one stage the EBS had an operation there and there was all the ... a number of the Irish banks were there and there also would have been all of the English institutions there.

And that was all perfectly within the ... Going back to Mr. Boucher in relation to the meeting and I know that you said it was difficult to recall all of the detail, he said in his own evidence, he said:

There was a discussion between ourselves and AIB, there was some commentary from the regulator that they felt, well, the haircut on Irish Nationwide's books would be, I don't know, a mid-teens per cent. Whether I had a justification to say it, but I do recollect I said, "Well, whatever they say, it's two or three times that."

And then he goes on to say:

I felt we should get out of the building. I said, "We can't support these people.

So, do you recall that at all?

Mr. John Stanley Purcell

I don't recall about-----

Or knowing about that?

Mr. John Stanley Purcell

Well, I was there at the meeting. I don't recall that particular comment. I don't ... I am not sure was he referring to loans or was he referring to something else? It looked like he was referring to loans.

He says also that there had been an "exercise" he describes it, back in 2006 - he can't remember the exact date - where options were being considered for Irish Nationwide, and he says:

[We sat down with the] chief executive of Irish Nationwide and his company secretary to discuss their business model to get an outline of the type of lending they did ... I got an understanding of what I felt the business model was. I went back to the chief executive and said I didn't feel ... there was an opportunity for us and I didn't recommend we pursue it.

Is that ... do you have a memory of that meeting in 2006?

Mr. John Stanley Purcell

I do have a memory of it.

What happened there? Why was there a meeting?

Mr. John Stanley Purcell

Well, I mean, there were a number of institutions we were talking to at the time, with a view that perhaps they may well be interested in buying Irish Nationwide and Bank of Ireland – that indicates – was one of those institutions.

And did they write back to you after that meeting and say, "Well actually we don’t think you’re a suitable fit", or did it just end after that meeting? Do you recall?

Mr. John Stanley Purcell

I don't recollect a letter, Deputy, but I know it didn’t progress.

Okay, and did you at that time talk to Allied Irish Banks in the same manner that you did with Bank?

Mr. John Stanley Purcell

I don't think discussions were as developed or as, you know, they didn’t, weren’t at that level with AIB.

One minute there Senator.

Yes. Documents that we have seen that obviously we can’t – for 33AK – sort of state precisely what they were, but they show that there was a long-standing difficulty between the INBS and the Financial Regulator, going back to even before the separation of the way they were set up in 2003 and 2004. Given that you were there all that time, would you say that, would you use that expression “long-standing difficulty” to describe or would you have a dispute with that description?

Mr. John Stanley Purcell

There was-----

I can give the reference if required, Chair.

Mr. John Stanley Purcell

I mean, there was communications with the regulator, IFSRA, the Central Bank, you know, over a period of time but in all our dealings with them they were dealt with on an open basis.

Sure, no I am not implying that but the suggestion here is that there was always a difficulty, that the regulator always had a struggle to get INBS to respond, to come back, to talk to them, to give the responses that they require to give, the information that they require to get changes through. That's the evidence here in these documents, so what is your own view given that you were on the board? And we have seen documentation, which I am sure you have been given in the evidence books, that would also show a long-standing difficult, long-standing exchange.

Mr. John Stanley Purcell

There’s a long-standing exchange but when they wrote to us and when they raised any matter, I mean, my approach and our approach was to deal with it as properly and as promptly as possible.

And you felt you did.

Mr. John Stanley Purcell

I felt I did. Sometimes issues took longer. Sometimes it took a while to come back on something because you were trying to put something in place or you were trying to get information or you were trying to go through it with somebody.

I have just one last question, Chair, and that relates ... and again I am going here now if I may, Mr. Purcell, to the time of the guarantee and to your medium-term note programme, and to the payments that you would have had to make on these. I am referring here to a document actually from Brendan McDonagh to William Beausang and it talks about repayments that you would have to make of €630 million at the end of November and then on into 2009 there would be another €1.5 billion payable, and I’m just wondering how did that arise that those, that there was so much to be repaid?

Mr. John Stanley Purcell

Well those-----

And again, I can give you the reference, Chair.

Mr. John Stanley Purcell

Those repayments would have arisen as a result of the deals we did a number of years before. Say, for example, we would have raised money, generally in lumps, and at different maturities, so some years you might have a small amount, a relatively small amount, and other you might have chunkier amounts.

But was that a difficulty for INBS at that time? Was that now becoming a much more, you know, looming problem than it might have been previously?

Mr. John Stanley Purcell

Well, I mean, every year we had EMTN repayments.

Mr. John Stanley Purcell

I mean, in 2007 I recollect we had one in February 2008, and we had one later in 2008 at least.

Mr. John Stanley Purcell

In 2009 we had more. The funding and the repayment of those would depend on the state of the markets. It would depend on whether we could raise funds.

So if the markets were poor, you were struggling.

Mr. John Stanley Purcell

Well, yes, that would have always applied, yes.

Of course. Thank you.

Mr. John Stanley Purcell

Unless you could raise money elsewhere through retail-----

And you were struggling to do that.

Mr. John Stanley Purcell

Well, in September there was a lot of issues with a lot of institutions as regards funding.

And raising funds wasn’t-----

Mr. John Stanley Purcell

Raising funds was obviously-----

Thank you. Thank you, Chair.

Deputy Joe Higgins.

First, if I can allude again to the meeting on 7 September 2008, and Mr. Boucher, in one of his statements to this investigation, stated the purpose of the meeting was to discuss potential liquidity support for Irish Nationwide. Now, leaving the Reuters issue aside, Mr. Purcell, why was there such concern in many quarters about the viability of INBS or the need for liquidity support because both Mr. Fingleton and Mr. Walsh in their opening statements stressed that INBS had sufficient liquidity at that time?

Mr. John Stanley Purcell

Yes, at that time we had between €3.5 billion and €4 billion in liquid assets and our liquid assets were liquid. I mean, they were readily available. They were short-term deposits with large European banks. However, the initiative as regards the stand-by: it came from the Financial Regulator and the Financial Regulator came up with the idea, probably in the light of the threat to liquidity and the threat of maybe increased withdrawals as a result of the Reuters report.

But were there concerns before that, Mr. Purcell? Because, for example, the Department of Finance had secretly or quietly put on the stocks legislation for the nationalisation of an institution like yours.

Mr. John Stanley Purcell

I wasn’t aware ... I heard that, yes, earlier in ... from the inquiry. Well, I mean, there was - how would I put it - there was a lot of concern probably in the summer of 2008.

Can I go over again the question of whether INBS was solvent in September 2008? And if I could refer to the Goldman Sachs report that was done into INBS. This is in documentation that has been many times in front of the committee but we have it up in front of us there, Mr. Purcell. And if you see that line of the total loan book, €11.7 billion, and then their mark-to-market analysis going from 69 ... best mark 69% of the loan book to the worst mark 42%, which equates to €8.1 billion or €4.7 billion worst. Quite clearly on those figures, INBS was not solvent.

And if I might then refer to a similar diagram from Merrill Lynch, presentation to the National Treasury Management Agency, 26 September 2008, and then on the right ... top right-hand side, Mr. Purcell, you’ll see their summary is INBS has €11.7 billion of loans, "Writedowns of 30% – 60% results in an impairment of €3.6 bn – €7 bn". In other words, figures remarkably similar to Goldman Sachs'. And then the very next line is the liquidity of €3 billion to the end of 2008. On that basis, INBS is not solvent. Now how can you square these figures, plus the concerns that emerged about the liquidity, as opposed to what Mr. Fingleton and Mr. Walsh have assured us?

Mr. John Stanley Purcell

Well, this scenario I'm looking at here is Merrill Lynch setting out a scenario of what possibly would happen. You know, they would be setting out best case, worst case, medium cases. At that time all options and all eventualities were being explored. It was people looking at what might happen.

Were you concerned ... were you worried at that time that INBS was insolvent, or not?

Mr. John Stanley Purcell

I wasn’t worried that INBS was insolvent at that stage. The main concern at that stage was liquidity and the ability to raise funds.

Okay. Thank you, Mr. Purcell.

Thank you very much. We'll move on so to Deputy Pearse Doherty, please.

Yes. The Financial Regulator sent a letter in December 2004 noting its ongoing concerns with the level of resources at senior and executive management level within Nationwide. These concerns were repeated in a further letter in March 2008. Can you explain why the regulator's concerns were not addressed and no apparent effort was made to strengthen the board of the senior management to the satisfaction of the regulator over the period stretching at least six years?

Mr. John Stanley Purcell

Well, in relation to some of the concerns raised in 2004 in relation to senior management, there were ... it was mentioned there that there had been people recruited. There was ... and I think it was also dealt with by Michael Walsh and Michael Fingleton, there was a difficulty in recruiting extra non-executive directors around that time.

They have mentioned that a number of people were approached and the situation that INBS was going to demutualise and sell, it meant we were not a very attractive ... as I understand.

In view of the concerns over resources levels in senior management, why did the building society continue to expand its loan book - and this is the years that it dramatically expanded its loan book and, in particular, its commercial lending throughout that period - given the resource level in terms of senior management?

Mr. John Stanley Purcell

INBS, you know, continued doing the sort of business it felt it had a capacity to do. It felt it was doing good business with experienced people, much of it repeat business and, as a background to that, we were recruiting people in relation to aspects of loan. We set up around that time a credit risk department. We were preparing the loan book for the mutualisation, for Basel II, and for credit grading a number of things. So we were working in areas that needed attention.

In your opening statement, you mention in page 3, you say "By September 2008 INBS's liquidity was coming under pressure due to [...] credit rating downgrade and an inaccurate report [...] by Reuters." Mr. Purcell, did your bank have access to ECB funding in September 2008?

Mr. John Stanley Purcell

In ... during 2008, we raised funds by a mortgage ... a mortgage-backed promissory note programme.

Mr. John Stanley Purcell

No, it was raised in banks.

Yes, but the question is, I'm not asking you about that.

Mr. John Stanley Purcell

No, I know. You asked me about-----

The question is-----

Mr. John Stanley Purcell

I will just come to that-----

-----did you have access to ECB funding?

Mr. John Stanley Purcell

We had ... We were working on a securitisation.

Did you have access to ECB funding?

Mr. John Stanley Purcell

No, we didn't have access at that stage.

Okay. Did you have access to funding from the money markets? Did you have access to the European medium-term notes at this time?

Mr. John Stanley Purcell

No, the ... around September 2008, the markets were not accessible-----

Mr. John Stanley Purcell

-----probably to us and ... not to us and to others.

Well, you were shut out from the markets and shut out from the ECB at that stage. When did Nationwide ... when were Nationwide shut out from the money markets?

Mr. John Stanley Purcell

Well, probably, I mean, I can't get an exact date on it, but probably some ... in ... in 2008, as the credit crunch-----

We've seen details, or I've seen details, that suggest that it would have been in the first quarter of 2008. Would that be in line with your view?

Mr. John Stanley Purcell

It possibly could be, you know. In early 2008, we were raising a lot of money on retail funding-----

Okay. Given the fact-----

Mr. John Stanley Purcell

-----and we were raising ... we were reducing our book at the same time.

Okay. Given the fact that you were shut out to the money markets from about September or, sorry, from about March 2008 'til this period I'm talking about now, in September, and you mentioned that liquidity was a serious problem, you know that in the next 12 months, in 2009, there was about €4.8 billion of a roll-over on the markets. How were you going to cope?

Mr. John Stanley Purcell

Well we, like a lot of other institutions, were faced with a credit crunch. It was difficult for others also to raise money on the money markets. I mean, the credit crunch had started in 2007, and was getting worse. There was very little lending. In 2008, we were trying to reduce our loan book and we have ... we had reduced our loan book by a lot. We were still raising retail funding and the market was in a stage where people were optimistic maybe it would improve next year.

You were the only Irish bank that were shut out from the money markets and the ECB at that time, just for the record.

Mr. John Stanley Purcell

I, I, yes, I don't know that, but, I mean, I, yes.

Do you believe that that might have been what prompted the Government to start preparing legislation to nationalise the building society around that period?

Mr. John Stanley Purcell

I can't say. I can't say, Deputy-----

Mr. John Stanley Purcell

-----but, I mean, we were, we were still raising money and we, we still had a lot of liquidity in September.

Okay but, yes, that was the major risk and the Financial Regulator understood ... accepted that as well. Can I ask ... you mentioned in your statement that you were also involved in IT systems and development of IT systems and this is an area that came under criticism from the internal audit report, I believe. There is mention in terms of the IT systems. Can you just clarify this for once and for all? Did the CEO of Nationwide have access to a computer in his office? Did he run a €16 billion business without access to a computer?

Mr. John Stanley Purcell

I mean, I think there was ... he definitely had access to a computer. His secretary would have a computer and he would have access through that. I'm not ... can't ... he ... he probably had one on his desk as well.

But, like, I'm thinking ... I'm sure you've been in with like his office on many occasions. It's usually .... one of the most notable things you will see on anybody's desk is a computer. But in terms of a bank, and you’re looking at the reports, and you’re looking at all of the stuff, obviously, you’re looking at it on a screen. Was there ... you know, you were, sorry, you were the person in charge with the IT systems in the institution. Did the CEO have access to a computer in his personal office?

Mr. John Stanley Purcell

I’m not sure. I don’t think he did, but he had access to one, and his secretary would have one, but he also operated in terms that reports were brought to him. In other words, he wouldn’t be focusing on trying to figure things on a screen. There would be regular reports.

We’re not talking about a corner shop here.

Deputy, just let me in there for one second. Was there any device on Mr. Fingleton's desk?

Mr. John Stanley Purcell

I can’t recollect whether he had a computer or not, at what stage.

Any electrical device?

Mr. John Stanley Purcell

But I would say, Deputy and Chairman, that he was well informed of everything in relation to the areas he was looking after.

Okay, back to yourself, Deputy Doherty.

The point I’m making is, in terms of the systems - and this may seem a bit trivial and all that but I actually think it's not. Right - in terms of the systems, because you mention you were in charge-----

Mr. John Stanley Purcell

Yes.

-----of IT systems.

Mr. John Stanley Purcell

Well, the IT. Now-----

We’re not talking, as I was saying, about the wee corner shop, you know, that’s selling a couple of loaves of bread and a couple of pints of milk at the weekend. It is a €16 billion enterprise, where Mr. Fingleton ... report after report is saying - we know he was the chief lender - but report after report is how he was heavily involved in all aspects of the bank. Can you explain to me, as somebody who was responsible for the systems, how the CEO didn’t have access to a computer, given in banking everything is computerised, is it not, or were you still running around with post-it notes and paper clips and reports?

Mr. John Stanley Purcell

I mean, he had access to a computer. I mean, if he didn’t use a computer a lot himself, he had access if he wanted to, to use a computer. You know, there was, he could sit down with somebody and go through stuff on computer.

Mr. Purcell, what do you say to those who accuse you of being Mr. Fingleton’s "Yes" man?

Wrap up, Deputy.

Mr. John Stanley Purcell

I don’t agree.

You don’t agree. In your view-----

Last question.

-----and in your knowledge, from being there, from being secretary, from being chief financial officer, was ... had ... did Mr. Fingleton ever sanction a loan or ask somebody to provide a loan to an individual without it first going through the credit committee approval process or the board?

Mr. John Stanley Purcell

I’m not aware. I don’t recollect a loan in that case.

Are you aware, as we've seen in the Deloitte report, an internal report, where loan applications were actually made after loans were advanced to the customers?

Mr. John Stanley Purcell

In Deloitte internal audit reports, that is what you’re referring to?

Mr. John Stanley Purcell

Yes, I mean, there were findings of that regard and they were followed up.

------wrap it up actually.

Could I just ask this because you sat on the board? So one of the findings was, in Deloitte, that Mr. Fingleton was the individual who extended Stg£10 million of a loan on his own say, nobody else, and this was also backed up in terms of the independent internal review.

Mr. John Stanley Purcell

Yes.

When those findings were made, did the board investigate these findings and clarify whether that was the case or not, or did you just say, "That was a nice read and let’s move on to the next item on the agenda"?

Mr. John Stanley Purcell

No, no, no.

Right, Deputy.

Mr. John Stanley Purcell

It would have been explained to the board and action would have been taken so that-----

What explanation did you receive?

Mr. John Stanley Purcell

I can’t recollect the explanation on that but I know it would have been dealt with.

Thank you. Mr. Purcell, I’m going to bring matters to a conclusion. I just have a couple of questions myself to ask and I just need to wrap up, and I’ll also be inviting yourself to make any closing comments or remarks that you might wish to make.

Mr. Purcell, this was, kind of, touched upon earlier. I just need to get a bit further clarification on it. What was the limit of the MD's authority to issue loans? What was the sum of money? What was the lending limit?

Mr. John Stanley Purcell

Well, the lending limit, there was a lending limit of stuff, of €635,000, that could be dealt with-----

Mr. John Stanley Purcell

-----in the loans department without coming to the board.

Okay. With an earlier question there that I put to Mr. Walsh when he was in earlier - and I can pull up the document again - I think that figure of €635,000 you mention seems to ring a familiarity with ... that the sum should have been £0.5 million but ... the ... in a report by the regulator, there was actually a comment about a sum of that size. So was that sum actually beyond the scope? Is that the same sum that's being discussed?

Mr. John Stanley Purcell

Yes, I think this figure of 600 and ... it was ... actually, it represented the old £500,000.

Okay. So it is the £500,000 instead of €600,000. All right. So once it went beyond the old £500,000 - £0.5 million - he would then need board approval, yes?

Mr. John Stanley Purcell

Yes.

Okay. Did he ever issue loan cheques to borrowers and later seek board approval retrospectively?

Mr. John Stanley Purcell

There may well have been some of those - I can't recollect an example.

Are you aware of any cases?

Mr. John Stanley Purcell

No, I can't recollect any particular case at the moment.

Okay. Did the board reject loans which were submitted to it by the credit committee?

Mr. John Stanley Purcell

It did.

Okay. Can you ... maybe without getting into the specifics of customer transactions and customer confidentiality, could you maybe give us a general example?

Mr. John Stanley Purcell

I can't think of any particular examples. I know there was cases of that and also there would have been cases of loans, kind of, sent back. You know, maybe the board wanted more work done on them.

So, in that regard-----

Mr. John Stanley Purcell

They mightn't have been rejected out of hand, a lot of them, but they would've been put back into the system.

So, are you also saying that there were situations so where the board seek ... or sought additional information from the credit committee before approving loans?

Mr. John Stanley Purcell

Yes.

Mr. John Stanley Purcell

Or the approval was subject to things being done.

To the suggestion ... to maybe just to get your own comment and opinion on ... to the suggestion that credit committees can be rubber stamps and ... was there ever ... that never would ... that never go against management ... a managing director's decisions to grant loans? Would that be a fair or unfair description of the credit committee in INBS?

Mr. John Stanley Purcell

Well, I was not a member of the credit committee.

Okay. But by your own observations?

Mr. John Stanley Purcell

No. By my own observations, that ... you know, the loans were underwritten in a proper way.

Okay. And at a board level, did anyone on the board every challenge the overall lending strategy? In particular, did anybody on the board ever challenge the practice of taking equity stakes in developments in exchange for 100% funding?

Mr. John Stanley Purcell

Well, in December 2007 the board deliberated and made a decision that we were going to cease new lending, but that was-----

Okay. That's not what I am asking you, though.

Mr. John Stanley Purcell

Sorry.

There was a particular model that was being operated by Irish Nationwide Building Society. Usually, if somebody went into a bank, they'd get a loan-to-value of 80%, 20%, 60% or whatever, and they would have to come up with some cash themselves. Irish Nationwide, if I'm correct, and you can correct me if I'm wrong, operated on a basis that they gave 100% funding but on the basis that they would get a proportion or a profitability on what they were giving the loan on. It's that lending model that I am talking about. Did anybody on the board ever challenge that practice of taking equity stakes in developments in exchange for 100% funding?

Mr. John Stanley Purcell

Not that I am aware.

Okay. On a review of that lending practice, how would you consider that now?

Mr. John Stanley Purcell

Well, probably, in today's terms it wouldn't be regarded as maybe interim lending-----

Mr. John Stanley Purcell

-----but back then it was based on the fact that we were dealing with experienced people. It was repeat business. We were dealing with people who had been very successful in the past and knew their business.

In terms of a recommendation to this committee going into the future, how would you view such a practice?

Mr. John Stanley Purcell

Well I ... in my statement, there, I was asked what regulators might do to ensure that lending markets didn't overheat in future and I said maybe there should be loan-to-deposit ratios applied, perhaps maybe a balance between residential and commercial lending and that's ... those, sort of ... loan-to-values as well, which the Central Bank have applied.

In ... I concluded with a question to Mr. Walsh earlier, Mr. Purcell, and I'd put the same question to you. And that is, Mr. Purcell, that this inquiry, in preparing for the public hearings, gathered hundreds of thousands of documents. For today's hearing regarding INBS, documents from the Financial Regulator's office consistently and repetitively over many years expressed concerns regarding corporate governance, senior management resources, lending expertise appropriate to your business strategy, direction of the society's overall business model and the associated control framework, issues on the regulatory reporting and control - and, I think, in your own engagement this evening, which, as you admit, were a source of continuing disappointment to you - and also the lack of experience in the quality of internal audited resources.

Having listened to your contribution this evening, Mr. Purcell, is it your opinion, as we come to close these proceedings, that these documents are consistently and repetitively wrong?

Mr. John Stanley Purcell

Those documents express the concern of the Financial Regulator over years. They brought up concerns following inspections and, in all cases, we worked to resolve the issues. For example, we worked to upgrade internal audit in all aspects of its operation. So, when you look at them all together there is a long list there, but they came up over a number of years and we would have worked to resolve each one as well as we could at the time. And many of them resulted in systems and processes being upgraded to a good standard. Some of them about recruiting directors, there was reasons why it was delayed and for other reasons.

You have a far, far greater experience of banking than I have, Mr. Purcell, and I would acknowledge that right from the get-go both in terms of experience, time in the job and all the rest of it. And you may or may not observe things better than I would just in terms of general detail, but ... and I am sure, maybe I'm wrong, that you would have maybe observed some of the testimony of the different financial institutions here to date. In quantitative terms in regard to just the volume of correspondence that came from the regulator's office to financial institutions in this country, where would you rank Irish Nationwide Building Society?

Mr. John Stanley Purcell

I don't know. I wouldn't have knowledge of what other banks had in dealings with the regulator, but I do know - I recollect it came up - a remark was made to one of our non-executive directors that the dealings that the regulator/Central Bank had with us were just normal issues.

That would be your-----

Mr. John Stanley Purcell

That was an observation that was made to-----

Yes, but what's your observation?

Mr. John Stanley Purcell

Well, my observation was that I don't know whether other institutions had more or less than we did.

Okay. Is there anything else you'd like to add by means of final comment, Mr. Purcell?

Mr. John Stanley Purcell

No, thank you, Chairman, except to thank the members-----

Okay, with that said, I'd like to bring matters to-----

Mr. John Stanley Purcell

-----and I hope I was of assistance.

Mr. John Stanley Purcell

I just want to thank the members and hope I was of assistance.

Okay, thank you. So, with that said, I would like to bring matters to a conclusion and thank Mr. Purcell for his participation this evening, and for his engagement with the inquiry, and to now formally excuse you. In doing so, I would just like to suspend for a moment to deal with just one point of information before we close this evening and as we prepare for our hearings tomorrow morning. Is that agreed? Agreed.

Mr. John Stanley Purcell

Thank you, Chairman.

The joint committee went into private session at 9.08 p.m. and adjourned at 9.10 p.m. until 9 a.m. on Thursday, 3 September 2015.
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