JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Thursday, 25 Feb 2010

Irish Banking Reports: Discussion

Chairman

The first item is a discussion with Mr. Klaus Regling and Mr. Max Watson on the report the Minister for Finance, Deputy Brian Lenihan, requested into the crisis in the Irish banking system and how the priorities of Oireachtas Members could be reflected in the report.

I especially welcome Mr. Regling and Mr. Watson to this meeting. Members will recall that the proposed Government approved framework of inquiry provides for two phases. The first phase provides for two separate reports to be prepared, one from independent international experts, namely, Mr. Regling and Mr. Watson, and the second from the Governor of the Central Bank on the performance of the functions of the Central Bank and the Financial Regulator. The second phase will be the establishment of a statutory commission of investigation.

Our meeting today with Mr. Regling and Mr. Watson, and next week with the Governor of the Central Bank, will provide an opportunity for the Oireachtas and, in particular, for the members of this committee to have an input into the process and thereby the priorities of Members can be reflected in the work that both the Governor and Mr. Regling and Mr. Watson are undertaking.

Before commencing the discussion, I wish to advise that we will have a short opening statement which will be followed by a question and answer session. I request that all mobile telephones be switched off.

I draw everyone's attention to the fact that members of this committee have absolute privilege but this same privilege does not apply to witnesses appearing before the committee. The committee cannot guarantee any level of privilege to witnesses appearing before it. Further, under the salient rules of the Chair, members should not comment on, criticise or make charges against a person outside the House, or an official by name in such a way as to make him or her identifiable.

I invite Mr. Regling to commence proceedings.

Mr. Klaus Regling

Mr. Max Watson and I are pleased to be here this afternoon. We consider it a privilege that the Irish Minister for Finance, Deputy Brian Lenihan, has asked us to conduct this preliminary investigation into the crisis in the banking system in Ireland. We met the Minister this morning and he explained our mandate in greater detail. As the Chairman reminded members, there are two phases to the inquiry. We will contribute our report and the Governor of the Central Bank, who will complete a second report, prior to the members, together with the broader committee, moving forward to the statutory commission of investigation.

We are here today mainly to listen to the members of the committee and to find out what their priorities are in this context, what they expect from our report, and we look forward to their comments and input. We are happy to answer any questions they may have, although we will not be able to tell them the results or conclusions of our report on which we will work over the next three months and which will be finalised before the end of May.

Before I go into the details of our mandate, work methods and how we intend to approach the task, it may be useful to speak a little about our background. We were told the members may be interested to hear something about that. I assume our CVs have been circulated. I will speak a little about myself and then Mr. Max Watson will take over. As members will note from my CV, if they have had time to read it, I have worked as an economist all my professional life, for more than 34 years now mainly in the public sector but also for a few years in the private sector. My first job after studying economics in Germany was with the International Monetary Fund. I was a staff member of the IMF for 11 years and I worked on different issues in the IMF such as forecasting capital market issues and country work. I also lived in Indonesia for two years where I ran the IMF's Indonesian office.

I worked for more than a decade in the German Ministry of Finance, mainly on European issues and, in the 1990s, I was director general at the German Ministry of Finance in charge of preparing monetary union. After leaving the German ministry I spent two and a half years working for a hedge fund in London. I had also worked for two years earlier in the 1980s for the German bankers' association. From 2001 to 2008 I was the director general for Economic and Financial Affairs at the European Commission. In that capacity I was the top civil servant of the Commission in charge of macroeconomic and financial issues. As members may be aware DG ECFIN, which I headed, is in charge of giving economic policy advice to all 27 EU member states. It also conducts economic and budgetary surveillance of the EU member states and the euro area. The DG ECFIN also produces forecasts, conducts financial stability analyses, prepares euro group meetings, writes reports about the enlargement of the euro area and maintains relations with the European Central Bank and the international financial institutions on all the macroeconomic, monetary and financial topics that are relevant from the EU perspective.

After leaving my position as director general of the Commission in summer 2008, I spent one year as a fellow at the Lee Kuan Yew School of Public Policy, which is part of the National University of Singapore, where I lectured and did research, including on the global financial crisis. In late 2008, I was also invited to join the Issing Commission that advises the German Chancellor on the reform of the global financial architecture that is discussed at G20 summits. After returning from Singapore, I started my own consultancy in Brussels which advises governments, central banks, companies and financial market participants on economic, financial and regulatory issues in Europe and Asia.

Mr. Max Watson

It is a privilege to be here and to be asked to co-author this report. My professional life started at the Bank of England working on the European economy and then for quite a while in banking supervision. In those days, banking supervision was a function of the Central Bank in the United Kingdom. My work there as a manager in banking supervision was particularly concerned with international supervision, working as secretary of the European group of bank supervisors and as an assistant to the then Basel Committee, known in those days as the Cooke committee when the chairman, Mr. Peter Cooke, was at the Bank of England. I helped him organise the first international conference of banking supervisors, which was an effort to extend the Basel Committee's work into emerging markets and offshore centres.

While I was there I was seconded to a London investment bank, S. G. Warburg, and helped set up a new segment of the euro-run market. I then moved to the IMF, where I worked as assistant to Mr. Jacques de Larosière who was then head of the IMF. Of course, the same Mr. Jacques de Larosière was the author of the eponymous report on bank regulation. I stayed for a long time in the United States. I was chief of the IMF's international capital markets division, which is where Mr. Klaus Regling and I first met, and my work there was concerned with changes and innovations in financial markets, the resolution of the debt crisis in Latin America, on which I chaired the fund's debt group, and with the way regulation interacts with financial markets and financial innovation. They gave me a year off, like in prison, for good behaviour and I went to Oxford on sabbatical to do a paper on financial liberalisation, questioning some of the ways it had been managed and raising issues about Asia in the 1990s.

When I returned to Washington, the transition in eastern Europe was in full swing and I found myself two weeks later on an aeroplane to the Balkans and led the famous, or infamous, IMF missions to countries such as Hungary, Romania and Croatia during the transition. In the run-up to monetary union I moved to work on western Europe, as it was then called, and led the surveillance effort in countries such as Italy, Spain, Belgium, the Netherlands and Finland. In functional terms, I was in charge of trying to organise the financial sector work on Europe from the regional perspective and in cross-country comparisons.

I left the IMF in 2002 when I took early retirement and returned briefly to Oxford. I then moved to the European Commission in 2003 where I was an economic adviser, advising Mr. Klaus Regling, among others, on two subjects. The first was the risks of a financial crisis in eastern Europe and the second was how the euro area would adjust under external shocks, the question of adjustment of economies within the euro area and their interaction with financial markets and co-authoring the Commission's rather heavy study on that which was produced in 2006. Two years ago, I moved back to Oxford, to live in the UK full time for the first time in about 30 years.

I have been engaged mainly in four things in the past couple of years. One was doing a study for the IMF executive board on the effectiveness of IMF financial market and monetary surveillance in Europe. The second matter was Cyprus. I was involved as adviser to the Annan plan during the original effort to reunify Cyprus and I have been going there every couple of months to help the Commission with its work and to help a group I set up some years ago to try to bring economists in the north and south of Cyprus together. The third thing has been working on emerging new markets, giving advice to central banks, private banks and institutions on emerging Europe. Finally, I have been writing a programme in Oxford on the political economy of south-east Europe. That is my background.

Mr. Klaus Regling

I will continue by looking forward, not backward. I will outline how we understand the mandate given to us and how we will approach our work. Our core focus will be on the root causes of the crisis. In that context, we will have to analyse the global and European economic and financial environment of the last decade or perhaps longer. This provided the context to the crisis in the Irish banking sector and the Irish economy. We will then consider the more specific Irish situation and the economic and financial developments in Ireland since the 1990s. We will look at Government policies in Ireland, the macroeconomic situation, financial markets and banking supervision and developments in the Irish banking system, including questions of corporate governance and so forth. We might not be able to come up with definitive answers to all the relevant questions but we will, at the minimum, identify all relevant issues which might be taken up by the commission of investigation in the second half of the year.

How will we structure and conduct our work? After today's first visit to Dublin and after listening to the committee members, we will have a series of meetings in Dublin and outside Dublin with important institutions and bodies. In Dublin, we wish to meet the relevant public and private sector bodies, such as the Central Bank, the supervisory authority, resource institutions, institutes and civil society, such as trade unions and consumer representatives. These meetings will begin next week. In addition, we will request data and other factual input from the authorities on specific topics. Outside Ireland, we will have a series of meetings with key international bodies, such as the European Commission, the European Central Bank, the International Monetary Fund and the BIS, the Bank for International Settlements in Basel, because we believe it is important to understand their point of view on the global financial crisis and what they think about the Irish specificities in that context.

We will finalise our report before the end of May; we are prepared to appear again before the committee after the completion of our report. That is my brief introduction. We are happy to listen to the committee's comments and suggestions and to respond to members' questions.

Chairman

I call Deputy Richard Bruton, spokesperson for Fine Gael, the main Opposition party.

Deputy Richard Bruton

I thank the witnesses for coming to the meeting. I am very impressed with their CVs. They have very clear perspectives that will be valuable to us. I will make a few comments about my views of what went wrong. In Ireland, unlike in most other countries involved in the global credit crunch, there was a bog standard property bubble. It was not complex securitisation, rating agencies or the like that led it but, basically, low interest rates, free flow of capital as a result of joining the eurozone, weak regulatory oversight and a political belief at the time that the property sector could perform and drive a sound, fundamental economy. That led to the eclipse of the survival kit of a small open economy which is about being competitive and being export led.

Beneath, there are several problems. It goes back to the establishment of IFSRA. I note Mr. Watson's interesting "Stress-Testing the Regulators: Market Risks and the EU Economy". When we established IFSRA, there was no stress testing of whether what we had was adequate. A big bulldog clip was put around all of the existing activities, it was sent to the new authority and there was a missed opportunity then to stress-test regulation, particularly in the new climate of being a member of the eurozone.

That has been a significant feature. The result is there for all to see. There was a lack of appreciation of information coming to the regulator that was not acted upon where things were going wrong. There were umpteen alarm bells ringing that were being recognised, but there was a sort of box-ticking exercise from the Central Bank and the regulator where the risks were recognised but no action was taken. There was a lack a clarity of what were offences by directors, managers and boards of banks. Even now, 18 months on, there is still no criminal case taken against anyone in respect of many activities that prima facie were in breach of the law. There may be issues in that regard around the criminal test, but there are also questions about the clarity of offences. There was a deep regulatory failure and I would be interested to hear the witnesses' view on that.

There was an unhealthy cosy relationship. In the literature, is it called symbiosis? Effectively, it was like people seeing things going wrong but feeling such loyalty to the system that to cry foul was seen as a greater risk than the merit of policing things that were going wrong and holding people to account and nipping them in the bud. That was a serious issue.

There was also a political dimension to this. The Governor of the Central Bank was a former chief official of the Department of Finance and was a political appointee to the Central Bank. The new person is not but, clearly, it was unhealthy to be appointing persons who had been core to the existing Government policy and to hope for an independent view. There was no attempt to take an independent view.

Underlying many of the problems was that there was no political understanding of the obligations of the eurozone, that we were now in a cheap money but tough currency regime. There was not an understanding in terms of economic policy of any of that.

Was it the late John F. Kennedy who stated that success has a thousand parents and failure is usually an orphan? That holds much truth here. Of the failure that has happened, there is nobody recognising his or her fault and that is a problem. There were multiple faults occurring right across the system. Its consequences are catastrophic, as the witnesses will be aware, for ordinary people's lives in terms of the collapse in employment and the significant debts with which people are ridden.

In some ways there is much material out there on what has happened and in many ways we look to Mr. Regling and Mr. Watson — I hope it is not impaired by their terms of reference — to advise on the response and the adequacy of our response. There has been some talk that their terms of reference would end in September 2008, which would be a tragedy because it is vitally important that we see beyond the growing crisis and look also as to what is the correct response and how we can establish a "never again" position in respect of the Irish banking sector. Those are very important issues for us.

Given Mr. Regling's background in the eurozone, I want to ask him specifically about his perspective on the eurozone's capacity to address what structural problems are now emerging. Ireland has been linked with other countries such as Portugal and Greece which are under pressure. There seems to be genuine problems that were glided over when the eurozone was being established as to how one establishes co-ordinated policies across these diverse economies. Some would say that part of the difficulty of Greece, Portugal and Ireland dealing with the crisis would be a continued structural surplus in other parts of the eurozone, that it is difficult for us to unravel with export-led strategies if everyone in the eurozone is trying to run export-led strategies. I would be interested to hear Mr. Regling's view on how the eurozone can react because it will be vitally important for the success of our strategies that the broader eurozone is also taking policies that can develop the coherence of the eurozone for the long term, as well as what one might describe as IMF-style short-term action that is going on.

We would expect Mr. Regling and Mr. Watson to look at the policies of Government in respect of the property sector, banking and the relationship with politics. We would expect them to look at corporate governance where there has been a dismal failure of boards and corporate governance and a weakness in legislation in making that happen. We would also expect them to look at accounting practices and internal audits and, apparently, the whimsical overriding of risk management that seems to have occurred within our banking sector. Obviously, the legal and regulatory structure must be looked at, as will the broader planning and regulatory policies and practices that allowed the property sector to become such a dominant factor in the growth model of the past number of years.

I have not offered many questions. I suppose, as they stated, the witnesses are listening to us. That is my take on it. However, I would be interested to hear their initial perspective on a strategy for Ireland to manage this crisis within the eurozone because I think we will look to Mr. Regling and Mr. Watson to give us some added value, in terms not merely of looking at what happened in the past but of applying the lessons of the past with the sort of firm handle they have on the international situation.

Chairman

I will take three contributions first and then come to Mr. Regling and Mr. Watson.

Deputy Joan Burton

I welcome Mr. Regling and Mr. Watson. In many ways this is an historic day for Ireland and for the Dáil. In many ways both of these gentlemen will be seen as coming here as the representatives of the European Central Bank and of the IMF in the context of the failure and collapse of the banking system in Ireland. Just as there has been enormous speculation in the newspapers about the so-called group of countries of Portugal, Ireland, Italy, Greece and Spain, it seems that the arrival here of Mr. Regling and Mr. Watson indicates that we now have two angels on our shoulders, formally coming from primarily the ECB but, clearly, from their CVs, coming with a certain imprint from the IMF. In terms of attempting to assist Ireland in resolving its crisis, in so far as it goes, that is fine. Also in so far as it goes, there is in Irish society a tremendous shock for most ordinary families and people who have seen businesses collapse and pensions for which they had worked hard to provide withering away, and for public servants who have seen major reductions in their pay and pension entitlements. On a number of occasions, our Minister for Finance has boasted in Europe that if other countries were to experience the level of adjustment Irish people have taken on the nose, so to speak, there might be a tougher response. For many people in Ireland, the gentlemen's job in their preliminary investigation is important because there are fundamental questions which most Irish people without too much knowledge of finance continuously ask. Those questions are as follows. How did all this happen? How come we, as a country, apparently talked about ourselves as being among the richest in Europe? Where has all the money gone? Why are people, such as pensioners and people on social welfare incomes from the State, taking so much of a hit?

While some things have changed in our banks — shareholders have lost most of the value of their shares — for the most part, the boards of the banks remain the same group of people who know each other, who perhaps went to the same schools as each other or who are members of the same golf club and yacht club. In a way, the reference in the Minister's initial statement of looking not only at the economic but at the social structure in this report is important.

I am still not clear about the exact terms of reference of the gentlemen's report. The Minister's initial statement describes it as a preliminary report into the origins of the crisis in the banking system. Are there terms of reference? Will the gentlemen explain them to the committee or give members a copy of them and publish them? As I said, the terms of reference in the Minister's original statement refer to the international social and macroeconomic policy environment which led to our banking crisis. What is the gentlemen's interpretation or do they have one yet? How will they explore this reference to the social policy environment and how this is thought to have contributed to the banking crisis? Will they give the committee a timeline for the preparation of their report?

The gentlemen mentioned they would interview — I gather in private — civil society and gave consumer groups and trade unions as an example of civil society. In that context, do they intend to meet the political parties, in particular the parties in opposition, given that I understand they met the Minister for Finance this morning? Presumably he has given them their terms of reference. How far will the gentlemen cast their net in terms of interviews with people such as bank executives, policymakers and the regulatory authorities in the preparation of their report? What resources are at their disposal for the report? Has the Minister given them any indication whether their report will be made public?

As the gentlemen are probably aware — reference was made to working with de Larosière — the reform of the Irish regulatory system is ongoing and we have a proposal for the merger of the Financial Regulator back into the Central Bank. As the previous speaker said, given that the Minister's terms of reference appear to stop at September 2009, which is before the Government started to intervene publicly and the banking guarantee, will the gentlemen be invited to have some oversight in regard to the reform process which the Government has already taken a decision to undertake?

I wish to raise a number of other issues, specifically in regard to the timelines of the gentlemen's inquiry and the events which they may or may not see as pertinent to the inquiry. In 2005, The Wall Street Journal telephoned me and several other people in politics in Ireland in the aftermath of its producing an article in which it described Ireland as the wild west of international finance. That became a well-known and unfortunate description which attached to Ireland. Will the gentlemen address the international commentary which developed about Ireland?

In the international context, I wish to refer to two specific events. The first is the issue of reinsurance in the Irish Financial Services Centre, specifically the reinsurance company which was subsequently acquired by Berkshire Hathaway, where one of the chief executives plea bargained with the US authorities in regard to the scandal which emanated from Dublin, which at the time was the subject of much Central Bank action and was deeply disturbing to those who heard about it. The second, which I will address more to Mr. Regling, was the issue of what happened in the Irish Financial Services Centre in the period before Hypo Real Estate acquired DEPFA Bank and the consequent losses that occurred in that bank. I have seen a number of translations of articles from German newspapers and when I have been in Germany or met people from various German organisations in Europe, this issue is consistently raised as a matter of discussion and concern on the part of Germans who have, in general, been quite admiring of Ireland.

Mr. Regling mentioned his work with Chancellor Merkel. Der Spiegel recently reported Irish banks as having obligations to Germany of €174 billion out of total obligations by the countries to which I referrer earlier of €522 billion. Will part of the gentlemen’s work specifically involve an examination of this relationship which again is at the heart of one of the previous questions?

Once we had the euro, there was a lot of money available from German banks to invest around Europe. Did our banks borrow short to lend long? They lent to the construction industry on a long-term basis but many people would argue that they borrowed short on the international money markets, in particular given that there was a lot of money available from Germany. Will that be one of the areas of examination?

Chairman

Deputy Burton——

Deputy Joan Burton

I have a number of specific questions for the gentlemen.

Chairman

There are many other speakers and we will not get to them all.

Deputy Joan Burton

I am the spokesperson for the Labour Party and these questions are important. The second set of questions I wish to ask concern Ireland. For a long time, I expressed concern about an Irish bank, Anglo Irish Bank, in the House and at this committee. In the run-up to the collapse of this bank, from 2006 onwards, it was reported in many of our newspapers that the owners of an insurance company were buying up a significant stake in the bank through a mechanism known as contracts for difference, CFDs. Ultimately, when the share price collapsed——

Chairman

Deputy Burton is going into great detail about——

Deputy Joan Burton

I am not. I am giving an oversight.

Chairman

Perhaps the Deputy would put the questions in writing.

Deputy Joan Burton

I do not have the terms of reference of our distinguished visitors. I do not know whether they meet political parties publicly or privately. With no disrespect to the Chairman, I wish to put my legitimate questions on the record. I will take approximately five minutes. I will give a list. Will the witnesses look into Anglo Irish Bank and the issue of the build-up of the Quinn stake via contracts for difference and the off-loading of the stakes to a group of people called either the "Maple Ten" or the "Golden Circle". Section 110 of the Finance Act was to close a loophole for people involved in construction and development avoiding stamp duty. It was never closed and, as a result, in the view of many of us, the property bubble to which the previous speaker referred became bigger. Will the witnesses look in detail at the history of the property bubble?

Deputy Frank Fahey

They are not here for a holiday. What else would they be here to look at but the questions Deputy Burton is asking?

Deputy Joan Burton

I do not know. I do not have any terms of reference.

Chairman

Deputy Fahey.

Deputy Joan Burton

Deputy Fahey may have the terms of reference.

Chairman

Deputy Burton. Deputy Fahey should not interrupt.

Deputy Joan Burton

In the run-up to the 2007 general election here our national television station produced a documentary called "Future Shock" predicting the collapse of the construction bubble and the difficulties that would arise for Irish banking. Will the witnesses have access to that material? It is very important that they would be able to see the reviews that were done.

What I say about the Financial Regulator should be confirmed by other committee members. During the period in question when the Irish banks were going down the tubes, on numerous occasions we in this committee had the Governor of the Central Bank, the Financial Regulator and managing directors, chief executives and chairmen of the various banks sitting where the witnesses are sitting. On every occasion we were told a couple of things; that everything was fine and not to talk down the economy. The former Taoiseach said that people who talked down the economy should go and commit suicide. We are coming from a situation where no one understood this fully. There were many warnings, both from commentators outside of this country and from events which the media covered in enormous detail that raised serious questions but no one took what was happening seriously. Perhaps they did in private but when they came to this forum they told us over and over again as if we were small children to go home, not to worry, to sleep well and that they were stress testing and the banks were solid and safe. We were told over and over again by the Financial Regulator, the Governor of the Central Bank, the Minister, the Taoiseach, all of the agencies, that everything was fine.

As responsible and senior Members of Parliament, we were not even given private briefings to say, "Hold on, we are concerned." That only came just as the crisis was about to explode. Will the witnesses take a view on what the future capital levels of Irish banks should be? Will they take a view of how prudential regulation should be arranged vis-à-vis consumer issues of value for money and service from banks?

Last St. Patrick's Day — a year ago — our current Minister for Finance gave an interview to the Financial Times in which he spoke about crony capitalism in Ireland. For many of us that is the golden circle between the banks, the developers and the ruling political party for many decades in this country, which the witnesses probably know is Fianna Fáil.

Chairman

Do the guests have any comments to make on what the previous two speakers said? We will move on after that.

Mr. Klaus Regling

I am happy to do that. I thank the members for their comments. This is the kind of input we were hoping to get as an important background to our work. I will try to go through the list of questions. I may not be able to answer everything. As I made clear in my introduction, at this point I do not wish to comment on the Irish situation. That will be in our report. It is too early for that. We start our work today. The detailed questions are useful as a background for us because they indicate what members are interested in. I would not be able to comment on that now.

There were two questions on the mandate. For me the mandate is very clear. Members have a copy of it in front of them. It was published by the Department of Finance. We do not have anything else. That mandate was confirmed by the Minister for Finance this morning. There is no secrecy or surprises around that. Members might not like it but we take it as a given that the mandate states clearly that we should look into the bubble. The history of the bubble and the root causes are very much part of that mandate. The mandate as we received it runs up to September 2008. We were not asked to assess the crisis measures or the emergency measures or to take a view on what is happening now, how to restructure financial supervision and all of those matters. That is not part of the mandate. We will be busy enough with the mandate as it is because we only have three months. As I understand it, we will make one input, the Governor of the Central Bank will make another input and then in the second half of the year the committee of investigation will act and it can go much further than that. That is why our report is called a preliminary report or at least that is how I understand it.

It would be outside our mandate to take a view on required bank capital. It would be going too far as the G20 and the Basel Committee on Banking Supervision is actively working on that. It would not be productive for the two of us to write about that although we have views on it. In our other work that has been published we referred to some extent to the origin of the crisis, globally, rather than specific to Ireland. It is clear that the gaps in supervision and the lack of bank capital were reasons that contributed to the global crisis. We reserve our judgment on Ireland. When we consider the global financial crisis, they are issues that have been discussed since late 2008 by G20 summits, the International Monetary Fund, and the Bank for International Settlements so they are clearly contributing factors. We will see what in our judgment played a particular role in the case of Ireland.

As Deputy Bruton suggested we will look at Government policies, corporate governance and regulatory practices. We have to consider the property boom but we will not look at what happened after September 2008. That is all I have to say on the mandate and processes. Mr. Watson might indicate if I have missed something.

I will respond to the interesting question on how monetary union can survive under these circumstances and how countries can respond to the crisis within the constraints of monetary union. Perhaps Mr. Watson wishes to add something.

Mr. Max Watson

I have a couple of other points to add. The time period was clearly set out to end in September 2008. However, it is clear we are meant to extract the lessons from what happened in the period up to 2008. Those lessons are extremely important when one considers the framework that was subsequently put in place. We are not meant to make specific comments on that framework.

On individual institutions, we have listened very carefully and are trying to inform ourselves of the overall position. One of the things we will attempt to do process-wise is extract from the experience of individual institutions a kind of typology in respect of what went wrong. Even an innocent and preliminary reading suggests regularity in the types of problems experienced. This regularity arises, for example, in the area of corporate governance. When this regularity is examined, it should be possible to extract lessons regarding the nature of the inherent problems. We cannot form a view on whether something was legal or illegal. We must, therefore, focus on the kind of governance issues that arose. The nature of the process will, in that sense, be investigative. However, we will not investigate individual people. We will not comment, except by way of illustrating an example relating to an individual institution. We will publish a full report. My understanding is that we will submit our report to the Government, which will then publish and lay before the Parliament.

We intend to meet bank economists, supervisors and so forth. We received the initial mandate earlier today from the Minister, who made it clear that he does not wish to interfere subsequently in the process or make suggestions of substance about it. We had not planned to hold meetings with politicians in the follow-up period. The only exception in that regard is this committee, which seems to be the natural interface with all of the representative politicians. However, as Mr. Regling stated, we will try to meet trade unions, consumer groups, and so on which, in a broad sense, constitute civil society. There are just one or two additional process clarifications with which Mr. Regling will deal.

Mr. Klaus Regling

Yes, I forgot to deal with some of those. The Minister confirmed this morning that the report will be published and given to members.

Deputy Bruton inquired about how the euro area can function in a crisis. This is the first real crisis to affect the euro area. It is also a crisis for the world economy. The euro area is 11 years old and this is the first test of how it really operates. We are somewhat better positioned after 11 years to identify where improvements could prove very useful.

To return to the beginning, in 1999 several countries which joined the euro area — I am not referring to Ireland in this regard but rather in general — under estimated the difficulties a country encounters when joining that area. What happened at the time was that several countries — again, not Ireland — made a strong effort to meet the criteria for entering monetary union. They were happy to achieve that and then they relaxed and thought most of the work had been done. The European Commission and the European Central Bank, ECB, both argued that this work should continue or it would become very difficult to meet the policy requirements relating to membership of the euro area.

Countries that join the euro area lose the exchange rate policy instrument and the monetary policy instrument and are obliged to work on the other instruments and tools that are available. This means they must introduce structural reforms, create greater flexibility in their economies and maintain competitiveness in the euro area vis-à-vis their partner countries. Not every state did a very good job in that respect. Again, this is not a comment on Ireland. Any comments we make will be contained in our report. That was a fairly widespread problem.

Those who designed monetary union knew that adjustment for countries within it would be different to the adjustment required by countries outside it. The adjustment to which I refer mainly works through the competitiveness channel. In countries with large economies, such as the United States or China, the regions gain and lose competitiveness and do well and less well. Members will be aware of stories regarding the rust belt in the United States and they will also be familiar with California's ups and downs. This is quite comparable.

Many studies have been carried out which compare individual countries in the euro area with regions in the United States, not to mention those in China, which are extremely heterogenous. California cannot devalue its currency because it does not have its own monetary policy. However, it has undergone adjustment cycles. It gains and loses competitiveness. In the US it is somewhat easier because they have small labour mobility and more structural flexibility, which helps. That is why one of the recommendations from the European Commission and the ECB was to move our economies in that direction. Some countries proved to be better than others in this regard.

Even in a very well-functioning monetary union, different regions and countries will undergo adjustment cycles. One very good example to consider in this regard in Europe is the Netherlands. The latter was a full member of the deutschmark bloc from the late 1970s and never altered its exchange rate. The Netherlands went through two full cycles. In the 1980s it lost competitiveness and this had clear consequences in respect of growth and led to an increase in unemployment. The Netherlands then regained competitiveness, did very well and enjoyed faster growth than Germany for a period. Thereafter, it lost competitiveness again and is now regaining it. The Netherlands went through two cycles in the past 30 years and this is quite a good example of what is normal within a monetary union.

Those who study the matter in detail are not really surprised that what I have outlined happens. It becomes problematic when an economy is too inflexible and when these normal cycles become too drawn out and last too long. This means that unemployment eventually rises. If competitiveness deteriorates over a long period, the cost of regaining it — which is unavoidable and which must happen — can be extremely high. All of this is not surprising for those who designed monetary union. The other important element is that there must be a coherence in fiscal policy and that is why the Stability and Growth Pact was negotiated during dramatic night-time sessions at an informal meeting of ECOFIN in Dublin in the 1990s.

Although all countries are experiencing difficulties at present as a result of the global crisis, those which complied fully with the Stability and Growth Pact prior to 2007 — I refer here, for example, to Finland — are facing much smaller problems than countries which have large deficits.

Life within monetary union is not easy and is probably more difficult than many would have thought when their countries joined it in 1999. However, we understand the requirements of being successful within monetary union and the benefit that a common currency can offer. We are also aware of matters in respect of which the euro area could do better. In that context, we are still too fragmented when it comes to supervision of financial markets. That is why the Council of Europe and the European Parliament has initiated a process to implement the recommendations in the De Larosière report. It is extremely important that we should arrive at a more integrated model of financial market supervision so that we might avoid problems in the future and make the market more efficient.

Another matter in respect of which the euro area should do better — I hope it will do so soon — is that relating to external representation. We speak with too many voices to the outside world and this very much weakens our effectiveness in international negotiations, particularly, for example, those involving the IMF, the G7 and the G20. We should do better in this regard.

The euro area must also move towards stronger co-operation in respect of policy. I do not believe we need to move to a position where everything is integrated and where there would be a common tax system, and so on. However, stronger co-operation in respect of general economic policies would be very useful. Governance of the euro area should be improved because this could be of assistance in the earlier detection of problems and imbalances in the economy. Increased peer support would encourage countries to overcome such problems and imbalances at an early stage before they become too big. These are important issues in respect of which progress would be extremely helpful. As a result of the crisis, they will probably be given serious consideration in Brussels.

Deputy Frank Fahey

I welcome Mr. Watson and Mr. Regling. Both of their CVs are impressive and I am confident they will carry out a forensic, independent, objective, no-holds-barred investigation. They are an excellent choice for this job.

Will Mr. Watson and Mr. Regling confirm that they do not represent the IMF or any similar body? In light of their comments to the effect that they wish to focus on the root causes of the crisis, will they confirm that they are best placed to fulfil the mandate with which they have been presented? Would they prefer to carry out their investigation in public or in the way that has been set down for them? Would it be preferable for them, for example, to come before the committee every few days so that there might be a public element to their investigation? There has been a great deal of debate in respect of the fact that their investigation will be carried out in private and that this is not the best course of action.

Why did no one involved with the global, European, Irish or British economies foresee the financial crisis? I recently saw a letter written in response to an inquiry from the Queen of England as to why the London School of Economics, with all the expertise available to it, did not see the crisis coming? The response was quite poor. Will our guests give the committee the benefit of their vast expertise by indicating how we landed in this mess, which no one saw coming?

Mr. Watson and Mr. Regling stated that they will not comment on the situations here at this meeting. Between the beginning of 2003 and the beginning of 2007, the total outstanding credit from the Irish banking system to the country's economy rose from €160 billion to €380 billion. That is an increase of €220 billion in four years. Will our guests provide an analysis of the seriousness of this country's problems in comparison with those experienced by its European neighbours, particularly the one located just across the Irish Sea? How much further into the mire is Ireland than its European counterparts?

Mr. Regling provided an extremely interesting response to Deputy Bruton's question on the euro area. Would Ireland be better off if it had not joined the euro? Is there any argument to be made in favour of withdrawing from the euro?

Senator Feargal Quinn

I also welcome Mr. Watson and Mr. Regling. I will not repeat the compliments offered by other members. However, we are delighted to have our guests present at this meeting.

We live in a very competitive world. In 1987 Ireland was at the bottom of the pile in Europe but by 2002 it had risen to the top. However, something went wrong between 2003 and 2007 or 2008. I am concerned that in the context of correcting what went wrong, we may overreact. Are our guests in a position to express confidence in respect of whether it will be possible to return to the position we held in 2002?

Mr. Regling spent some time with the Lee Kuan Yew School of Public Policy in Singapore. I am familiar with Singapore, whose economy has been extremely successful, as far as I am aware, on foot of an efficient, soft-touch regulatory system. However, I stand open to correction on that.

I visited Panama a couple of years ago and the authorities there informed me that they wanted to make their country attractive to foreign direct investment. They decided to reduce the length of time it took to open a new company. They achieved best-in-the-world status in that regard and one can now open a new company in Panama in seven hours. I was stunned when I discovered this. The Cayman Islands have the fifth largest banking system in the world. How does a country such as that manage to avoid the problems we have encountered?

Do I presume that our guests' eventual proposal will almost certainly make Ireland less competitive? In attempting to correct what went wrong between 2003 and 2008, will we be obliged to take steps that will make Ireland less capable of being able to compete in the future?

Deputy Michael McGrath

I, too, welcome Mr. Regling and Mr. Watson. Based on the evidence I have seen and heard to date, I am sure they will do a very competent job. I wish them well in the work they are undertaking. They have a limited period in which to complete that work.

There are several key questions to which we and the public would like an answer. Do our guests believe the model of inquiry that has been established is appropriate, namely, that comprising the two-part process, with two preliminary investigations followed by the statutory commission of investigation? The Government has been unfairly criticised for adopting such a model. I would appreciate it if our guests, based on their experience, would comment on the approach the Government has adopted.

There are several key questions which our guests must address in their report. For example, during the boom years, why did the principal financial institutions in Ireland engage in what is now widely regarded as excessive and irresponsible lending to one sector of the economy — property and development? Why was this allowed to happen and why were the banking system and the wider economy exposed to all of the risks associated with one sector? It is clear that at the time all the action in the economy was centred on that sector. The banks were making huge profits on the back of activity in that sector, into which they invested increasing levels of their own resources. As a result, the classic bubble scenario developed and burst and we are now dealing with the consequences.

People want to understand why the regulatory system singularly failed to call a halt to the excessive lending to which I refer. When our guests produce their report, I would like them to indicate whether the regulatory system was fit for purpose and why it allowed such massive and unprecedented lending to take place.

In the context of risk assessment, how did the financial institutions continually arrive at the conclusion that lending vast sums of money to developers in order that they might invest it in the property sector, was a prudent course of action? The risk assessment process of these institutions is an important aspect.

The funding model adopted by the banks led to their over-reliance on wholesale funding markets and their move away from the traditional system of relying on the customer deposit base. The banks moved to a position where they borrowed multiples of the money available through their customer deposit base on the financial international markets. How did this happen and why was it allowed to happen?

Did the reward system for senior executives within the financial institutions perpetuate the problem? The more risks these people took and the more lending in which they engaged the more their bonus and salary packages increased in value. Did the system of rewards lead to even greater magnitude of the problems we face? Similarly on the issue of the ethical standards and corporate governance in the institutions, clearly the witnesses cannot comment on the ongoing criminal investigations but it seems at a senior level in some institutions the culture was to take decisions which put the interest of the bank and their own interests ahead of any consideration of the implications for the economy or the system generally, and crazy risks were taken.

Mr. Regling said their terms of reference take them up to September 2008. At the end of that month, the Government had to intervene and announce a guarantee scheme. I would like the report to come to a conclusion or a view as to whether that was the right thing to do. I believe the Government had no option and it was the right thing to do. What would the consequences have been had the Government not intervened at the time? We would like a definitive conclusion on that question. Why did no one should "Stop"? Where were the failures? What are the lessons we can learn going forward to ensure this is not repeated?

Mr. Klaus Regling

I thank the members for their questions. This is useful and they laid out a long list of good questions, which are basically on our list. They said they do not expect an answer today, which I appreciate, because that should be at end of our three months work. We will try to go into those questions.

Deputy Fahey was first in this group of questioners. I would like to confirm that we are not representing anybody. The Deputy said we were coming here from a strong IMF background. To some extent that is true but, in my case, I left the IMF 19 years ago and Mr. Watson, more than a decade ago. It was very good training but we are certainly not representing the IMF, the ECB or the European Commission. We are both now in the private sector and we are not representing anybody there. We were chosen because of our perceived independence and we feel very independent.

I cannot answer the Deputy's question about whether we are the most suitable people to fulfil the mandate because there may be better people but we feel up to the job. I am sure there are others who would also be able to do that.

Deputy Frank Fahey

I just needed a little reassurance.

Mr. Klaus Regling

I hope I can do that.

Mr. Max Watson

To the extent that we have any intellectual parentage that can be twinned, it is an interest in trying to see how the macro, top down, and the micro, bottom up, fit and what are sometimes called, very fancily, macro-financial linkages. It would be good to know what they were and why one did not spot them in advance. We both think that kind of analysis is interesting and the way it operates at the level of sovereign states. To that extent, we will do our best.

Mr. Klaus Regling

That is absolutely right. We have been fascinated by this question, of course, stimulatedby the crisis but we looked into these questions even before the crisis became obvious. What are the financial linkages between the macro and micro sides? We find it intellectually stimulating to do this work and we will try our best.

The Deputy also asked whether we think the current approach is right. I think so given that the timeframe is limited, which is also quite appropriate. We have to do our work in private mainly in three months. It would not be productive to come to this committee frequently because we prefer to present the results once we have them and not as bits and pieces in between because that would not be a complete picture and, therefore, we believe that the process suggested to us is quite appropriate, including being here now and listening to the committee. That is very much part of the beginning of the process and then we report our results in public later.

One can talk for an hour on the question of how we got into the crisis and the different elements. I do not want to comment at this stage on Ireland but this is a western crisis involving Europe and the US. I was told in Asia in many times it is a western crisis. Some people anticipated the crisis. The Deputy said nobody knew about it; that is not quite true. After the fact, more people always say they knew but it is documented, for instance, that people in Bank for International Settlements in Basle in their annual reports of 2003, 2004 and 2005 wrote about these problems. Concerns were also expressed at the ECB and even at the European Commission. At the global level, about which we will talk a little in our report, a combination of several factors came together at the same time and they all contributed to the crisis. The crisis could never have been so deep if there were only one or two factors.

It could only become so bad globally, particularly in the western world, because there were failures in many respects. There were policy failures on the macroeconomic side. I am not talking about Ireland again; this is the global picture. Supervision regulation failed and the system was inadequate. There were some special developments, including global imbalance developments in Asia where exchange rates were fixed and current account surpluses and foreign exchange reserves accumulated. Money flowing back to the west kept interest rates low and inflation was relatively low temporarily because of technological progress and particular productivity gains. There were failures at the rating agencies and in the compensation system for bankers. It is a long list of factors that, unfortunately, all happened at the same time between the mid-1990s and 2007 and they pushed our economies and financial sectors in the same direction.

There were country specific developments on top of that and the Deputy mentioned some of the Irish ones, which we will return to in our report. It was a special situation. A few people talked about it early on, to be fair, but one also has to recognise that it is difficult for markets to decouple from such a global trend. If one bank says we are very much concerned about the risks and we see the risk but all our competitors seem to be ignoring the risks and it does not play the game, it will lose market share, or if one talks to a pension fund trader who says he does not want to do this because he thinks this will lead to a disaster in a year or two but he does not know when, and then he does not do the things done by all his competitors, he will lose his job. One needs to understand how market participants operate. This also means there is a strong role for the public sector because it has to set the incentives and the framework in which the market participants can operate. The herd instinct is very strong and one has to understand that. We will talk a little about all these issues in our report.

There was a question about whether Ireland would be better off outside the eurozone or leaving it now. I do not want to comment on that today. We may come back to that in three months but, in general, the euro has proven its worth during this crisis. The European Central Bank has done a tremendous job. Just imagine what the crisis would be like if we did not have the euro. We would have some 16 European central banks that would have to co-ordinate among themselves, negotiate with the Federal Reserve and set up swap arrangements with the Bank of England and China and Japan. It would be a nightmare. Co-ordination problems were already significant because so much happened in such a short period, but the ECB was very able in handling those problems. If that had to be done by 16 different central banks, it would have been much more complicated.

Countries that are not in the euro area, like the EU members in eastern Europe, all wish they were. I expect they will join during the next decade, depending on when they meet the criteria. Despite what I read in the Financial Times yesterday, I do not see any trend away from the euro, quite the opposite. The crisis has demonstrated the value of having a large monetary union in which there is some stability. On average, though not for Ireland, some 60% of the trade of EU countries is conducted within the EU area, for example in my own country, Germany. This is very helpful during turbulent times when more than half of foreign trade is not really affected by any turbulence.

Senator Quinn asked a question about Ireland that I do not wish to answer now, namely, whether Ireland can return to where it was before the crisis. We will have to consider that and what it means for competitiveness. He also asked about Singapore. It got through the crisis very well, but it was not alone. Basically, all of Asia came through quite well, including China, India and Korea. I was in India two weeks ago and discussed with the governor of the Central Bank of India the reasons he thought India came through the crisis better than many countries in the west. His answer was amazing. He said India's banks did not buy products they did not understand. He said the Indian Central Bank was also in charge of supervision and it did not allow the banks to do off balance sheet transactions and when housing prices went up too much they imposed lower loan-value ratios. These are all matters I have discussed now in the west. Some countries already did the right thing in the past.

I have seen similar systems in several Asian countries and their banking systems are much more healthy. That is why they are getting out of the crisis faster. They also went into an economic downturn — quite severe in some cases — not because their banking systems were weak, but because they felt the indirect effect of the collapse in world trade and were cut off temporarily from capital imports. This has now changed as world trade is recovering. Global capital flows are recovering and money is again flowing to emerging markets. These countries are recovering and because their banking systems are in good shape, they can recover faster than us. The recovery is not only Singapore, but it is a good example of a place where the right economic decisions are made. The Senator said they had soft touch regulation. That is correct in one way, but they also have a firm, clear system and do not allow certain practices that seem to be permitted in the industrialised world, including my country, such as creating CIFs and off balance sheet activities. It seems these were accepted in the west by supervisors. We will look into the Irish case in our report, but we could learn something from Asia in that respect, including from Singapore. In that sense, it was interesting to live there for a while and see how it handled the situation.

Deputy McGrath asked whether the process of inquiry here is appropriate and about the two stage process. I took it that this was as a result of Ireland's institutional set up and how Parliament operates and that this was what people here are used to. We did not question it, but took it as a given. I think it is quite a useful process. We do what is called a preliminary report, like the Governor, and that will then feed into more substantive investigation. That is quite appropriate in light of the problems that exist. The other issues the Deputy raised were more to inform us as a basis for our report. That is welcome. Did I forget anything?

Mr. Max Watson

Not that I know of, but I can add to what has been said. I would like to make six quick comments. First, we both forgot to address the issue of the resources we have at our disposal. We have been told that we have full access to factual resources, even as far as helping us put statistical material together — some of which we have already — and that these will come without spin. We feel free to make use of this resource. We also have, within our firms, some degree of research assistance available if we want some things checked quickly and independently.

There has not been much comment on the social cost. This is important. The system in some countries was oriented quite strongly to consumer protection, but in many countries it has been the consumers that suffered. One aspect we try to examine is the question of what happens following a collapse. When things go up, they go up quickly and easily, but when they come down, the adjustment process can be very asymmetrical. We must ask whether Ireland is a case which is very subject to asymmetrical adjustment costs or less subject to them. We must ask how this can be eased in the future.

I endorse a comment by Mr. Regling with regard to the Bank for International Settlements, BIS, from 2003. I conducted an independent outsider survey, for the IMF executive board, into whether the IMF, the ECB or the BIS had foreseen elements of the crisis and into whether some 12 examples of national processes of countries in Europe had foreseen it. The BIS was rather unique, because it saw the domestic counterpart of what was building up — like as if a piece of elastic was being stretched — in many countries and in global interest rates and markets. We would like — we hope this will be of value to others also — to examine how external surveillance worked. We would like to know whether there are lessons to learn from the Commission's process of surveillance. It must support the process of adjustment in the euro area; but how did its surveillance work? We also want to examine the internal early warning systems, such as the financial stability reports of the Central Bank as the advisory authority. Were these on the ball or were they more or less on the ball than others?

The question was asked whether there was a danger of over-reacting. Mr. Regling described the type of long cycles in the EU area where countries come out of a boom and naturally lose competitiveness, which is part of the process of slowing down to their trend growth rate. We discovered — including in the research of the Commission — that when countries do this, their budgetary positions also go through quite large swings, especially during financial cycles of this kind. We hope to understand a little better, how far the big swings and symmetrical swings in finance are structural. This will give us some clue as to the underlying fiscal problems — which is a difficult question.

Another aspect of this is the loss of competitiveness. This reminds me of something similar when working on international banks in the 1970s. We did a little investigation then into whether highly capitalised banks in that period were unprofitable. The answer was they were able to fund very cheaply and were very profitable. Now, we see that some of the banking groups that maintained high capital, such as Canada, have no banking crisis. It has no banking crisis even though it sits on the edge of the United States. That is fantastic and the banks there do not regret now being conservative. They did not become uncompetitive by being conservative. However, there are areas of the adjustment in the real economy where competition and quick reaction and approval are helpful. There is nothing wrong with that. Therefore, the question of competitiveness may depend on how deep the competitiveness is or whether it is pseudo competitiveness of a rather flash product and quick judgments.

We view the way the inquiry is set up as not our responsibility. However, we have not felt any discomfort with trying to operate in that framework. We hope to achieve three things. Perhaps we can help by stating what is clear and by that being accepted. Some things are clear or seem to us to be relatively clear. The second point, as I said before, is to identify some suggestive trends and make sure they are not missed in the inquiry in some sense. We will make comparisons with other countries and see what was unusual about Ireland in a good or a bad sense. We will try to draw lessons without infringing the mandate which is to look at the period up to September 2008.

Deputy Kieran O’Donnell

I welcome Mr. Regling and Mr. Watson. They have touched on a number of points and I have some questions. Is the period under examination to begin at the beginning or end of September? This is a relevant point.

The terms of reference of the inquiry are to assess what lessons can be learned and to inform the future management and regulation of the sector. I thought the inquiry should be informed by an overall view of Government policy decisions and others.

I suggest the inquiry should present a progress report to the committee to allow for interaction with the committee and perhaps this could be presented towards the middle of April.

Will the inquiry team interact with the individual banks and will the inquiry have access to information from the individual banks? Will the inquiry have discussions with the current and former Minister for Finance over the relevant period, the current and former Governor of the Central Bank and the current and former chief executive officer of the Financial Regulator, in order to get an overall view?

Mr. Watson made reference to the macro-financial linkages. I think it would be important for the inquiry to meet with the people involved as this is a small country and the human factor is extremely important rather than the inquiry just being an academic exercise.

The inquiry will investigate the root causes. Mr. Watson made reference to the financial stability report, which I am assuming the inquiry will review and which is completed by the Governor of the Central Bank. There had been references to the property difficulties but I would feel it was a murmur rather than a roar and that needs to be looked at.

In 2005, the International Monetary Fund certainly issued warnings that there was a property bubble in Ireland and I think the investigation needs to consider 2003 to 2007. I am being materially accurate here without being specific. Bank development loans nearly doubled over that period in Ireland and that was the root cause. Questions need to be asked why more heavy weightings were not in place. Mr. Watson made reference to capital requirement ratios and more risky loans. Mortgages of 100% had been introduced. With regard to individual institutions, certain entrants to the market, specifically Anglo Irish Bank, were extremely aggressive in the market. It appears there were major difficulties.

I ask the delegation to deal with those questions because both witnesses come with excellent credentials. It is critical we get a report that is practical, that deals with the issues and that includes conversation with the people involved because there is a significant interaction between various organs of the State and between the Minister for Finance and the Governor of the Central Bank. If the weightings and loans had been changed over the past ten years, many of those development loans would never have been made. We now have a situation whereby NAMA has been established, the actual value of the loans is depreciating at an alarming rate and they are all tied into development loans. This has been a domestic crisis but there was an international crisis in terms of the supply of money. Our Irish banks borrowed short to lend long but fundamentally the issues really arose where there were significant drops in value.

To summarise, will the review period begin at the beginning or end of September 2008? I think it should be extended to get a proper position. The Government guarantee scheme came in on 29 September. I ask that the inquiry team might come back to update the committee at least once during the investigation. The interaction with all the stakeholders is absolutely vital. If this does not involve discussions with former Ministers for Finance, former Governors of the Central Bank and former chief executive officers of the Financial Regulator, I question the value of the report. I do not question the credentials of the inquiry team but rather the overall value of the inquiry.

The approach needs to be holistic to discover the root causes of how development loans between 2003 and 2007 went out of control. I ask the witnesses to deal with those points.

Deputy Arthur Morgan

I welcome the witnesses. There was indeed a significant debate on what was a very contentious issue, the establishment of an investigative team. Transparency is something about which people had strong views. I refer to transparent inquiries such as in the United States where people are brought in, or in some cases, hauled in before commissions or committees and the whole inquiry is held in public and therefore is very transparent and accountable.

How will the witnesses conduct the investigation into the Central Bank? I assume they will meet representatives of the bank, perhaps next week. When will the coats come off and the sleeves be rolled up? What level of detail will be investigated in respect of the conduct of that institution, for example, or of the other banks, in respect of communications between those banks and the Financial Regulator and vice versa?

There has been a persistent difficulty with the willingness of the banks to give accurate information to either the Department of Finance or to the Financial Regulator. Will the investigation be looking at that area? I ask for some indication as to the details to be investigated.

The issue of Government policy has been looked at so I assume this will be investigated. I will forward to the witnesses for their information some statements which are on the record of the House, made by my colleagues and me in 2006, warning of the property bubble and warning of the over-dependence on consumption taxes.

We have dealt with the communication between the banks and the Financial Regulator in some detail. How forensic will the inquiry be? Will the inquiry investigate whether any warnings were given by auditors, risk managers or credit committees? Were such warnings given and if so, by whom and were they heeded? What discussions took place on issues such as the dependence of banks on borrowed funds rather than on deposits? Many of us believe this is clearly one of the core issues. Will the inquiry deal with the issue of culpability? That may be a strong term. Will the inquiry at least identify those responsible, the bottlenecks and where the blockages were? I believe it was Mr. Watson who rightly said people were there and doing their job, which was to lend. They needed to do what their competitors were doing. If they did not do what their competitors were doing, then they would lose their jobs. That is an explanation at an individual level. However, will the witnesses be reviewing the role of the regulator, the Central Bank of Ireland and all that? We all know where the shareholders stood, which is obvious.

Senator Dan Boyle

I welcome Mr. Regling and Mr. Watson. When compiling their report do they see any purpose in comparing how other countries have dealt with banking crises by way of inquiries? How were such inquiries constructed and how useful were they? They will be aware from contributions today that there is considerable political debate as to the extent to which there should be a fact-finding element and whether such fact finding should be done in private or public and the extent to which the Houses of the Oireachtas should be involved. It would be useful for the report to have those kinds of comparisons with other jurisdictions, especially in the areas in which it is necessary to get the facts in private hearings and what can and should be done in public.

I hope both Mr. Regling and Mr. Watson agree that one of the end determinants of a process of inquiry such as this one is that it inspires public confidence. To inspire public confidence it needs maximum public involvement in the process of inquiry. While what Mr. Regling and Mr. Watson will be involved in will not be the final determinants of the inquiry, it is an important element. I accept that given the time involved they need to do as much of their work in the background as possible. However, I also agree with Deputy O'Donnell — I shall be saying the same to the Governor of the Central Bank of Ireland at a subsequent meeting — that Mr. Regling and Mr. Watson should appear before the committee or a sub-group of the committee as part of their process if there are difficulties in the process they are undergoing before a final report is submitted. That would help inform the public element and help with public confidence in the process.

Despite some of today's questions, because there will be a commission of inquiry, Mr. Regling and Mr. Watson will not supply all the answers. Many of the questions will be left hanging and it will be for the commission of inquiry to try to get to the root causes of many of those unanswered questions. As part of my original question, I ask them to indicate, based on their personal background and experience, the role parliamentary committees such as this one can play in helping to inform the subsequent terms of reference of that commission in terms of the parliamentary input because that will be an important part of that process. What should follow a commission of inquiry in terms of parliamentary input? It needs to be part of a complete process to gain the public confidence I mentioned earlier.

Regarding the central banking and financial questions Mr. Regling and Mr. Watson will be asking, to what degree will they compare Ireland as an international economy with the circumstances Ireland has gone through at least in the past decade as being a regional economy, especially regarding the property bubble? When Irish property prices exceeded eight times average income, there was talk that we had already well exceeded the situation in which London found itself in the 1980s when its bubble burst at five times average income. Will the report be better informed by those types of comparisons rather than comparisons with larger countries?

The big question ultimately relates to sanctions. Obviously we want to avoid these events recurring. However, the degree to which confidence in our financial systems has been lost internationally is determined greatly by the involvement of individuals and the continuance of the practice that brought us to this situation in the first place. Without necessarily identifying key individuals, which should be a part of the remit of the commission of inquiry and any subsequent parliamentary investigation, in framing the report and making recommendations, do Mr. Regling and Mr. Watson see their role as being as blunt as necessary in proposing that whichever individuals were involved in these types of practices certainly should not be involved in any renewal of the Irish financial system? They need to take personal responsibility and we need systems in place to make them accountable for those actions. The system cannot recover if we are to go back to business as before with the same cast of operators.

Deputy Noel Ahern

I join the comments of welcome for Mr. Regling and Mr. Watson. May I say, in jest really, that I am concerned for them? However, I am sure there is no need for such concern. The country is now full of people I would put into the category of "I told you so". They pretend they told us everything. There have been such comments today. While they might have mentioned it in the odd paragraph in the odd speech, the following paragraph probably chastised the Government of the day, calling it Scrooge-like and complaining it was not spending enough, etc.

While it may not be relevant, outside the political and financial sector there are other groups of people, including those in the media, who basically created or encouraged a stampede. The weekly property supplements in our newspapers a few years ago were enormous. The English language did not have enough colourful adjectives to describe the fantastic——

Deputy Joan Burton

The then Taoiseach was extraordinarily keen on boosting property.

Chairman

Allow Deputy Noel Ahern to speak without interruption.

Deputy Joan Burton

He said he should be kind to the banks and we should all buy more houses. That is what the then Taoiseach said. He said that people who talked down the economy should commit suicide.

Chairman

Deputy Burton, please.

Deputy Noel Ahern

I listened to the Deputy's wisdom with patience. I am saying that certain categories of people were throwing petrol on the fire, so to speak——

Deputy Kieran O’Donnell

Talk about the kettle calling the pot black.

Deputy Noel Ahern

——and promoting the stampede. It was implied that those who did not have 100% mortgages were nobodies and that every young person should have one. That led to excessive borrowing, bubble bursting, etc. Mr. Regling and Mr. Watson should be careful about what people tell them, but I am sure they have been around and know that.

I wish to make a comment on monetary union. I am sure we will get our competitiveness together and we can do our reform. It is somewhat difficult when the biggest island off our coast, the UK, is not in the eurozone. It is traditionally our biggest market and its currency is effectively floating. If it used the euro, I am sure we could be much more efficient and trade would be easier. It is a difficult job in that context.

Deputy Seán Barrett

I also wish Mr. Regling and Mr. Watson every success. They may have learned something today and I shall give my tuppence. Our regulatory authorities completely failed us. A committee such as this can effectively only highlight issues without having the power to take proper decisions to correct them. The Governor of the Central Bank of Ireland appeared before the committee in September 2008 and told us there was nothing to be concerned about. If one really wants to know what our problem was, that was it. How can it be corrected? Anyone with a brain between their two ears would have said that this thing could not last forever. The banks were allowed to do what they liked — that is the truth. Mutual building societies became banks in the own right, or at least they thought they did. They knew they had no obligations on foot of their mutual status. One building society got involved in lending to Fulham football club. A mutual building society is supposed to lend money to people to buy their own homes from deposits made by other ordinary individuals.

The regulatory authority completely collapsed. One of the main reasons was that a tradition had been built up whereby on the retirement day of the Secretary General of the Department of Finance, he took his belongings out of his office in the Department, walked to Dame Street and became the Governor of the Central Bank. Nobody can tell me that in such circumstances, one will suddenly change and become a totally different person. There was a continuity of policy and thinking. It was daft for a top civil servant in the Department of Finance, who had worked with the Minister and the Government, to become the independent watchdog, or supposed independent watchdog. That is what happened.

As far as I am concerned, the real problem is in deciding how to deal with our banks, which operate in a free society. The banks in Britain, and everywhere else, are giving the two fingers regarding the payment of bonuses. We are now facing a huge question mark with regard to our banking structure. How should we deal with it? The Government of the day has no direct control over the behaviour of the banks. It can impose regulations on the assumption that they will be adhered to. Banks were chasing each other for business. People were encouraging each other to get after their share of that market. That is how we started to have 100% loans, and even 110% loans. Those who applied for loans were asked if they were sure they had enough money for new carpets — that type of stuff.

There is not a great mystery attaching to our difficulties. If our regulatory authority did the job it is supposed to do, the banks behaved as they are supposed to behave and the mutual building societies did what they are supposed to do, we would not have the serious problems we have. Under our governmental structure, we have an Executive of 15 members of the Cabinet, who decide on policy and bring legislation to the floor of the House. They have the numbers to put legislation through. As Opposition Deputies, we can say what we like but nothing happens. This committee has just completed its consideration of the Finance Bill 2010, over two and a half days. Not one amendment was accepted from the Opposition. We have a real problem with how we are governing ourselves. We cannot ignore such matters if we want to solve these problems.

We are totally dependent in some respects. I am not being personal when I point out what happens. The same people have been in government for the past 23 years, with the exception of two and half years. The relationships that have been built with public servants over that time are bound to be influential. I do not mean that in a party political way. If we were in the same position, rather than being in opposition, perhaps we would think the same way. These problems cannot be ignored if we are to be true to ourselves as we consider how we can get out of this mess. If we are to deal with it now, we have to find a way of dealing with the banks. Mr. Regling made a point about his visit to India. In that case, there was good banking practice and responsible people made responsible decisions. That is why India did not get into this mess. I do not know how one can impose that sort of proper behaviour in the sort of free and democratic society we operate. That is a real problem we have to face.

Mr. Klaus Regling

I thank members for their useful input and very good questions. We will try to pick up on their thoughts in our report. Deputy O'Donnell suggested that we should take an holistic approach. I tried to make clear earlier that this is a global crisis, rather than an Irish-specific crisis, and that many factors contributed to it. One has to examine all of that in an holistic manner. We will do many of the things the Deputy suggested. We will talk to former Ministers for Finance and, possibly, to former Governors of the Central Bank. We will see how much time we have. In principle, that is a good suggestion. I agree that the human factor, as the Deputy put it, is very important. That relates to Deputy Morgan's remark that information flow needs to be analysed. He spoke about communication between bank supervisors and the Central Bank. We know from many countries — I am not talking about Ireland, but about other countries we looked at and are familiar with — that a shortage of good co-operation, information flow and communication between supervisors and central banks contributed to their financial crises. A lack of global communication between supervisors in different countries also contributed to such crises. That will have to be part of the analysis. The word "forensic" might not be the right one. We do not have the ability or the time to undertake a forensic analysis. As I see it, this is a diagnostic identification exercise. A forensic analysis would push us in a certain direction. That might be going too far. We do not have the mandate for that.

Deputy Arthur Morgan

Will it be possible for the inquiry to comment on the positions, if not the names, where significant issues exist? I refer to people not doing their jobs, for example.

Mr. Klaus Regling

We will identify wrong policy decisions, but we will not get into names. I do not think that is our task.

Deputy Arthur Morgan

Fair enough.

Mr. Klaus Regling

As I see it, part of our mandate is to talk about policy failures. I am sure we will identify some failures. That will be just unavoidable because this is a real crisis. The members of the committee know that better than anybody.

Deputy Arthur Morgan

As long as Mr. Regling does not blame the media.

Mr. Klaus Regling

We will see problems as we dig deeper into the situation. Senator Boyle asked us to compare how investigations of this nature are done in other countries. I do not think we want to compare processes. That would take too much of our time. We will look at how the situation affected other countries. Mr. Watson has mentioned Canada, for example. We will consider why the crisis had a much smaller impact on Canada than other countries, including some European countries. While we will undertake that kind of comparison, I do not think we will compare processes or means of analysing the situation.

Deputy Kieran O’Donnell

Can Mr. Regling clarify the dates?

Mr. Klaus Regling

I am coming to that. The mandate is very clear — it talks about the end of September.

Deputy Kieran O’Donnell

Is that 30 September?

Mr. Klaus Regling

Yes. It says "the end of September" in the mandate.

Deputy Kieran O’Donnell

Does Mr. Regling envisage that the terms of reference will be extended to look at the events of a later time?

Mr. Klaus Regling

Our mandate does not involve analysing the emergency measures taken after late September. We will not comment on their effectiveness or on what should have been done differently. That is not really part of our mandate.

Deputy Joan Burton

The episodes, issues and circumstances I raised all related to the historic period from the early 2000s and before the bank guarantee. Will Mr. Regling and Mr. Watson examine discrete historical events and institutions or will they conduct an overview? To give an example, Ireland has suffered significant reputational damage as a result of the episodes to which I referred, including developments that culminated in the DEPFA Hypo affair. A German parliamentary inquiry has made some comments on Ireland in that respect. Will Mr. Regling and Mr. Watson examine issues of that nature? I understand prominent figures from our public regulatory and financial system were non-executive directors of the bank in question prior to its takeover.

As an Opposition spokesperson, I have followed the crisis and from 2003 onwards, I spoke about policies I believed were wrong. Will Mr. Regling and Mr. Watson examine the specifics of the collapse in the Anglo Irish Bank share price which occurred on or around St. Patrick's Day 2008 and is now known as the St. Patrick's Day massacre? If, at that point, the authorities had taken action to deal with the bank, which was clearly in deep difficulty and, in the view of many people, a rogue institution in the banking system, its collapse may not have been avoided but the damage done subsequently and the suffering of ordinary people may have been significantly limited. Will Mr. Regling and Mr. Watson examine specific cases in the period covered by their mandate?

Chairman

I ask the witnesses to answer Deputy Burton's questions when they have completed their replies to previous questions.

Mr. Klaus Regling

Our main task is to get an overview of trends and policies. While this will imply examining specific actions, deals and transactions, in three months we will not be able to examine all important bank transactions over the past ten years. That is not feasible or possible but that does not preclude us from taking a look at some very important individual transactions if we wish to do so. I can promise today that we will look at everything the Deputy mentioned.

Deputy Joan Burton

They are the biggest pointers to the problems in the system.

Chairman

I ask the Deputy to allow Mr. Regling and Mr. Watson answer the questions put by other members.

Mr. Klaus Regling

Does Mr. Watson see the issue in the same way?

Mr. Max Watson

Yes, I do. One of the questions was whether we will name institutions. The answer is yes, I think so. It is pretty difficult to get into such a process without making comments about the role played by particular institutions, the decisions they took and the policies they pursued. We will definitely name institutions but, as Mr. Regling stated, we will definitely not name individuals. People may, however, make inferences.

We are indebted to members for pointing to certain events because, like Mr. Regling, I have been trying to read a little of the background from sources. These range from the most official and formal to less formal and more colourful sources. One gets the feeling that one must look at a certain number of events and shocks to see what was the systematic pattern.

Let us suppose we are looking at a bank called "Toy Bank" and a developer called "Enthusiastic E-developer". We do not feel obliged to mention that it was because of the behaviour of Toy Bank on a certain occasion that we drew a certain conclusion. We will refer to the period we are talking about. What we should be extracting, probably as a lesson for policy, is what went wrong, was it non-random in nature and were there problems in the system that helped cause it. We should look not only at the fact that lending doubled or tripled but also examine what were the ups and downs and at which moments could action have been helpful. I believe, therefore, we can achieve the guts of what members are seeking but there will be probably be an element of granularity that we cannot deliver in the time, which may also be about providing some legal protection.

Senator Dan Boyle

Mr. Regling and Mr. Watson may have been distracted by subsequent questions but my question on the value of interacting again with the joint committee over the three-month period of its inquiry was not answered. Is there value in our guests meeting the joint committee again to indicate whether they are receiving the appropriate level of co-operation or whether co-operation has been lacking in certain areas as they compile their report?

Mr. Klaus Regling

If we encounter a lack of co-operation, we may have a way to communicate that to the Chairman. We could inform him about the process, for example, but I would be reluctant to make a commitment that we will discuss the substance, let us say, in six weeks from now because——

Deputy Kieran O’Donnell

Do Mr. Regling and Mr. Watson envisage appearing before the joint committee in six weeks to provide an update?

Mr. Klaus Regling

I was about to say that, on the process, we could indicate to the committee that things are going well and we have been receiving the co-operation we want from the authorities, that is, the Department of Finance, Central Bank, supervisors and individual banks. However, this may not justify a meeting such as this one because the issue would be the process. On the substance, I am reluctant to have a further meeting because it would be in the middle of the process. This is because, partly by accident, we will have talked to some people because they were available early while others will not be available until later. As a result, we would have a partial view and I would not want to talk about a partial view in public as it would not be fair.

Senator Dan Boyle

Mr. Regling and Mr. Watson may come to realise that much of the frustration some of us have about what has taken place arises from a lack of co-operation in dealing with these issues properly in public and in being up-front and honest about the difficulties that have faced financial services. It would be helpful in terms of improving confidence in the process among the public if a message were conveyed that the investigation is proceeding properly and process is being followed.

Mr. Klaus Regling

If the committee finds that to be the case, perhaps we could use it as our ally if we believe something is going wrong.

Deputy Arthur Morgan

That is a good idea.

Mr. Klaus Regling

Perhaps the Chairman would be the right channel. Maybe we should agree that we meet to talk about the process. Certainly, if something goes wrong, we would meet sooner rather than later.

Deputy Joan Burton

With due respect to the Chairman who is a member of one of the Government parties, will Mr. Regling ensure that if he and Mr. Watson decide to meet the Chairman, they will ensure representatives of the three Opposition parties, perhaps the finance spokespersons for Fine Gael, the Labour Party and Sinn Féin, are present? We would honour whatever terms Mr. Regling and Mr. Watson chose to set for any such meeting. As Deputy Barrett pointed out, one of the problems we face is that the form of government that has developed in this country largely excludes the Opposition when compared with those with which Mr. Regling and Mr. Watson may be familiar from Germany and the United Kingdom, respectively.

Chairman

I would have no problem if representatives of the other parties were present.

Deputy Frank Fahey

The Government side wants the report produced by Mr. Regling and Mr. Watson to be full and complete. We want them to question everybody involved, from politicians on the Government side to public servants and others, to ensure we get answers.

Chairman

I thank Mr. Regling and Mr. Watson for appearing before the joint committee. Members are grateful for the presentations and the detailed responses provided to their comments and questions. I hope the views expressed and questions asked by members will be helpful in the deliberations of Mr. Regling and Mr. Watson over the next three months. I look forward to their report and hope everyone involved will provide the assistance and co-operation required to make it a success.

The joint committee adjourned at 4.40 p.m. until 2 p.m. on Tuesday, 2 March 2010.