Mr. Peter Nyberg:

I am very pleased and honoured to have been invited to assist this committee by clarifying the work and report of the Commission of Investigation into the Banking Sector in Ireland, which finished its work some three and a half years ago. The commission worked strictly as mandated by the Commission of Investigation Act 2004 and by the Commission of Investigation Order 2010 which contains its terms of reference. This has some implications for today's hearing. For instance, I have no other documentation available to me other than the published report to assist me in answering members' questions. All of the documents used as sources were security deposited, according to the Act, when the commission was dissolved and have not been available to me since. I will do my best to answer all questions but I hope that the Chairman will keep this constraint in mind, as well as the number of years which have elapsed since my work was completed.

The terms of reference were quite explicit in specifying the tasks of the commission. These tasks were to examine the main causes of the serious failures within the covered banks that led to the need for public support; the main causes of the failure of the financial supervisor, the Central Bank and the Department of Finance to properly discharge their duties to prevent problems; and to look at whether external auditors commented on the failures in the banks. Special attention was to be given to board and senior management implementation of policies and practices leading to financial distress. The period for the commission to investigate was only from 1 January 2003 to 15 January 2009 - a period of six years which is not a very long time.

As an independent outsider, I was, to be frank, struck by the many similarities between the causes of the Irish crisis and earlier crises elsewhere, including in Finland, of which, unfortunately, I had some experience. Subsequent investigations in the USA, UK and by the IMF on the causes of the crisis tend to confirm such similarities as well. By that I mean that the Irish crisis was, in all respects, not unique and was similar to many crises elsewhere.

I understand that not all commentators in Ireland have been or are fully satisfied with the contents of the commission's report. Nevertheless, it does represent my independent and objective assessment, at that time, of what happened. Now that I have had reason to review the report once again, this assessment remains unchanged. The commission's work was, in essence, about the "Why?" of the Irish crisis and not about the "Who?". Consistent with its governing legislation and the terms of reference, the commission was not required to name names and decided, from the beginning, not to do so. There were very simple reasons for that.

First, useful information and co-operation of witnesses and institutions were much easier to get when reputations were not simultaneously under a threat of being publicised. Legal challenges were much easier to avoid and the risk of redactions to the final report were minimised. I know this is not generally accepted but the responsibility for mistakes is already obvious in my mind. Directors and senior staff, as well as junior staff, are responsible for the decisions they are empowered to make. The names of such people are quite often listed in the published national annual accounts of banks. Heads of public institutions and private institutions are responsible for how these institutions fulfil their mandate alone or in co-operation with others. Each person, including the borrower, is responsible for both what is done and left undone. In particular, borrowers and lenders are responsible for the debt and risks they voluntarily take on.

This approach speeded up the work appreciably, improved the quality of information, reduced costs and made it possible to stay within the required time limit and budget. We could also use previous scoping reports and avoid duplication. The commission's work included dealing with issues which the previous reports were not mandated to do. First, we had forensic study of individual decisions and events in the institutions mentioned in the terms of reference, particularly those which were known to have caused problems, such as decisions on big real estate loans. We also tried to explore why all the existing private and public sector mechanisms to mitigate risk failed at roughly the same time in Ireland. These simultaneous sector-wide failures are a necessary precondition for the systemic crisis which happened not only in Ireland, but everywhere else. My work required not only access to documentation, but also discussions with representatives of the institutions about the events leading up to the documented decisions.

I was aware that broadly similar reviews had already been carried out and mostly were in progress in several other countries, such as the UK, the US and Iceland, as well as in the International Monetary Fund. Iceland was of course a very different case from Ireland as it controlled its own currency and the assets of the bank and the balances of the banks relative to the economy were very much larger in Iceland than they ever were in Ireland. Once the losses materialised, there was no possibility for Iceland to repay them, even if it wanted to.

The banks, external auditors and public sector bodies were requested to provide access for the commission to a large array of possibly relevant internal documents. Teams of commission investigators visited these institutions to identify relevant documents and, when necessary, they clarified document contents and existing procedures through technical discussions with staff. The identified documentation was copied to the commission's secure data system for closer inspection at commission premises and used as a source for producing the final report. With this work approach, I was able to assess and draw conclusions from a very large volume of data.

At the same time, the commission requested formal but confidential interviews with decision makers of the bodies being investigated. The interviews had two primary aims; they were to broadly verify the preliminary conclusions reached on the basis of the documentation and to understand why risk assessment, broadly defined, had failed and how governing bodies in practice had functioned or malfunctioned in that period.

Particular attention was given to the extent and quality of deliberations by decision makers, adherence to and control of agreed internal procedures and to any presence of voiced contrary opinions or doubts.

The final report contains the results of these interviews and documentation in a general format to allow the informants and institutions to remain anonymous as promised. It does not contain easily repetitious examples of, for example, lending processes gone bad for individual loans in various banks. It includes such observations in the form of more generalised commission conclusions, valid for many or even all the banks which were subject to my report. Anglo Irish Bank and Irish Nationwide are quite often discussed separately because that was the request in the terms of reference.

I will turn to observations that could be particularly relevant to the joint committee investigation. The commission felt responsibility for the crisis in Ireland, as well as elsewhere, must be very widely allocated and any investigation should thus be wide-ranging. As I already stated, a systemic crisis can arise only when a large number of risk-mitigating functions in many institutions in society have become impaired. For instance, it would be wrong to assign blame primarily to lenders and ignore the fact that a bad loan also requires that a borrower would have made a bad risk assessment on the possibility to handle credit.

The Irish crisis was essentially the result of the sudden deflation of a widespread domestic real estate bubble, implying that domestic policies, decisions and processes should remain central in an investigation, as it was for the banking commission. I repeat and stress that this real estate mania in Ireland was not a unique phenomenon and can be compared to recent developments in the United States and Spain, as well as in Scandinavia in the 1990s. This time, the triggering factor for the crisis was a tightening of liquidity originating in the US market, which affected Irish banks particularly through dependence on market financing and over-concentration in real estate. Even in the absence of the US crisis, it is quite unlikely, in the opinion of the commission, that the domestic Irish bubble episode would have ended well. In other words, it is unlikely that the hoped for "soft landing" would have been the ultimate outcome. That is because at the start of the crisis, there were very few signs that either the banks or the institutions were changing the way they were acting. The assumption - I stress it is an hypothesis - is the work and behaviour would have continued as before until it became impossible and the crisis would have come for some other reason.

One of the conundrums was the presence of contrarians, of which there were very few, particularly in the public sector but also in the banks. Despite doubts, some were very insistent, even when they were ignored and at times sanctioned, usually indirectly. They did not change their minds. In any case, they were not listened to and their views were not taken seriously. The question is "why not?" and why did this not happen even in the confidential confines of individual institutions?

This is something on which the commission has hypotheses but no clear evidence.
Another important point is part of the background to the crisis was a global consensus view that the financial markets were stable and efficient. This has implications for the Irish private and public decision-makers. I classify this as groupthink, which is thinking as one's peers does so as not to stick one's head up too far. It would explain to some extent the fact that everybody was unprepared for the crisis when it came and that everybody was more or less willing to accept the occurrence of risky behaviour on the part of the banks and the public sector. It is fair to say that it is also possibly one of the reasons that what happened not only in Ireland but in several other countries in the world was not caught, criticised or challenged by international organisations, academics, the media or consultants. Everybody believed in the same thing and nobody saw that for which they were not looking.
An aspect which makes it difficult to discuss the crisis is that while the bubble was being blown many people, not only the banks, had concrete benefits from its continuing. The Government received much tax revenue from continually expanding the real estate market and this income was dealt out to the population through higher public sector wages, better social security and less onerous costs for public sector services. Many people had concrete joy from the bubble for as long as it lasted. Once the bubble burst these advantages were no longer available and this has been the case since 2008. The advantages and pain of the crisis have been widely shared, which is one of the reasons the Commission felt that it is not fully balanced to seek a few critical decisions which started or continued the bubble. Hundreds and hundreds of individual decisions were made by contributors who never felt they did anything wrong but which made it possible.
Another hypothesis the Commission has is that it was not a lack of regulation and supervision per sewhich was important for the bubble to continue but a lack of implementation of existing regulation and powers. The fact we have had many systemic crises in developed countries since the Second World War, indicates that the existence of supervision and regulation is not enough to hinder systemic crises.

The question is what one should do to make this possibility less if one cannot trust public servants.

There is not very much to say about external auditors except that, contrary to what one might expect, they did not seem to know more or less than anybody else. Certainly they did not warn their clients about problems to come, although as far as the Commission could tell they did discharge for the most part the checking of historical accounts that they see as their main sort of business. The question is, of course, is that enough. That is something for the committee to decide.

When one looks at the guarantee decision, and that is the position of the Commission, one has to look at the decision in its historical context, meaning that it came at the end of a long period during which everybody concerned with judging risk in the country had told each other as well as the Government that the banks were solvent and there were no problems and consequently one did not have to prepare for any problems. Then all of a sudden the problems were there. There were efforts in the last minute, particularly in the Department of Finance, to get legislation under way which would have made it possible to resolve the banks in an orderly manner before they closed, but that was no longer possible anymore because it would have taken a long time. In the end the question was, when one sat there on the evening, much like the committee members are sitting here this morning, what should be done to avoid a collapse and closure of the banking system the following morning. From previous experiences back home, when decision-makers are faced with that situation, what one tends to do is to make the safe decision, even though afterwards it might not seem so wise. That is, I think, what the Government did. That is why the Commission says that it does understand the Government. It does not necessarily condone it because it is the culmination of a lot of mistakes that were made before, but the mistakes were not really made on that night. The mistakes were made several years before, and not only by the Government but really by everybody else.

I refer to the paper I have circulated on the issues that are not included but could be looked at. Most important is that one looks at more than only the covered banks and the institutions that the Commission was constrained to look at. One looks also at the other banks that were helped by other governments - not the Irish Government but the other governments - and the support from them, as well as the media, academics and consultants, and also the political parties and the Parliament, because they are, of course, the ultimate decision-makers, or were for several years. There I would hope the joint committee is more knowledgeable than anybody else.