Mr. Cormac McCarthy:

Thank you, Chairman. Good afternoon Chairman, members of the inquiry. I welcome the opportunity to appear before the inquiry and I'll be as helpful as I can to assist you in your work. I've submitted a witness statement to the inquiry which addresses the lines of inquiry, as requested.

As you all know, Ulster Bank is a universal bank operating primarily in the Republic of Ireland and Northern Ireland. It is owned by the Royal Bank of Scotland. My own background, as it relates to the inquiry, as the Chairman said, is as follows. In 1998 I joined First Active from Woodchester Investments as head of finance. Two years later, I was appointed chief executive. Following the acquisition of First Active by Ulster Bank in January 2004, I was appointed to the position of chief executive of the enlarged Ulster Bank Group. I left Ulster Bank and Royal Bank of Scotland in May 2011. The objective of Royal Bank of Scotland in combining RBS ... Ulster Bank with First Active was to form a credible third force in Irish bank ... in the Irish banking market, to enhance competitiveness and to challenge the dominance of AIB and Bank of Ireland in particular. You will all recall that the need for a credible third force in Irish banking was strongly promoted by politicians, the media, business groups and consumer advocacy groups.

As chief executive of the Ulster Bank Group, I was responsible for all of the operations of the bank. On assuming the role I was tasked with combining and integrating a management team from Ulster Bank and First Active, whilst maintaining the two brands, working with RBS to move the bank's technology platform to those of RBS, developing and executing a strategy to avail of the growing Irish economy and creating a real universal banking alternative to AIB and Bank of Ireland. I was very much enthused by this opportunity, believing that by being a part of RBS, the Ulster Bank and First Active combination could bring something to the Irish market that was both needed and unique. The scale and sophistication of RBS, allied to the on-the-ground capability and experience of the existing indigenous banks, underpinned the opportunity. At that time, all of the economic indicators in Ireland pointed towards sustained growth. I was assured by RBS following my appointment as CEO that capital and funding support would be made available to support growth, obviously with the appropriate group risk framework. I'd like to spend a couple of minutes explaining the governance structure at Ulster Bank Group, as it does differ from the other banks appearing at this inquiry.

The RBS governance model which was in place before the First Active acquisition remained unchanged. Integral to this was significant RBS oversight of and involvement in the Ulster Bank business, particularly where credit, regulatory and operational risk was concerned. Ulster Bank management in each of these areas had solid and dotted reporting lines into senior RBS management. This also applied to the CFO, the head of HR and the head of internal audit. Members of RBS senior management were either formal members of Ulster Bank boards or committees or had rights of attendance. In addition, the Ulster Bank Group had a board of directors comprising independent, experienced and high-calibre people. This board also had RBS representative members. The chairman of the board had open access to the chairman and chief executive of RBS and engaged with them regularly, independent of Ulster Bank management. Ulster Bank Group had three legal entities in Ireland, each of which had a separate board of directors with independent chairpersons and non-executive directors. The bank had what is called a high-level controls framework, which underpinned the RBS governance model. The governance structure at Ulster Bank Group was identical to the governance of all RBS subsidiaries. It was, and is, entirely appropriate for a bank with a single shareholder. Having both a local board and RBS governance felt like we had the best of both worlds, with the benefit of being part of a significant global bank and the comfort of having local boards populated by respected and well known business and public figures.

The approach to strategy was also dictated by the same high-levels control framework. This included, amongst other things, an annual off-site strategy session with the board where the proposed business strategies and five-year plans were reviewed and challenged. The outcomes were fed into the RBS strategic planning and budgetary process, which was a detailed and rigorous exercise in itself. Performance against plan was closely monitored by RBS on a monthly and quarterly basis. The business plans were constantly evolving, based on detailed reporting and forecasting. And this was subject to detailed engagement between myself, our CFO and the RBS CEO and CFO. I was required to report directly to the RBS board annually on Ulster Bank strategy and performance. In a nutshell, the bank's strategy was to grow all aspects of our retail business and corporate business throughout Ireland, North and South, availing of strong economic conditions and positive indicators. Each of us is looking ... each of us in the room is looking back at the period between early 2000 and 2008 with the benefit of knowing what happened. It is a sobering perspective, particularly given the impact the outcome has had on so many people's lives. It is, however, important to consider what the prevailing perspective actually was back in 2004 to put in proper context the development and adoption of strategies and decisions. All of the economic indicators in 2003 to 2007 regarding the demand for housing in particular over the median ... medium term were positive. This included underlying demographics, particularly in the household formation bracket, numbers per household, economic growth, migration and interest rates. It was estimated in 2003 that a minimum of 40,000 housing units a year would be required through the period to 2010, following which there would be a lower but still significant ongoing requirement. In aiming to become a genuine third force in Irish banking, Ulster Bank lent too much money to too many people on the basis of assumptions which turned out to be seriously flawed. This was not to say that we adopted a cavalier or reckless approach to banking, we didn't. What is clear is that our strategy, while genuine in its motives and ambition and backed by one of the worlds largest banks, was ultimately proven the have been ill-judged and mistaken in the light of what transpired in 2008 and beyond. I deeply regret that this happened while I was chief executive of Ulster Bank. I'd like to spend a couple of minutes guiding you through the banks approach to risk and credit.

Business divisions in Ulster Bank were given general, non-specific growth targets that were to be achieved within acceptable risk policies, appetite parameters and lending caps. Hence, as a full service bank, there was no formal sector-specific lending focus. Sector risk appetite over the period was set out initially at a high level. Appetite didn't set limits but articulated the bank's view of a sector which influenced business development. Over time, sector reviews and appetite statements became more detailed and prescriptive. The only property-related portfolio cap was in respect of speculative lending on commercial property. This was set at 3% of total loans and this cap was adhered to throughout my time in the bank. The Ulster Bank Group had a risk policy and controls committee. Policies were structured around rules and guidelines. Rules had to be followed and if breached, were strictly subject to exception reporting and higher level approval. Guidelines which were exceeded had to be justified. All credit policies were subject to annual review. Under the Ulster Bank credit committee and delegated authority policy, the most significant credit risks were presented to the most senior credit committee for approval. Delegated authorities to other committees were based on a combination of the aggregated amount of facilities and the borrower's credit grade. Credit authorities for the credit committees were approved by the RBS risk committee. Loans above certain thresholds had to be submitted to an RBS credit committee for approval.

In retail banking, Ulster Bank branches had no lending authority and every loan application was referred directly to credit. First Active branch managers had authority to approve mortgage lending up to certain limits, subject to policy rules. A detailed process was put in place to deal with exceptions to lending policy. All policy rule exceptions had to be reviewed and approved by the appropriate credit authority as set out in the policy. Exceptions within retail, were reported monthly to risk policy and controls committee and RBS Group credit risk and also presented to the relevant board. Responsibility for monitoring sector concentration risk rested with the risk policy and controls committee. Reports in this committee were presented to the board. The nature and purpose of concentration analysis evolved throughout the years to 2008.

In 2004 and '05 residential lending, commercial real estate and construction accounted for over 60% of the bank's lending portfolio. We did introduce a sector exposure framework in 2005 to develop a more systematic approach to concentration analysis in line with Basel II and RBS Group policy requirements. In 2006 a policy of producing quarterly operational reports was introduced to provide a risk-focused approach to the management of sector concentrations in the lending book. This was supplemented by periodic reviews.

Stress testing was carried out as part of the Central Bank and regulator's biannual process. This examined baseline versus shock scenarios provided by the Central Bank and regulator. The return for July 2008, following shock scenario testing, showed minimum tier 1 and total capital ratios of 7.9% and 8.8%, compared to base case ratios of 8.6% and 9.9%. These stress-testing processes were supplemented by macroeconomic stress testing, involving input from Ulster Bank Group economics and John FitzGerald of the ESRI. They tested three global shock scenarios and John FitzGerald used the ESRI HERMES model to simulate the impact on Ireland over the period 2006 to 2010. The results of the medium-term shock scenario were used as a basis of the Ulster Bank 2007 ICAAP return to the Financial Regulator.

I would like to address the issue of the introduction of 100% mortgages, because I know that it's a concern of the inquiry. In 2004 the First Active mortgage market share was coming under pressure in the first-time buyer segment, where mortgage brokers in particular were gaining increased traction. Following market research and customer feedback, two things became clear to us. Firstly, whilst dated market maximum loans to value were already at 92%, some of our competitors were increasingly prepared to stretch LTVs to 100% or more to secure first-time buyers' business. Secondly, our customers were increasingly having to rely on expensive short-term debt, through credit cards and personal loans, to fund the excess between the maximum LTV and the house purchase price. We already had a 100% mortgage product in existence for some years for professionals on which our experience had been very good. Given this experience, together with factors to which I already referred and the positive economic and demographic backdrop, we decided to recognise the market reality through publicly introducing 100% mortgages in what we judged to be a controlled and restricted way - no exceptions policy, reduction in maximum term. Before launching it, we put the mortgage through a rigorous risk assessment program in RBS and we notified the regulator of our intention. In the three years between mid-2005 and mid-2008, Ulster Bank and First Active combined advanced €1 billion worth of these mortgages to approximately 4,000 customers, which amounted to 4% of our total mortgage lending in this period. The introduction of 100% mortgages had little impact on our market share of mortgage lending, for which the period between 2004 and 2008 remained at 16%. In reality, the collapse in house prices has been of such a magnitude that almost any mortgage written after 2004 with a loan to value in excess of 50% subsequently went into negative equity. With the benefit of hindsight, the introduction of 100% mortgages was a detrimental initiative which became all too apparent as property values collapsed.

I appreciate that much of the inquiry's work has been taken up with the bank guarantee and in my witness statement I have touched on the difficulties which it created for Ulster Bank. I should also confirm, Chairman, the first I knew about the guarantee was when I heard about it on the news on the morning of 30 September 2008 and I was surprised, since I had been in touch with the Financial Regulator on two occasions in the preceding two weeks because of the obvious stresses in the funding market. Following the putting in place of the guarantee, we immediately made significant efforts to address the difficulties this was causing us. In the end, we were afforded the opportunity to enter the scheme but the terms involved proved impossible for us.

In conclusion, Chairman, I can say to you today, hand on heart, that all of the decisions I made were made in good faith on the basis of the best information to hand at the time. I never anticipated the circumstances that transpired in 2008 and beyond and I was mistaken not to have done so. I greatly regret that decisions I made while chief executive of Ulster Bank have had the impact they have had on so many peoples' lives. Thank you, Chairman, I'm happy to take questions.