Mr. John Beggs:

Thank you, Mr. Chairman. You asked me to give evidence on eight lines of inquiry relating to my role as chief economist of Allied Irish Banks. Now I've covered these as best I can in my written statement of 9 April, and I propose today just to summarise the main points of those lines of inquiry. Before I do so, I want to clarify that I was not the chief economist of Allied Irish Banks in the period leading up to the banking crisis. I was promoted to this role in a restructured bank in late 2011, a position I held briefly until my retirement in 2012. My actual position from 1992 to 2011 was that of chief economist, global treasury. My role was primarily focused on advice within wholesale treasury and supporting corporate and commercial treasury in relation to general economic issues, particularly around the outlook for interest rates and exchange rates. The economic research unit which I headed was located within wholesale treasury in the capital markets division. The AIB Group's property-related Irish exposures were in the retail Ireland division. Overall risk management, capital management and relations with the supervisory authorities were handled at group division level.

Though part of global treasury, my unit was a limited resource available to other business units across AIB and provided on-demand services to other parts of the group. One area of support was in relation to stress testing. My unit produced and published research and I will deal with aspects of that in the questions following my statement.

In giving evidence before this committee, on the lines of inquiry indicated to me, I believe therefore it's important to clarify that I did not occupy a central role within the AIB Group, or a management role in the lending strategy of the retail division. Furthermore, in relation to some of the lines of inquiry in which I've been asked to give evidence, I must point out that I had very little involvement with the Department of Finance or the Central Bank - Financial Regulator, during my career in AIB.

The first line of inquiry you asked me to comment on was in relation to banks' risk appetite and the appropriateness of their property-related credit policies. In relation to risk appetite, I make the point in my statement, I use a risk appetite statement from AIB from 2007, and then contrast it with the concentration of property as set out in the bank's presentation on their results for 2006, which shows that property lending constituted 33% of total lending. I make the point that reconciling the two is only possible, in my opinion, on the basis that AIB believed that its business was well diversified geographically and sectorally, well managed, of good quality and low risk, based on its customer profile and knowledge of its customers' financial standing. I believe that banks focussed primarily on what they perceived to be the quality of their individual loan books, with less consideration of the potential systemic risks in the Irish banking system as a whole, and the contagion risks, should serious problems emerge in an important bank, particularly given their overall dependence on external funding.

As to the appropriateness of property related credit policies, I'd make a general point that the sustained growth in the Irish economy in terms of real GDP and employment meant that the assets of the banking system became increasingly tied up in bricks and mortar in one form or another over the period. As banks are the main source of finance for the Irish private sector, there is a high correlation between the growth in credit and GDP-GNP. The appropriateness of Irish bank lending policies cannot be divorced from the stance of fiscal policy, other macroeconomic policies, and the role of monetary and prudential policy. Here, I want to integrate a comment on the third line of inquiry as to the appropriateness of macroeconomic and prudential policy, in commenting on this first issue. Strong growth in bank lending occurred against a very expansionary fiscal policy which provided misguided support to bank lending policies. Monetary conditions were also very favourable. Interest rates were too low. Prudential policy was too deferential and failed to pick up on warning signs. Last but not least, banks, as described by the Nyberg report, were engaged in high-risk growth strategies involving a significant expansion of credit. There were no countervailing policies in operation.

Research shows that while the decade of 1990s was primarily driven by exports, the expansion of credit was also a key contributory factor. Strong employment growth and the rise in the population led to a large increase in house building. Furthermore, the ratio of private sector debt to GDP was well within the range of other countries. In the period after entry into EMU, in my opinion, developments prior to around 2002-03 could be characterised as still within acceptable ranges for many key ratios. A period of slower growth was warranted thereafter as the growth in total lending carried increasing levels of risk as property price inflation and investment and construction headed for unsustainable levels based on international standards. I set out a number of statistics in my written statement relating to credit expansion which I won't go into here in this summary.

On the second line of inquiry, relating to risk concentration in base, and in adverse scenarios, I would say that stress testing was undertaken within AIB by the stress testing steering group which was part of the central group risk management framework. My role was to present an overview of the economic scenarios to the STSG based on, for instance, the initial economic data provided by the regulatory authorities, either in the UK or in Ireland. The aim was to provide group and divisional risk management, finance and credit units, with the fullest possible understanding of the transition from the base case to the adverse economic scenarios. The actual calculation of the effects of the adverse economic scenarios on the bank's capital and other metrics was undertaken by analysts within the group and divisional risk and credit units. When it comes to concentration risk, the methodology changed over time to include additional studies to examine the correlation between sectors, particularly in relation to property. Adjustments were made to the impact on credit provisions to take account of this factor.

As to the third line of inquiry, the adequacy of the assessment and communication of both solvency and liquidity risks in the banking institutions and sector, here I'm really looking at the role of the three policy makers, and I want to focus particularly on fiscal policy, because it seems to me, and certainly from my experience of the Department of Finance, that far too much of the time of the Department is taken up with the annual budget process. Macroeconomic issues over the medium term, or other issues, are not really handled effectively within the Department. And in terms of publications from the Department, they tend to just simply back up what's contained in the supporting ... what's contained in the annual budget statements. So therefore, there were no commentaries, that I'm aware of, from the Department, relating to the property sector in the period leading up to the crisis. The prudential practice covered both micro and macro policies and, I'm quoting here from the Honohan report which pointed out quite a lot of deficiencies in the way in which these policies were carried out, but at no stage did the assessment of the banking system, such as it was, show any concerns about liquidity or solvency issues.

On the macro prudential side there were annual financial stability reports published between 2004 to 2007. These reports failed to trigger a more cautious approach within the banking system. An important earlier point worth noting is that several research papers produced within the Central Bank and by the ESRI, the IMF and the OECD, consistently came to the conclusion that Irish house prices were overvalued, often by significant amounts. I believe that the consistency of this conclusion should have alerted the supervisory authorities to investigate the implications of this more rigorously with the financial institutions.

On the fourth line of inquiry, appropriateness of the expert advice sought, quality of the analysis, and how effectively this was used, I again refer to quite a number of international organisations that provide analysis and advice to the supervisory authorities. However, I also feel that these reports are often subject to a little bit of suasion from the domestic institutions as to what's contained in them. However a more ... I suppose, a better form or research from these organisations might well be found in the number of housing market reports published by the OECD and the IMF, in the 2003-04 period, and by the OECD in 2006, which raise quite a number of issues in relation to the Irish property market. And other studies produced by the OECD in 2006 raised issues about adjustments in the property market in the context of a monetary union and these, I believe, were important and useful studies for consideration by the authorities and also by financial institutions.

In the area of contrarian views, I would say that, by the time these contrarian views became public knowledge and got a great deal of publicity, the Irish property market was already in slowdown mode. I found the reaction to them to be quite surprising because research, I think that we had published, showed that by 2005 the ratio of house prices had already risen quite dramatically, affordability was deteriorating, interest rates were on the rise, investors were increasingly worried about the market, employment growth had levelled off, so we were in a situation where there was a turning point already on the way.

As to the remaining lines of inquiry, Mr. Chairman, I don't propose to read into my ... anymore out of my statement. I will make the point, though, in relation to the liquidity issue in banks, I sat in the dealing room of AIB during this period and every event, and there were quite a number of them, from mid-2007 to the collapse of Lehman Brothers, was a big event and was quite troubling in the context of how the markets saw it. I think, if you're not in that space, you don't really have a full appreciation of just how difficult that was.

So, Mr. Chairman, that concludes my summary of the main lines of inquiry, but with your permission, I propose to deal with the issue of Professor John FitzGerald's reference to me in his testimony to the committee on the 11th.