Mr. Robert Gallagher:

Thank you, Mr. Chairman. I welcome the opportunity to appear before this inquiry and I shall be as helpful as I can in assisting you in your work. My opening remarks this morning are supplementary to the written statement, which I submitted to the inquiry on 9 April.

My professional background is in international banking. Prior to joining Ulster Bank I was head of corporate banking international for AIB, with responsibility for businesses in London, Frankfurt and Paris. I joined as chief executive, corporate markets, at Ulster Bank Group in late 2005 and worked at the bank until I resigned in September 2011.

I joined the bank well into its growth phase, and in the six years I spent working there, I oversaw a two year period of growth followed by four years of intensive portfolio management and remediation of the corporate markets divisions of the bank.

The reputation and strength of RBS Group was a key factor in influencing my decision to join Ulster Bank. RBS was then a very successful bank. It was held in high regard globally, and I believe the significant presence they had in Europe, the US and Asia could be leveraged to the benefit of Irish companies seeking to expand in those markets. Looking back, I was excited about the opportunity to develop and grow a corporate business here to compete with AIB and Bank of Ireland.

As chief executive of the corporate markets, my responsibilities included corporate banking, business and commercial banking, property finance, capital markets in the Republic of Ireland and in Northern Ireland. Corporate markets had approximately 1,700 people working in Dublin, Belfast and 32 business centres around the island.

On my arrival into the business, Ulster Bank already had a well developed and long-standing property division. The commercial property loan book was then approximately 60% of the corporate loan book. On joining, a key objective of mine was to diversify the portfolio. I sought to do this by bringing the RBS global capacity and products to the corporate and business customers in Ireland. In order to facilitate this objective, I oversaw a significant expansion of the business centre network, the enhancement of the corporate systems capability and initiated substantial training and investment in our people, particularly on financial and cash flow analysis.

The bank's strategy was to become a third force in the Irish universal banking market, to challenge the dominance of the big two. As a wholly owned subsidiary bank, treasury, capital funding and balance sheet management were provided to us by RBS. Our focus in corporate markets was on growth and diversification of income streams.

The bank's strategy and business agenda were underpinned by a control and reporting framework, which was aligned with the wider RBS Group. We were plugged directly into the RBS credit approval framework. The risk, credit, finance operations, internal audit, HR and treasury functions all reported into RBS on a matrix basis. The concept of first and second line of defence was deeply imbedded in the RBS approach to the control environment. The risk management division of Ulster Bank, which was independent of the corporate markets, was structured, resourced and managed in a manner consistent with other RBS divisional risk management functions. We were obliged to operate within the parameters of a comprehensive and detailed policy rules and guidelines, which prescribed how risks were to be managed. These policies covered lending limits and approval structures, LTV limits, stress testing and evaluation processes.

In my view, the governance structures and policies at Ulster Bank were adequate. Did everything work according to plan? No, I can't say everything did. However, in the vast majority of situations, the rigour and consistency of the bank's approach worked well. The critical mistake was to base our ambitious growth strategy on economic assumptions which we firmly believed to be well founded, but which proved in time to be seriously flawed. When I joined the bank in 2005, the internal economic analysis and pretty much all of the external economic analysis forecasted continued GDP growth into the medium term. Ireland had experienced a property boom which had lasted then over ten years, driven in main by the fundamental factors such as low interest rate regime, increasing population, strong growth in employment and rising household incomes. Corporate activity was particularly strong from the late 1990s onwards through a combination of buoyant indigenous enterprise and foreign direct investment.

Come 2007 when the signals of the slow down became apparent, most economic analysis, including our own, predicted the notorious soft landing. The consequence of the reliance on flawed assumptions allied to the failure to critically analysis and challenge the pace and extent of the property construction lending has been clear to everyone. As a former director of Ulster Bank, I deeply regret this. I spent the period from 2008 onwards remediating the business. During this period and as a member of the executive of Ulster Bank, we sought and received RBS approval for an action plan to protect the Ulster Bank franchise in Ireland. In corporate markets, this plan included the allocation of over 300 people to a new division to manage the deteriorating portfolio; the reduction of the intergroup lending limit, which had grown substantially following the introduction of the bank guarantee scheme in the Republic of Ireland, of which Ulster Bank was not part; and the reduction of the cost base of the organisation and the re-shape and re-size of the business to reflect the new economic reality.

Through this very difficult period we continue to have the support and faith of the new RBS management team which has brought in to manage business. Thank you for listening to my opening remarks and I am happy to address the questions from the members of the inquiry.