Mr. Richard Burrows:

Mr. Chairman and members of the joint committee, I welcome this opportunity to meet with you and to assist you with your inquiry into the banking crisis. As requested by you, I submitted a written statement on a number of specific topics identified by you. I do not propose today to repeat all of the points made in my written statement, but I do want to highlight a number of points which I believe are of particular relevance to the business of the inquiry. Looking at events from a number of years ago, it's important to try and recall and to understand the context in which actions were taken or decisions were made.

This is particularly so in circumstances where the banking world has changed so dramatically in the intervening period. Before touching on some of the points made in my written statement, let me make a few brief words about the backdrop against which Bank of Ireland and other banks operated during my time on the board.

Peter Nyberg's evidence to the inquiry described that the global consensus back in the noughties was that financial markets were stable and efficient, a view to which Irish private and public sector decision makers adhered. A number of previous witnesses before the inquiry have referred to the general economic backdrop to the early 2000s, including the strong growth in employment, the extraordinary growth in the Irish population and the consequent huge increase in demand for new housing.

The report by Regling and Watson, which forms part of the evidence presented to the inquiry, notes that Ireland's strong and extended expansion during the previous decade fostered expectations of a continued rise in living standards and in asset values. Regling and Watson also note that in this macroeconomic setting, bank governance and financial supervision faced major challenges and, looking back, I would agree with this observation. They described banks operating in a setting of greatly increased wholesale funding opportunities following the adoption of the euro and banks from abroad beginning to compete strongly in retail mortgage lending. Another factor highlighted by Regling and Watson was that when modern Ireland ... was that modern Ireland had never experienced a property crash. As the chief economist of Bank of Ireland set out in his written statement to the inquiry, the fall in house prices in the first half of 2008 was modest and the full effect of the unprecedented collapse of the global credit markets which followed the Lehman bankruptcy in September 2008 was not felt until 2009. So the 2008 crisis was not primarily caused by the property devaluation but by other factors, later exacerbated by the collapse of property values.

I was asked to discuss the quality of the business model setting process in Bank of Ireland, which I took to mean the quality and setting of the strategic plans. In my view, a key point to bear in mind when making judgments on a strategy setting process is the backdrop against which the strategy is developed. Bank of Ireland's strategy was informed by the consensus view on likely economic developments in the countries in which the bank was most exposed to credit risk. While I believe that the process for setting the bank's strategy was extensive and robust, in hindsight the bank's strategy, in common with other financial institutions in Ireland and internationally, which assumed continued economic growth in the bank's main markets, reflecting the consensus view, led the bank to expand in a manner which, as I said at the extraordinary general meeting of the bank in March 2009, was regrettable. The bank's funding of that growth assumed the continued normal functioning of wholesale interbank markets, which did not happen, and the risk of this funding not being available was not, in light of our perception of future events at that time, fully appreciated.

While prudent strategic decisions were made to focus on the bank's core business, and not to enter into certain business segments, which meant that Bank of Ireland's position, when compared against many of its peer companies, was less severe overall, this was of little consolation to the bank's shareholders, who suffered a very serious decline in the value of their shares and through the cancellation of dividends.

At the extraordinary general meeting in March 2009, I also acknowledged that the bank's change of strategy, to a much more defensive position, was not commenced early enough in the cycle of the economic decline. Reports commissioned by the bank in the period following the crisis have noted that while the bank could not have escaped the unusually severe economic downturn, the effects could have been mitigated if corrective action had been taken earlier.

As I said at the time and at the AGM in July 2009, I accept responsibility and accountability as governor for the situation in which Bank of Ireland found itself in 2008. I also placed clearly on the record then, my appreciation of the Government actions in 2008 and 2009, which ensured the survival of Bank of Ireland.

I’m referring to the guarantee, which stabilised the situation in September of 2008, the capital infusion into Bank of Ireland, since, thankfully, fully repaid and the creation of NAMA and its acquisition of the banks property loans, which allowed Bank of Ireland to become an investable institution and thus allowed new, third-party shareholders to come aboard. This package of support was comprehensive and determined the continued viability of the bank. I have outlined in my written statement, the structures which were in place in Bank of Ireland in relation to risk monitoring. A key issue in my view, is that despite these structures, we the board and management did not fully appreciate nor factor in the risk inherent in the rate of growth of the bank's core businesses and in particular, while property lending grew broadly in line with other lending, the risks arising from the absolute amount of property lending and from the group's reliance on wholesale funding.

In hindsight, risk should have been a more fundamental driver of the setting of strategy. This would have resulted in a set of constraints around strategy development reflecting the risk appetite being set down by the board. I do not believe that the appetite for property lending in Bank of Ireland was any greater than for lending into other sectors. In particular, Bank of Ireland had a relatively lower appetite for, and by extension, lower relative exposure to, landbank lending than other banks in the Irish market. So, while the growth in property lending was not disproportionate, the amount of the bank's property and construction book was significant and thus the bank was heavily exposed to the significant downturn in the Irish and UK property markets.

I have seen from the previous evidence sought by the inquiry that the members have a strong interest in analysing the decision to introduce the bank guarantee on the night of 29 September 2008. You have asked for my opinion on the appropriateness of that guarantee and in response, I would say that there is no doubt that the Government at the time found itself in an extraordinarily difficult situation, particularly on that night of 29 September, when it became clear that a liquidity default risk facing Anglo Irish Bank could have serious implications for the entire banking system. I am not aware of the range of options considered by the Government at the end of September 2008 and I am not, therefore, in a position to comment on the appropriateness of the guarantee as against those other options. I would say that in my view, the immediate funding requirements of Anglo Irish Bank could have been addressed by guaranteed financial support, which Bank of Ireland and AIB were prepared to make available in the short term to Anglo Irish Bank.

Such a decision may have given the Government more time to consider its options. However, the Government chose to go further and to guarantee all financial institutions, which certainly avoided the collapse of Anglo Irish Bank that week.

Let me conclude these remarks by repeating that it was a source of great regret to the board of Bank of Ireland, which had served its stakeholders so well for over two centuries, that we required substantial support from the Irish taxpayer and from the State. As I've said earlier, that support was comprehensive and ensured the continuing viability of the bank, and for that I remain very grateful. I'll do my best to answer any questions which you may wish to raise, Chairman.