Mr. Con Horan:

Chairman, members of the committee, thank you for hearing my evidence today. It provides me with the opportunity to assist the inquiry in its work into what has been the most catastrophic, financial and economic crisis in the history of the state. The crisis has left many indelible marks, the system of oversight of the Irish banking sector clearly failed. The lessons learned from these events, as well as those in European banking over the recent years, have and will continue to drive major changes so as to avoid a repeat of what occurred. Commentators have implied that I personally did nothing to prevent the problems of 2008. Nothing could be further than the truth. Four years have passed since the report of the commission of investigation. Accordingly, I very much welcome this opportunity to have my voice heard and communicate the actions I took in seeking to avert the collapse.

When the Governor of the Central Bank, Professor Honohan, spoke to you in January this year, he advised that the people who took corrective action had been vilified in the media. He was speaking about my situation. When the commission of investigation report spoke about the lack of professional scepticism in the Financial Regulator, it also identified that there were exceptions at the level of the regulatory authority. I believe that exception was me. I can, however, assure the inquiry that this does not alleviate the sense of deep regret I feel, as a member of the senior management team in a registered authority that was not more intrusive and did not prevent the collapse of the financial system.

Before going into the events leading up to the crisis, it is important to distinguish between the roles of the Financial Regulator and the Central Bank. Briefly, the Financial Regulator was primarily responsible for supervising the safety and soundness of individual banks and their compliance with prudential requirements. The Central Bank, on the other hand, monitors stability of the overall banking system and the threats to the financial system. The Central Bank's views of market ... of the market inform the Financial Regulator in its supervision of the banks. The Financial Regulator in turn, contributes to the analysis of the stability of the overall system by communicating what it was observing in individual institutions.

I joined the Financial Regulator in mid-2003 as head of banking supervision. I reported to Mr. Patrick Neary, who was the prudential director. In this role I was not a member of the senior management team and only occasionally attended meetings of the authority. I was required to implement the strategic principles-based approach to regulation adopted by the authority prior to my appointment. As it would be expected, I acted at all times within the structure and the approach set down by the authority.

However, I believe the records demonstrate that I continually pushed the boundaries seeking to make the regulations of banks more intrusive and assertive. During this time, I proposed interventions in the property market to address high-risk mortgages. I proposed the imposition of formal corporate governance requirements on banks, including specific proposals to address the most difficult cases. I advocated for the establishment of a dedicated unit of specialists to pursue administrative sanctions. I also took on the role of head of banking supervision at a time when the international approach to the regulation of banks was undergoing the most radical change in decades. The Basel II accord was published in 2004, it was designed by central banks and regulators from major countries in the world. It established the key prudential ratios the banks needed to comply with and how these ratios should be calculated. The approach containing the accord was, in effect, the continuation of the deregulation of the industry which had been happening for more than a decade. While not fully responsible for the crisis, it provided poor incentives and moved supervision towards a greater recognition of banks' own methods for managing risk and calculating capital. The system of regulation supervision contained in this accord has proven to be grossly deficient and I will revert to this point. While I cannot be specific as to the dates, I believe it was around the end of 2004 or early 2005 that I grew increasingly concerned about the way property-based lending was developing in Ireland.

My concerns were supported by my research of international banking crises and, in particular, what had happened in Scandinavia in the 1990s. In mid-2005, I made a written proposal to increase the bank's capital requirements on high loan-to-value mortgages. This sought to put more capital aside in the event of a downturn and to establish a standard in the market for prudent lending. However, the proposal was not accepted. My understanding was that senior management in the Financial Regulator and the Central Bank had considered the matter but did not believe the action was necessary. Macro-prudential analysis on mortgage growth conducted around this time suggested that the developments could be explained by economic fundamentals.

In 2006, Mr. Patrick Neary became the CEO, following the retirement of Dr. Liam O'Reilly, and I was appointed prudential director. The Irish Timesquoted in an article as follows "Shortly after Neary became the regulator's chief executive in 2006, Con Horan, who replaced him as prudential director, knocked on his door and warned that something had to be done to restrain property speculators as house prices reached new highs on spiralling land values and the market was awash with 100 per cent mortgage offers." Reflecting these concerns, my first week as prudential director, I presented proposals to the authority for capital measures to address high loan-to-value lending ... mortgage lending. This was the first time in almost a decade of an exceptional property market that the regulatory intervention was instigated. Prior to this, moral suasion was the tool used to try to persuade banks to rein in the practices. Therefore, the taking of direct action represented a significant change and met with internal resistance. There was concern that such action would jeopardise the stability of the Irish financial system. There were concerns that such intervention was inconsistent with principles-based supervision. However, it was approved, after what Governor Honohan has described as long and agonised debate.

I wish to point out that I took these actions immediately on my appointment because it was imperative to signal to the banking industry that the approach of property-based lending was changing under the new senior management regime. The speed and level of consultation in the introduction of the measures led to me being rebuked by the statutory financial services consultative industry panel. The panel considered the lack of consultation with its members in the preparation of the measures as regrettable and retrogressive. The chairman of the panel wrote to me reflecting those concerns.

Later in 2006, I followed up these mortgage measures with the introduction of the most stringent capital requirements in Europe for speculative commercial property lending and additional requirements for buy-to-let mortgages. There was also resistance to these measures. Clearly the majority view at the time was that the property market was going to have a soft landing as interest rates increased. There was fear about the message that regulatory intervention would communicate in terms of the property market in Ireland and how it might affect the competitiveness of the banking system. It is important to point out that a public consultation undertaken on the introduction of the measures did not produce support for these regulatory actions. The responses received to the consultation were largely critical, with the banks and their representative body expressing the belief that such action was unwarranted and raised the prospect of international investors reacting negatively to the Irish market. It took a lot of persuasion and a number of board meetings to get agreement on these actions.

I would highlight that had the actions been the catalyst for a sharp correction, as many had feared, it would have raised very serious consequences. However, I did not leave matters there. In July 2007, revised prudential stress testing guidelines were issued to credit institutions to address loosening underwriting standards. In effect, my first ten months as prudential director were spent pursuing this agenda of change, culminating in the most stringent regulatory regime in Europe for the key areas of property risk. Initiating such changes met a lot of internal and external resistance and an absence of public support.

The following slides demonstrate how the market slowed after the measures were introduced. Okay, I'll be very brief on this. The first slide deals with residential mortgage lending, and I just really tried to show the sequence of events, that in February 2006 I was appointed prudential director. I immediately proposed the change and the new rule was introduced on 1 May 2006.

I think the committee can see that thereafter there's a very clear and consistent decrease in the level of mortgage lending.

And if I can have the other slide please? This relates to non-mortgage credit, and again it's from October 2005, and again just appointed prudential director February 2006; I proposed the measures in around September '06 with the capital requirements directive coming in. The measures came into effect on the 31 December 2006, and again I think you can see in general how the mortgage market, or the non-mortgage credit, went thereafter.

In all my research and in making my recommendations I was conscious of the views of external contrarians and used their arguments to support the positions I was putting forward. However, I was also conscious of other views as it would have been entirely wrong and counterproductive to ignore what the domestic mainstream authorities including the ESRI and the Department of Finance were saying. You must also remember that private sector professionals such as rating agencies, stockbrokers, investment managers and analysts were broadly supportive of the way markets were performing. The IMF has also acknowledged that it provided few clear warnings about the risks and vulnerabilities associated with the impending crisis. From its on-site reviews, it was supportive of the approach of supervision that was being taken. In 2006 it proposed that the prudential director should be appointed to the authority so the position would be on a par with the consumer director.

Other international bodies such as the OECD were also supportive of the macroeconomic analysis of the domestic Irish authorities. And the ECB, with its financial stability mandate, was not advocating macroprudential action. It was positive towards the strength of the EU banking sector prior to the crisis. It is of some comfort to me that the Basel II accord and the capital requirements directive which provided the foundation of the regulatory regime in Ireland have in recent years been acknowledged to be grossly deficient. In addition to permitting grossly excessive levels of leverage, Basel II encourage pro-cyclicality, failed to provide for systemic risks and allowed banks to operate on extremely low levels of capital, resulting in buffers that were far too low prior to the collapse. The weakness of the regime has now been identified by many authoritative sources, including parliamentary committees in other jurisdictions. The process of correcting the deficiencies has been ongoing since 2008, but even now, seven years on, the reforms are not complete.

To conclude, I wish to repeat that as a member of the senior management team in the Financial Regulator from 2006, I deeply regret and I'm sorry that the system of supervision did not prevent the collapse in the banking system. I do hope the inquiry will recognise that I took risks to address key problems by introducing stricter regulations in a difficult environment of groupthink. It was of course my duty as prudential director to do so. While the ten years as prudential director I saw the introduction of some of the most stringent capital and liquidity rules in Europe, regrettably, however, these measures were too late and were not sufficient to reverse the excesses of the previous decade and save the financial system when the global financial crisis struck.

Thank you for your attention, members. Can I also add one additional point if I can, Chairman? I do want to correct a point on my earlier statement ... just a brief correction on page 4 ... the third paragraph down under macroprudential supervision. There is a reference there to the IFSRA board, that reference ... the IFSRA should be removed it should just be the board. It's the Central Bank board I was referring to there.