Mr. David Doyle:

Thank you, Chairman. Thank you for the opportunity to make these opening remarks to the committee. May I say that my objective at all times during the banking crisis and today has been and is now to serve the public interest. I will limit myself to comments on the guarantee, nationalisation, the ECB, Central Bank, regulator, while also dealing briefly with fiscal policy.

Fiscal policy in the decade up to 2008 should have been more conservative and the crisis was caused by a dramatic escalation in lending by the banks. The banks created the banking crisis but the Financial Regulator and others might have done more. The Department was concerned about the over-reliance on the property market as a component of economic growth and, of course, about pro-cyclical fiscal measures and Ireland's lost competitiveness. However, the Department did not anticipate the severity of the property crash and the international financial crisis. It accepted the consensus view of the Central Bank, the ESRI and others that the construction sector was facing a soft landing. At that time, it was generally thought that there would be a significant reduction in levels over a number of years and not a sudden crash. The Department was wrong to take, without challenge, the assessment of the Central Bank, the Financial Regulator and the banks' reassurance about the state of the financial sector. Such a reliance on consensus forecasts and the assessment of the Central Bank, the regulator and the banks was a mistake and I regret it. In the decade up to 2008, the demand from virtually all sides of the political and lobbying spectrum was for greater expenditure on more public services and for a reduction on taxation. The typical response to increased levels of spending in many quarters was that it wasn't big enough.

Before dealing with fiscal and taxation policy matters in more detail, I'll just run over quickly the guarantee decision itself and the decision to nationalise Anglo Irish Bank. You are all familiar with the fact that funds were flowing out of the country and that there was huge public concern about the safety of savings, which led to the introduction of the €100,000 guarantee. That assuaged the ordinary customers of banks but not the wholesale money market and larger depositors. Intensive discussions took place between the day of that decision around the middle of September and the end of the month about what further measures might need to be adopted. Matters came to a head on 29 September. The Minister had detailed advice from Merrill Lynch with the input from the Central Bank, the regulator and the NTMA also. Merrill's document, that was considered on the night of the guarantee, was that you could not ... they recommended you should not allow any Irish bank to fail because of the state of the market and the impact of that would be so damaging. They went through a number of options, liquidity provision, taking Anglo and Nationwide into protective custody, consolidate some of the banks and introduce a guarantee. Their conclusion was:

Even if the situation stabilises the immediate outlook for monoline single asset ... lenders is increasingly uncertain. In this context it is important for the Government to act quickly and decisively to step in and prevent a systemic problem.

Turning to the guarantee night, on the night of the guarantee, the Financial Regulator was of the view that while Anglo was illiquid, it was profitable and solvent. All of the banks were suffering from liquidity pressures but Anglo had no access to liquidity and was facing imminent collapse. The question of emergency liquidity assistance was considered for Anglo that night and stand-by arrangements were put in place for it. But there was a major concern that if word got out into the market that ELA had been put in place, that this would have leaked, inevitably it would have leaked, and lead to the sort of consequence that you had with Northern Rock which has, if you recall, the BBC running the story, ELA had been extended, massive queues outside their branches, including in Ireland, and a decision then to guarantee their deposits and ultimately nationalise it. On the night, concern about the sustainability of Anglo and Nationwide models were heightened. The two major banks, AIB and Bank of Ireland, emphasised those concerns and argued that they should be addressed by nationalisation, which should also be accompanied by a guarantee for all banks. The regulator continued to assure the Government on the night that all the banks were solvent. Nationalisation of the organisations was considered on the night of the guarantee. The case for nationalisation was that the business models were regarded by the major banks and indeed, by the Department and the NTMA as suspect.

There was a real concern that there could be a serious problem with their loan books, regardless of what the boards of management were saying.

An involuntary liquidation at that time of a bank would have created a real danger of a complete collapse in the banking system with all that would entail for the economy as a whole. An orderly nationalisation, given the conditions at that point, would have taken over all the assets and liabilities, as occurred in January 2009. The reservations that night about nationalisation centred around a number of key questions. The first was whether nationalisation was warranted. There were concerns about the business model but no quantified evidence had been produced which showed insolvency. There was some theoretical stress testing but no bottom-up examination of the loan books had been carried out.

On a second question, whether nationalisation could be undertaken without having a domino effect, one view was that nationalisation might lead to the undermining of the other banks even with a full guarantee. This is because it could give rise to the idea well if Anglo was that bad, the others could be equally exposed. So in that case, the guarantee might not have been convincing from day one and might have failed.

On the third question, whether nationalisation would avoid the need for a guarantee, the view was that, nationalisation or not, a guarantee would have to be given to save the banking system and in strong conditionality terms. On a fourth question, whether the ECB would allow a bank failure, the view of the ECB as quoted to the meeting by the Governor on the night was that Mr. Trichet had advised him that no bank failure could be allowed, or words to that effect. On this point, the domestic and international market turmoil at that stage was such that this view was shared by all concerned at ministerial, Central Bank and Department of Finance official level. Nationalisation would not, of course, have been a bank failure as such, but it might have been regarded in the panicked market conditions as tantamount to a failure, and indicative of greater dangers.

Throughout the night of the guarantee the pros and cons of (a) nationalising Anglo and having a guarantee, or (b) having a guarantee, were debated several times and late into the night. The two main contending viewpoints in the debate were: there was a strong case for immediate nationalisation; and the nationalisation at that point could lead to an undermining of the banks and the guarantee. Whatever about those contending viewpoints, the simple fact was that if emergency measures were not taken that night to address the problems created by the banks, there was a very real danger of a collapse in the domestic banking industry, not just in Anglo but quickly in the rest of the banks, through a widespread loss of confidence.

The damage to individual depositors, large and small, both personal and business would have been extreme. The potential reputational damage would have undermined consumer business confidence, domestic and international investment, existing and future. A collapse in the banking industry would have led to Ireland's sovereign borrowing reputation and capacity being irretrievably damaged. A collapse on this front, combined with impacts on revenue, would have resulted in Government services and investment across the board being summarily cut or suspended. No one was prepared to countenance this. The Taoiseach and the Minister left the room for a private political discussion late in the night to review the debate. On their return, my recollection is that the Taoiseach said they had decided to recommend a guarantee to the Cabinet and that Anglo would not be nationalised for the present. The Minister did not in decree, indicate any disagreement on this approach.

Turning to nationalisation of Anglo in January of 2009, very quickly after the guarantee, there were a series of meetings with Anglo which didn’t generate a lot of confidence given their business model, one aspect of which was they paid more for deposits and charged more for loans. They very assertively stressed their profitability, their liquidity and their positive future but it was received with some scepticism. A report by PwC after the guarantee pointed to end September transactions with another bank and this raised serious questions. That matter was referred immediately to the Financial Regulator. Subsequently, further corporate governance issues regarding directors' loans and the nature of certain other loans also raised serious concerns.

It also became clear over the following months that new or existing shareholders were not going to emerge and a "white knight" who some people were expecting to emerge, wasn’t going to emerge either. The banks, the domestic banks had enough of their own problems to address without getting involved in Anglo. All of that undermined confidence, despite the appointment in December of 2008 of a new chairman and public interest directors. The loss of confidence culminated in early 2009 and led the Government to decide the close control of the bank had to be taken to ensure confidence in the banking system for the same reasons I referred to earlier, that a bank closure had to be avoided. That decision was taken after consultation with both the Central Bank and the regulator.

Turning briefly to the ECB. The ECB is an independent body and it pursues its treaty-mandated primary role which is the maintenance of price stability through interest rate policy, and that policy takes account of the average conditions across the eurozone, not in individual countries. Credit growth in Ireland to households and non-financial businesses in the ten years 1998-2008 increased by an average of nearly 20% each year. Interest rate policy over much of the early 2000 period operated to boost borrowing and lending in the Irish context. Those low rates encourage inappropriate lending by the banks.

The Treaty on the Functioning of the European Union states that the European system of central banks, which consists of the ECB and the national central banks of all member states, "shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system". The ECB, as you know, is completely independent of Governments and so is the governor. It’s a matter for the Central Bank to say whether the ECB ever advised the Irish Central Bank and any others experiencing excessive growth rates that specific measures needed to be taken to curb this. My view is that they should have.

Turning to the Central Bank. When the Central Bank was being amended following the Government decision in 2001 on financial regulation, there was express powers included in the legislation to give authority to the Governor and the board to issue guidelines to the regulator. I might just read that out:

'Either [the Government] the Governor or the Board may, with respect to the functions of the Governor or the Board, issue to the Regulatory Authority guidelines as to the policies and principles that the Authority is required to implement in performing functions, or exercising powers of the Bank ... The Regulatory Authority is required to comply with guidelines issued to it under this section.

The financial stability analysis produced by the Central Bank in 2006 and 2007 suggested that while concerns were heightened about escalating house prices and associated banking exposures, this would not lead to any insolvency issues. The Central Bank placed undue reliance on their reports of the banks and assessment of the regulator in arriving at this conclusion. That was a mistake. The regulatory regime also imposed ... the legislation also imposed obligations on the regulator in relation to financial stability. It provided that if a matter relating to the financial stability of the State’s financial system arises in the connection with the performance or exercises by the regulatory authority of its functions, that authority shall consult the Governor. It goes on to say then if that arises, they may give a report to the Minister. The Department has told me there was no ... they could find no record of such a report. I do recall the financial sector having deep concerns about the credit union sector.

The combination of the express authority given to the Central Bank, together with the requirement on the Financial Regulator to put any financial stability issue to the Central Bank, and the fact that there was some common membership of the board did provide for an effective corporate governance structure if properly operated. While somewhat cumbersome, it was an appropriate regime. I'll just mention briefly an IMF report into the regulatory system in 2006 more or less gave it a clap on the back and said it was amongst best practice and that they had ... conclusion was that the results of stress tests undertaken through the Central Bank and the regulator and the major lending institutions confirm that the major domestic lending institutions have adequate capital buffers to cover a range of large but plausible hypothetical shocks. The Financial Regulator operated a principles-based regulatory system, which obviously took at face value the assessment of the banks and did not exercise independent judgment on their exposures and the quality of their loan books. This, too, was a mistake.

Turning to fiscal policy, in the decade up to 2008, Government programmes, combined with the pressures ensuing from social partnership, as well as the need to address both infrastructural deficits and demographic pressures on various sectors, drove expectations of public expenditure higher. The outcome was that from 1998 to 2008, total Government current and capital spending, excluding the Central Fund, increased from €20 billion to about €60 billion. Total current spending increased from €18 billion in 1997 to €53 billion by 2008, an average increase of 11%. That was clearly an excessive increase. The Department did recommend a much tighter control of current spending. Total capital spending increased from over €2 billion in 1997 to €9 billion in 2008, an average increase of 15%. A good deal of this increase was supported by the Department, as it felt that major infrastructural deficits such as our core interurban transport corridors - motorways - had to be tackled before demographic pressures crowded out investment. In general, prior to 2008, and as result of the pressures exerted by the social partners, individual Ministers and the Cabinet, the annual budget day packages ended up significantly higher than those recommended in the budget strategy memoranda put forward by the Ministers for Finance. The fact that revenues were buoyant in that period added to expectations.

Taxation, just to touch briefly on that, Chairman, the reduction in the top tax rate from 48% in '98, to 41% by 2006 increased disposable incomes significantly and that added to the appetite for fixed assets. The pressure from all sides were for less taxation over that period and, as I noted earlier, for more public services. Tax incentive generally in relation to housing and the incentives for commercial development did contribute to pressures in the construction sector. Other factors driving activity were reduced interest rates, the availability of loans and easier terms and the expectations that investing in property was always going to be a winning formula. Loose and unco-ordinated planning development controls contributed to the problem. On foot of recommendations from the Department of Finance, the Minister for Finance progressively moved from 2005 onwards to reduce and terminate tax incentives associated with building and tax minimisation by high earners.

Uncontrolled lending: the accepted analysis after the establishment of the ECB and the transfer of monetary policy from Irish Central Bank was that the only tool available to Government to control economic activity in the economy was through taxes and spending. The Department of Finance placed too much store on this conclusion. Greater consideration should have been given to the impact of uncontrolled lending. The Department should have adopted a more critical stance on monetary and regulatory matters in the decade ending in 2008. As Secretary General between July 2006 and January 2010 I was an ex officiomember of the board of the bank but not of the regulator. I do not recall any proposals being advanced by the management teams of either the Central Bank or the regulatory side on foot of any identified imminent threat to financial stability or to the solvency of any particular institution.

As I said earlier, the analysis that was done was insufficiently critical of the realities behind the financial reporting of the banks. Some of the factors involved in pushing growth in the economy over the decade ending in 2008 include increased wages and changes in Government spending and taxation. However, increased bank lending was by far the biggest factor. The average annual increase in spending already touched on was about €10 billion - sorry - €4 billion a year, average of about 10% a year. The tax package cost about €1 billion a year, increased costs of wages and salaries in the economy, all adding fuel to what was going on, was about €6.5 billion. Unit labour costs in the economy increased by more than 55% in Ireland between 1997 and 2008, remained static in Germany and increased by 26% in the USA and 36% in the UK. The average increase in lending to individuals and non-financial business was almost €25 billion per annum or an annual average of more than 20%. The total increased from €40 billion in 1997 to over €300 billion in 2008. The reality is that it was this huge increase in lending that drove excesses in the property market. A more moderate approach to spending and taxation would have been better. Even with such moderation in spending and taxation, the uncontrolled explosion in credit by the banks would still have created much of the problem which crystallised in 2008.

I might conclude, Chairman, the guarantee decided in September 2008 was essential to avoid a complete collapse of the banking system and the economy. Ultimately, Anglo Irish Bank had to be nationalised in January 2009 to stop it collapsing and triggering a wider banking failure. The ECB set interest rates at a level that it judged appropriate to the whole of the euro area. The question of ensuring that credit growth was appropriate to the particular conditions in each euro country was left to the domestic central banks. Measures to control credit should have been taken. The Central Bank placed undue reliance on the regulator's assessment of the financial reports of the banks - that was a mistake. The regulator took the report of the banks at face value and did not subject their loan books to any meaningful scrutiny - that was a mistake. The Department of Finance was wrong to rely on consensus forecasts for a soft landing. It was also wrong to take at face value the assessment of both the Central Bank and the regulator of the state of the financial sector. I regret this. Fiscal policy in the period 1998 to 2008 was pro-cyclical. The pressure for more spending and less taxation came from all sides. The average increase in lending by the banks to individuals and non-financial business, in the period 1998 to 2008, was €25 billion per annum. That is what really caused the banking crisis. Thank you Chairman.