Mr. John Dunne:

May I begin by thanking you, Chairman and members, for giving me the opportunity to contribute to your inquiry. By way of introduction, I referenced my period of office as director general of the Federation of Irish Employers from 1988 and as the first director general of IBEC in 1992. I retired from IBEC in 2000. At the beginning of 2000, I was appointed to the board of the IDA and subsequently in June to the position of chairman. I was reappointed chairman in 2005 and retired in 2010. I believe that my role within IBEC was a significant factor in my being asked to join the board of the Irish Financial Services Regulatory Authority and subsequently of the Central Bank. My CV did not include any specific banking or financial experience but the challenges and successful outcomes of the creation of IBEC were, I believe, viewed as relevant and useful.

The committee will note my retirement from IBEC in 2000. I was appointed to the board of the Financial Regulator and the Central Bank as a non-executive director in 2003 and am therefore unable to comment, from an IBEC perspective, on any of the issues raised, other than social partnership to 2000, in the committee's terms of reference for my appearance before it.

I confirm that I advised the committee secretariat of the position immediately on my receipt of the committee's request for my participation in its work.

Initially, I wish to make a number of general points. Firstly, I have no interest in seeking to apportion responsibility and-or blame between the bank and the regulator. Secondly, and in view of the comments made by another witness to the committee, I wish to assure members that I have never had any political affiliations and have acted completely independently in my participation in various public sector organisations. Thirdly, I have never had any connection with banking or financial institutions or anything to do with property interests. And, fourthly, I did not on any occasion discuss the business of the IDA within the CBSIA orvice versaother than to note some areas of overlapping interest.

I believe it's relevant to outline some of the issues which impacted on the work of the new organisation. First of all, I believe there was a general consensus that emerged amongst authority members that the construct was flawed. The regulator was set up as an independent entity, but, in certain key respects, had an umbilical cord back to the Central Bank. It was housed in the bank; it had key services, notably HR and IT, provided to it by the bank; its remuneration were controlled by those of the bank; its budget was the subject of consultation with the bank and required the approval of the Minister of Finance. Cost pressures arose from the operation of the levy which was shared 50% between the Central Bank and the industry and the staff of the regulator were mainly drawn from the Central Bank. In these circumstances, the achievement of real operational independence was a major task. From the bank's point of view, the main change was a loss of the direct contact in operational areas with financial institutions and its dependence on the regulator for key information critical to its financial analysis and policy formation. And, of course, the new order created grey areas where both organisations may be said to have had overlapping responsibilities.

In addition to the above,. there were policy issues pulling in competing directions. In particular, the enhanced consumer protection emphasis, whilst entirely worthy in the overall context, sat somewhat uneasily with prudential regulation and attracted attention and priority from it, particularly in the early stages. There seemed some confusion, certainly externally, about the fundamental role prudential regulation had in the overall protection of consumer rights. Another example was the bank's mandate for the development of the financial services sector and the lack of clarity, notwithstanding the good co-operation and operational MOU which existed between the bank and the regulator over who was responsible for what.

For all these reasons, the challenge of building the new body into an effective organisation was always going to be significant. This challenge was made even more demanding for the regulator by the discontinuity caused by the loss of its initial CEO after only three years, and two years later, of its chairman, and, of course, by the scale of the crisis, which later developed internationally and domestically.

I turn now to the regulatory system. A critical issue which the committee has heard about ad nauseam from previous witnesses and which was fundamental to all that subsequently transpired was the choice of regulatory system. It is not my intention to rehearse all the points already made but I believe it is relevant that, at the formation of the new structure, I can recall no challenge to the adoption by the regulator of that principle-based system. It was, in fact, already in use by the Central Bank. It was consistent with attitudes to good regulation here at the time and it was in widespread use internationally. Specific rules were always part of the system, and these were added to over time as a result of EU and domestic decisions. The Financial Regulator laid out clearly that under the system of the ... under the system, that proper management and control of a financial services provider and the integrity of its systems rested with the board of directors and its senior management and specified the nature of the monitoring checks and inspections that the regulator would undertake. There is now no gainsaying, in the light of what happened, that the original principlescumrules based system was not adequate and, in any event, had not been implemented intensively or intrusively enough. Regulatory systems internationally have now been completely revamped since the crisis. Intensive and intrusive regulation is now the order of the day. The actions of the banks have ensured that this must be the case.

However it is, I believe, also appropriate to acknowledge the very real concern that actions or opinions which might have been taken or expressed by the regulator or the bank could have had unattended consequences - specifically, that they could precipitate the outcomes in relation to the banking system or the property market which the regulator the bank were seeking to prevent. Even although, with the benefit of hindsight, its clear that much more could and should have been done, these concerns were material in discussions at the time, particularly when the consensus amongst domestics and international commentators was for a soft landing.

I've been of the view that the international dimension has not been given sufficient weight in the various inquiries and reports into the crisis and its genesis. In my responses to the Honohan and Nyberg investigations, I raised these international issues and the passage of time has not altered the views I expressed to these bodies. I still believe there was a possibility that, without the international financial crisis which engulfed us in 2008, a "soft landing", defined as a 20% or even slightly greater reduction in property prices from the peak, might have occurred. The problems in liquidity across the financial markets changed the situation fundamentally. Other witnesses to the committee have, I believe, made the correct connection between the crisis in liquidity, dramatically caused by the Lehman's situation, and the resultant, to all intents and purposes, closure of the wholesale markets and the onset of the spectre of insolvency, pending fresh injections of capital. The capital requirements, which most commentators, both internal and external, believed were adequate in the pre-Lehman scenario, were proved inadequate once the failure of Lehman's happened. All of this was compounded by the almost immediate onset of the recession internationally.

There are three issues, which have been covered in previous testimony, on which my own views as a member of both boards and as a member of the budgets and remuneration committee of the regulator and the bank may be helpful. On the issue of contrarian views, I know of no instances were at board authority or committee levels, there was any attempt to shut down such views. I am not privy to issues of this kind if there were any arising below board or authority levels.

On the issue of resources, it is a fact that there were cost pressures at work. Within the Central Bank board, the Department of Finance representative, in particular, had quite properly a continue ... continuing interest in this area. So too had the consultative panels. In this context, the procedures of the regulator's budget and remuneration committee, known as the BRC, are important to appreciate. The committee received a draft budget from the executive, compiled from detailed discussion within the various divisions of the regulator. The proposals were then the subject of rigorous examination by the committee, and discussion between it and the executive. The outcome was the subject of agreement between the two parties. That outcome was always subject to the requirement that the agreed budget was sufficient for an organisation to carry out its functions and mandate in an efficient and cost effective manner. I was always satisfied that this procedure was sufficiently rigorous to ensure that adequate resources were in place to allow staff to perform the tasks that were asked of them under the system in place at the time. However, as mentioned in other testimony, despite the best efforts of the authority, a full complement of agreed numbers was never reached.

Finally, in regard to the operation of the authority in the Central Bank board, as a non-executive director, I believe both operated well and to their respective remits. I agree that, although a number of the non-executive directors had significant banking and-or financial skills and experience, there was a case for more specialist input. This lack of such expertise was perhaps a hindrance in the ability of the authority to engage fully with the executive in the detailed way that was necessary, particularly as regards the interrogation of credit risk data and the proper interpretation of such data. The main lack, however, was that the authority should have pushed the executive much more forcefully for outcomes in the preface ... in the face of prolonged obfuscation from some institutions.

I now address the lines of inquiry indicated by the committee. Appropriateness of the macroeconomic and prudential policy - during the period in question the Government was generally following a pro-cyclical economic policy. There was significant growth, continuing over a prolonged period, and claims from many quarters for actions whose efforts would have been ... whose effects would have been to further fuel expansionary tendencies. Low interest rates, a major problem for Ireland, were a function of the ECB. Against this background, the macroeconomic and prudential policies advocated by the Central Bank, and which formed an important conditioning environment for the regulator, whilst cautionary, were generally optimistic.

Overall these policies, whilst recognising and publically pointing to a variety of risks, nevertheless consistently pointed to a soft landing. The vehicle used was through the Central Bank's financial stability reports. Here the bank was confronted by the dynamic I mentioned in the introduction to this opening statement, that of triggering events which it was actually seeking to prevent.

Final editing of the reports was undertaken by the Governor of the bank and were nuanced to reduce the risk of unintended consequences but without changing their substance. In hindsight, it's clear that from 2005 to 2006 onwards the policies being pursued were not appropriate to the situation which was developing and understated the underlying risks in the growth of credit and related matters. Measures such as increased capital requirements were taken by the regulator but were not sufficient.

Nature and effectiveness of the operational implications of the macroeconomic and prudential policy - overall, the thrust of the financial stability reports was that the banking system was sound. They acknowledged that while there were significant risks in relation to certain key areas the capital position of the system as a whole and of individual banks was at a level which could cope with these concerns. In his evidence, the then Governor outlined the range of considerations which, in the banks view, would keep the situation under control. He also set out a number of factors which subsequently altered the scenario originally envisaged and rendered the actions made inadequate. With hindsight, it is clear much stronger action was needed.

Appropriateness of the expert advice sought, quality analysis of the advice and how effectively the advice was used - throughout my period of office, a range of external consultancy advice was sought to augment resources. Those in which I was most involved were the Mazars report on business process, resource benchmarking and the efficient use of resources and the PwC report commissioned in the aftermath of the September 2008 guarantee into the position of the main banks at that time. In both these cases, it was clearly appropriate that such advice be sought. In the Mazars case, issues around resource levels and allocation and the possibilities for a greater effectiveness were, I believe, self-evident from the earlier discussion relating to staffing levels in the regulator. The quality of the exercises was, I believe, at a high level, relevant and based on sound analysis. The overall conclusion was that resources were adequate for the system in use. In so far as the PwC exercise was concerned, this was largely necessary in the light of the guarantee. PwC had a large team working on the issues involved. I've no reason to believe that the assignment was carried out in anything but an extremely professional manner. However, the outcome, notwithstanding many caveats, was that the banks were at that specific point in time adequately capitalised, and that they would continue to be in the short to medium term. This conclusion was relied upon by the regulator as a key indicator of the health of the system at that time. The detailed views of the bank and the regulator on the PwC report was supplied to the Minister for Finance.

Assessment of what has been done, work in progress and what remains outstanding, etc. - since I retired from any association with the regulator-bank in July 2010, I cannot really comment under this heading.

Cost of the crisis and sharing of the impact - I accept the estimate of the cost of the crisis made by the current Governor of the Central Bank. The indirect costs are impossible to calculate in financial detail at this stage, but perhaps of more importance are the social implications of the crisis and the acute personal distress which so many people have endured. It's not clear to me what alternatives existed domestically for sharing the impact of the crisis consistent with the need to restore soundness to the financial system and to promoting renewed growth in the economy, with its vital social consequence of rebuilding employment levels.

Role and influence of the ECB - this is clearly an issue of substance but I can add little to the sum of knowledge already available. The political issues continue to be the subject of debates.

And, finally, options for burden-sharing - the options under this heading have also been the subject of intense debate. It seems correct that all practical options be considered, and I believe this occurred. Again, these are matters which are primarily in the political domain and which I understand are still being actively pursued.

Finally, I should say that I fully acknowledge that whilst I contributed to the best of my ability to the regulatory authority and to the board of the bank, in hindsight key issues were missed and I shall be ever mindful of the consequences of this. As mentioned earlier, the damage caused to the social fabric of the nation and to individuals has been immense and is a matter of enormous personal regret. Thank you, Chairman.