Ms Fidelma Clarke:

Thank you. I have been asked to provide a witness statement in relation to my role as chief risk officer and company secretary of EBS Building Society. As you've said, Chairman, I was appointed chief risk officer in January 2009, reporting the to CEO, Fergus Murphy. From that time, I also had a dotted reporting line to the chairman of the board risk committee. I had been appointed company secretary in July 2008 and resigned from that position in June 2009 to concentrate on the demands of the chief risk officer role. Given the hour, I thought what might be most beneficial for the committee would be for me to drive some of the key themes from the written statement that I have submitted and, with the benefit of some time for reflection, some of the lessons learned.

The route cause of EBS's financial difficulties were set out in its restructuring plan submission to the EU Commission in May 2010, comprehensively covered by Professor Nyberg and have been discussed by this committee earlier today and also last week. These were: a decision to step up lending to the land and development sector at the height of the Irish property boom and insufficient management oversight of this lending; strong growth in EBS's residential loan book in response to competitive pressures; the fact that EBS was a moderately-capitalised business albeit, within regulatory requirements; and an over-reliance on wholesale funding. The board of EBS took the decision to enter into land and development sector in 2002 and to step up this lending in 2005. Controls put in place to mitigate risk weren't sufficient in the face of the timing of the decision and the scale of the financial crisis which ensued.

The growth in residential mortgage lending over the period 2000 to 2008 is a reflection of the strategy of the board of the society to retain EBS's mutual status and remain a relevant mortgage provider in Ireland. This necessitated moving with the market. Numerous changes to credit policy were approved, which allowed customers borrow more than they had in the past. At each stage, the options were clearly documented and considered by the executive and the board before approval. Increased risk appetite, as set out in the society's policies, was supported by a strong economic climate, improved demographics, higher income and lower tax levels - all of which improved loan affordability. Loan exposure was limited with mortgage indemnity insurance. Significant investments in underwriting systems, models and management reporting were made. The long-established management controls in place, including centralised underwriting, loan affordability assessment, mortgage indemnity insurance and independent property valuations, were insufficient to withstand the scale of the economic downturn and the significant correction in house prices.

In terms of its capital position, EBS operated within regulatory capital requirements throughout the pre-crisis years. But its tier 1 capital ratio of 7.9% at the end of 2008 was inadequate to absorb the unprecedented level of provision losses arising from the crisis. The PCAR II and PLAR exercises in Q1 2011 resulted in a required tier 1 capital ratio of 22.5%. Finally, in relation to the liabilities side of the balance sheet, the reliance on cheaper wholesale funds of all credit institutions has, I believe, been extensively commented on.

Between 1999 and 2007, EBS's loan book grew by 300%, while deposits grew by 170%. Similar to other institutions, the gaps that ... had been funded through wholesale funding and international corporate deposits. As we now know, this was an unsustainable model and new regulatory requirements in relation to loan-to-deposit, liquidity coverage and net stable funding ratios are in place to prevent a recurrence of this situation. Accountability for these failings was demonstrated to members in the stepping down of the chairman of the board and the finance director early in 2009.

In terms of the risk management of the society, Professor Nyberg expressed the view that the risk management system in EBS was not adequately resourced and seems to have lacked influence within the bank. Looking back, and with the benefit of hindsight, I agree with him, although I do not believe that this of itself contributed significantly to the overall outcome for EBS. The risk team was established in 2002, comprising three people. It's responsibilities were set by the chief risk officer. These included establishing and providing input to a credit risk committee, an operation risk committee and a capital committee over the period 2003 to 2006, documenting the society's risk governance framework, developing a risk assessment process for each function, ensuring that all of the organisation's risk policies were documented, developing an enterprise risk report for the chief risk officer with inputs from across the society on key risk trends and risk positions, delivering the Basel II programme, which included the new requirement for capital assessment, the ICAP process, an internal capital adequacy assessment process, modelling and reporting on requirements - a significant undertaking between 2004 and 2008 - also developing loan-loss provision models to meet aspects of the new international financial reporting standards and building and submitting new regulatory reports on liquidity, asset quality, large exposures and impairments.

The credit risk committee was chaired by the chief risk officer and comprised representatives from the business areas, credit underwriting, the distribution channels, and risk. Its role was to monitor risk trends and review proposed changes to policy in line with the society's approved strategies for onward recommendation to the executive and board. The risk team was not involved in strategy formulation, approval or implementation in terms of day-to-day business operations, nor was it involved in the credit approval process. This was managed by the commercial business and residential underwriting and from 2005, a commercial underwriting unit. There was a senior management credit approval committee, called the loan advances committee, made up of business, credit and senior management, and separately, a subject which the committee has touched on earlier today, a board credit approval committee, comprising non-executive directors and members of the executive.

This committee has heard there have been many regulatory developments in the area of corporate governance and risk management as a response to the financial crisis. Risk management is not confined to risk specialist or control functions. Current corporate governance for financial institutions is set out on a three-lines-of-defence model. Business units are the first line of defence and are primarily responsible for managing risks on a day-to-day basis, taking into account the institution's risk tolerance and appetite, and in line with its policies, procedures and controls. The second line of defence is a risk management function, which is independent of operations and management. Its role is to challenge decisions that affect the institution's exposure to risk and to provide comprehensive and understandable information on risks, enabling the board to understand the institution's overall risk profile. The third line of defence is an internal audit function, which assesses the adequacy of the operations of the other two lines. Today, good governance requires that a chief risk officer should be an independent senior executive with distinct responsibility for this job.

In EBS these standards commenced with my appointment as a dedicated chief risk officer and member of the executive team in 2009. From 2009, I presented a detailed risk report to the board each month with an independent assessment of the level of risk being run in various key areas and the actions management were taking to mitigate risks. The number of board risk committee meetings increased and I met regularly with the chairman of the committee to discuss the risk position and outlook for the organisation. The board credit approval committee was disbanded and board training programmes were extended. We developed a risk appetite statement setting out the board's limit of risk appetite in each area and monitored and reported on adherence to this risk appetite statement on a monthly basis.

A number of actions were taken to mitigate, where possible, the extent of the downturn in the Irish economy and property market on the society's balance sheet and to manage the business on a day-to-day basis through the global credit crunch. Lending criteria were tightened. We brought in external, experienced credit resources to advise us on how to manage our business through a downturn.

The credit function was reconfigured to manage distressed assets and those at risk of becoming distressed. From the first quarter of 2009, we conducted quarterly reviews of at-risk and impaired cases which informed provision estimates. We commissioned an external firm to review potential mortgage debt solutions in place internationally and we presented the findings of this review to the Oireachtas committee in 2009.

We completed a number of control enhancement programmes. These included enhancements to commercial property documentation and security and deeds management. It ensured that no legal discounts were applied by NAMA, nor capital add-ons applied by the regulator, as a result of missing or incomplete data or documentation. And, of course, throughout the period 2009 to 2011, we monitored funding and liquidity positions very closely and took all actions available to us to avert the risk of a run on deposits and to make contingency plans for that eventuality or possibility.

Some concluding remarks, if I may? The crisis and its aftermath have been debilitating in terms of Irish people's financial health. I fully acknowledge my share of responsibility, together with all who worked in EBS in the pre-crisis period, for that failure, however unintended. From 2009, I worked to the best of my ability with the executive team of EBS, overseen by the board, to minimise, where we could, its impact on customers, on EBS and on the economy. And I am sorry that we could not do more.

Concerns of a housing bubble at the start of the 2000s dissipated in the face of sustained economic growth and the apparent levels of increased wealth, reinforced by positive commentary from external bodies and commentators. The system misjudged both the probability of an economic and property market collapse occurring, and its impact in terms of loan losses when compounded by an international credit crunch - a one-in-100-year event. It has taken more than six years to fully realise the impact of the deterioration in asset quality which concluded with the publication of the European Central Bank's comprehensive assessment results in October of last year.

In the past, policy followed strategy. Risk appetite and risk capacity are now considerations which feed into banks' strategy-setting processes. Limits of risk appetite, in pursuit of the agreed strategy, are set out in banks' risk appetite statements. Regulatory mandated recovery plans ensure that early warning indicators inform banks where action is needed to prevent bank failure.

Excessive competition must be curbed where it threatens the stability and soundness of the banking system, a concept at the heart of conduct risk considerations. And I think the recent example of the loan-to-value cap for first-time buyers is a welcome development in this regard.

Finally, it may sound self-evident to state that banks are, at the end of the day, credit institutions. There needs to be sufficient credit expertise and credit risk evaluation at each level of the organisation, from the boardroom to the bank branches. Thank you very much.