Mr. Alan Dukes:

Go raibh maith agat, a Chathaoirligh, agus tá an-áthas orm an deis a bheith agam cabhrú le h-obair an chomhcoiste fíosrúcháin seo.

I intend to deal with some general issues before going into more specific areas, Chairman.

The combination of financial and fiscal crisis that hit Ireland in 2007-2008 was totally unprecedented in modern Irish history. The Irish Government, the Administration and the regulatory systems did not have the tools that were required to deal with the combination of circumstances and problems that faced them. Prior to September 2008, there had been discussions about the nature of a possible bank guarantee and a framework of draft legislation for bank nationalisation had been prepared. There was no legislative provision for a bank resolution system until the Credit Institutions (Stabilisation) Act of 2010. Apart from the credit institutions winding-up directive of 2001, no bank resolution system was in place in the eurozone. The eurozone implemented the single supervisory mechanism in 2013 and the single resolution mechanism, which is intended to deal with future bank resolution requirements, will come into effect at the beginning of next year. Prior to the Irish bank guarantee in September of 2008, the UK had dealt with the Northern Rock and the Bradford and Bingley cases. The Irish Government, prior to that, had gone through a dispute with the German Government on the question of which of them had responsibility for the Depfa affair. That was resolved by the German Government having to take responsibility for it.

Ireland was the first eurozone member to find itself obliged to take action. And I think it's fair to say that any action in an area like this by a first mover was bound to be controversial and, indeed, by definition, unprecedented. Other countries followed. Germany had to take action about Landesbanks, an issue that is still the subject of ongoing work in Germany. France, Belgium and the Netherlands had to take joint action to deal with the problem in Fortis bank. Spain, Portugal, Italy, Greece and Cyprus all had to take action and Latvia found itself obliged to take action in this area, in fact before it joined the eurozone. Of the early movers, I think its fair to say that the action taken by Ireland was the most comprehensive of any. Indeed, I think it was probably to our disadvantage that the Irish Government at the time made it very clear that it was dealing with the whole banking system. Other countries took action that was virtually as wide in its effect but they didn't have to say they were dealing with their whole banking system.

Retrospectively, it has been suggested that once the burning of bondholders was ruled out, the options available to the Government in September of 2008 were, first, a blanket guarantee, accompanied by nationalisation of the entire banking system; or a blanket guarantee, accompanied by the liquidation of Anglo Irish Bank; or a blanket guarantee, accompanied by the nationalisation of Anglo Irish Bank; or, the liquidation of Anglo, accompanied by what's been described as a "political guarantee" for the rest of the system. In the event, the course of action that was adopted was a blanket guarantee, followed shortly afterwards - within a few months - by the nationalisation of Anglo and AIB and a partial nationalisation of the Bank of Ireland.

The evidence available is to the effect that the European Central Bank, some eurozone partners and some US authorities, made it clear that repudiation of bondholders would have serious, if unspecified, negative consequences. Relatively little attention has been paid to the fact that the repudiation of senior bondholders would, as a result of the pari passutreatment convention, have had very serious repercussions for depositors with deposits of over €100,000. These repercussions would have affected individual depositors, corporate depositors and other banks - both Irish and non-Irish banks. In his evidence to this committee on the 15th of this month, Mr. Paul Gallagher, who was Attorney General at the time, said of the relative positions of depositors and senior bondholders, and I quote, "The law at that stage was that they ranked equally".

Liquidation of Anglo in September 2008 would have had, I think, the following consequences,inter alia: first, a draw on Government funds to cover the €100,000 deposit guarantee - Anglo was largely illiquid at the time - or measures to move the Anglo deposit book to another institution, which would have been a fairly complex exercise. It was done later and it wasn't a simple exercise to carry out. Other consequences would have been litigation issues arising from the absence of banking resolution legislation at the time. And the need for some type of vehicle to realise the banks assets in order to avoid the contagion effects on other banks of calling in outstanding loans on the Anglo books, including many cases where borrowers from Anglo were also borrowers from other banks in the system. NAMA didn't exist at the time, and I think it's fairly clear that any transfer of the loan book of Anglo to any other institution would immediately have spread the contagion to those other institutions. On the face of it, that would have been a much more complicated procedure than the one actually adopted. Again, in evidence given on the 15th of this month by Paul Gallagher, we find the statement that at the time, "It was quite clear to everybody that you couldn't take the risk of winding down a bank, in whatever fashion."

Liquidation of Anglo would, in my view, have cast very serious doubt on any political guarantee that might have been ... that might have accompanied it, particularly given the fact that the liquidation of Anglo would have required ... would have inevitably had a contagion effects on the other banks. And I think if there's need for any further illustration of the difficulties that would have accompanied a liquidation of Anglo at the time, I think we just have to look at what's happened since February of 2013. In that liquidation, which involved a very much smaller outstanding volume of loans - I think about €15 billion net - two and a half years later, the process has still not concluded. And that's not in any sense a criticism of the liquidators; I'm sure they're doing as much as they can. But I think that gives some indication ... a small indication of what the difficulties would have been of a liquidation in 2008. I have to say that, having listened, debated, worked over the period since September 2008 up to date, that had I been in the position of the Government of the day at the time, with the knowledge, or the lack of knowledge that they have, I don't think I would have done anything very different.

By the time that I was appointed to the board of Anglo Irish Bank in November 2008, that bank, and the other Irish banks, had greatly exceeded every prudential limit in terms of the concentration of lending by sector and by client. It was very clear that they had already, at that stage, found themselves in a very, very high risk position. This had happened under the noses of the regulators, who had access to all the information required to arrive at that conclusion. I don't know whether the failure to appreciate this can be ascribed to role confusion in the then bicephalous regulatory structure, or through any lack of capacity. Immediately after nationalisation, the Anglo board ... the new Anglo board set in train a detailed review of the banks provisioning policy. We commissioned an independent external review of the methodology, and, on 15 April 2009, we informed the Department of Finance that the recapitalisation requirement at that point was in excess of €4 billion, rather than the €1.5 billion that the Department had in mind at that point, with a very substantial downside risk from any further deterioration in property prices. And I don't think I need to remind the committee that property prices had been falling from some point in 2007. That fall actually accelerated very substantially in January 2009 and from then out. So, in mid-April of 2009, we informed the Department of Finance that the recapitalisation requirement for Anglo, as it was at the time, was in the region of €4 billion, with, as I say, a very substantial downside risk from further deterioration in property prices.

That was clearly unwelcome news which also had substantial implications for the other guaranteed institutions. When we conveyed that the Department of Finance itself commissioned a separate study, to the best of my recollection by PwC, and that came to a conclusion broadly similar to the one that we had arrived at in Anglo. I have to confess, a Chathaoirligh, that I was a little taken aback to hear the second secretary of the Department of Finance say recently in the course of her evidence to this committee, "Anglo surprised on the downside every time you looked at it." The Department should not have been surprised since a very clear warning had been given in April of 2009. I don't know whether the warning was understood or not.

Were the banks, including Anglo, insolvent in September of 2008? That has been a question that has exercised minds. I frankly don't know what the answer to it is, but my guess is that if the exercise had been carried out at the point when the guarantee was given, that Anglo would probably have proven to be solvent at the time on the basis of what was known, and the other banks I think would certainly have been. That situation changed, it deteriorated as I've said, very rapidly over 2009 and continued to deteriorate for some time after that.

The then Minister, the late Brian Lenihan TD, came to the view early in 2009 that the staff resources in the Department of Finance were inadequate to deal with the issues facing it and personnel were drafted in from the National Treasury Management Agency. I have to say, a Chathaoirligh, that that body's very considerable expertise lies in treasury management, not in securing repayment from borrowers, which is a different function. Difficulties inevitably followed when staff of the Department, of the NTMA came to deal with issues of bank restructuring and dealing with externally recruited persons who had specific skills and a lot of experience in the area of restructuring.

The then head of banking in the Department of Finance proposed to me in 2011 that Anglo should be run, "as a subsidiary of the Department of Finance". That proposal was a non-starter in terms of governance and prudence but unfortunately the bank's rejection of that negatively influenced the relationship with the Department. And that problem was further compounded by the bank's later rejection of a suggestion made in a report commissioned by the Department of Finance from McKinsey's, a suggestion that the functions of chief financial officer and chief risk officer be combined. The combination of those two functions in the bank in 2007 was identified by the Nyberg report as one of the deficiencies in the bank's structure and risk management system - and the committee had some discussions with a previous witness this afternoon on that issue.

Notwithstanding all of that rejection of that proposal - which we regarded as very, extremely unwise - the rejection of that proposal by the bank was seen by the Department of Finance as yet another example of obduracy on the part of the bank. I have to say that a difficulty that continued throughout that period arose from what seemed to me to be an entirely inadequate appreciation by the Department of Finance of the role and obligations of the bank as a separate company set up by statute with all the duties that that implies under company law, and the duties and obligations of a regulated entity. It was required, and this was indeed acknowledged, in the first relationship framework to operate at arm's length from the Minister for Finance for very solid prudential reasons. And as I point out in the statement I submitted to the committee, I take issue with the current second secretary of the Department of Finance who observed to the Public Accounts Committee that that arm's-length requirement changed in some way when the bank was put into wind-down mode in 2011. To my mind, and to our minds jointly in the board of management of the bank, the wind-down mode did not in any way affect the necessity for the arm's-length relationship for the prudential protection of the Minister and of the State.

On a more general note, I have to say that since the onset of this crisis both the Eurogroup and the European Union authorities have been, I must say politely, dilatory in their approach to all of this and have only gradually recognised and attempted to get to grips with the flaws of the architecture of EMU. I think that's well illustrated by the fact that the crisis really began in 2007, the single supervisory mechanism came into effect at the beginning of 2014. I think that's an extremely slow pace of reaction to one of the most difficult crises we've had to deal with.

Having said that, I believe that against this very difficult and confused background, the Irish authorities have dealt extremely well with the macro-level consequences of the 2008 bank guarantee and the challenges of resolving highly distressed bank assets. And in that regard, I think NAMA has performed extremely well, and indeed the performance of all of the banks in dealing with the greater part of the distressed assets has, I think, been rather good. I'm not sure that I would have the same level of comfort about their mortgage books but that's perhaps something we could get into at a later stage. Apart from the Central Bank, it's my belief that the authorities here did not have the skills to micro-manage banks and should not have attempted to do so in any case. And I have to say that the Department of Finance frequently seemed to adopt a defensive and hostile approach to outsiders who were recruited for their specific skills that they brought in. Following the liquidation of IBRC in February of 2013, the directors produced a statement of affairs as required by the legislation. This showed that, on the basis of the balance sheet, and the support measures in place up to the moment of liquidation, the bank was solvent. The joint special liquidators are reported to believe, or to expect that on completion of their functions, there will be a surplus of something in excess of €1 billion for distribution to unsecured creditors. The Governor of the Central Bank forecast that that institution will make an appreciable profit of several billion euro from its participation in the funding and the payment flows associated with the bank bailout process, much of which, of course, was associated with operations concerning Anglo and IBRC, and NAMA expects to return a surplus at the end of its operations.

The combined effect of those factors will produce a useful mitigation of what will still be a very large final cost to the State, of the banking crisis. Together with my colleagues of the board of management of IBRC, I'm happy to have been able to contribute constructively to the mitigation of that cost. Thank you, Chairman.