Mr. Michael Walsh:

Thank you, Chairman, members. I know you're pressed for time so I'm not going to repeat my statement in full, but obviously I'm more than happy to cover any aspect of it. As the Chairman has indicated, my career and background is in finance and public service. In 2001, I agreed with the board and the Central Bank to become non-executive chairman. The purpose of my appointment was to help the board oversee a sale of the society under legislation which was agreed by the authorities and which was to be implemented the following year. Accordingly, I expected my role would be relatively short, circa two years. When the authorities failed to deliver that legislation in 2002, the Central Bank and subsequently the Financial Regulator required that I stay in situuntil the sale could be completed.

Every single year, the authorities, be they the Central Bank, the regulator, the Department of Finance, the Department of the Environment, and the relative Ministers, promised they would deliver the necessary legislation within the next 12 months. They failed to do so. As a result, instead of the expected two-year term, I actually served as non-executive director and non-executive chairman, in particular, for almost eight years, until I resigned in February 2009. The planned sale of the society is not the focus of this committee. However, the significant, avoidable delay in implementing the necessary legislation is and was very frustrating. Implementing it earlier would have avoided any involvement by the society in the banking crisis. This points to the enormous cost of inaction by the authorities and the policymakers alike, a theme that I will return to.

Chairman, I'd like to put on record my acknowledgement of the massive challenges that the collapse of the Irish banking system has imposed on the Government finances and the citizens of Ireland. Many families have suffered from both the collapse in the property market and the era of austerity that has followed it. Mistakes were made by all financial institutions. Irish Nationwide was no exception. However, in my view, by 2006-2007 it would have been impossible to completely avoid the damage from the global credit crisis. While the damage could have been mitigated, we must recognise that the crisis was global; it was systemic. None of the financial institutions, none of the authorities or the international or domestic economic advisers fully appreciated the significance of the global credit bubble, particularly as it related to property and indeed structured credit. This was equally true in the US, where both of the quasi-Government finance agencies, Fannie Mae and Freddie Mac, failed. The Fed models didn't adequately capture the events and 12 of the top institutions required support.

My greatest regret is that we didn't recognise sooner the convergence of factors that led to this global financial collapse and the devastating series of interrelated knock-on impacts for the Irish property sector, the financial institutions and the public purse. Some of the criticism levied at the Irish financial institutions, including the society, is warranted. That said, I cannot concede all the points made by those who have criticised the society, often without any real understanding of its model and, furthermore, based on 20:20 hindsight.

From the inquiry's perspective, I am deeply concerned that the popular, but erroneous, depiction of the society as being in the poorest financial health of all institutions at the time may hinder both the inquiry and, indeed, the public understanding of the real issues at play.

For example, when the downturn hit, the society had the highest percentage capital of all Irish guaranteed institutions. Equally, at no stage did the society advocate a guarantee for bondholders. Because of the society's liquidity position, the society wasn't reliant on future bond issues.

You have heard from the managing director, later you'll hear from the finance director - the two key executive directors. My perspective is that of a non-executive director and I'd like to focus on a few key areas in my opening remarks: firstly, the society's model; secondly, the society's awareness to the changing environment and its actions in the period from December 2007; thirdly, the regulatory authorities - the interaction between the society and them and their powers; and, finally, I'll turn to liquidity and solvency. I'm going to spend most of my time discussing the society's model, so do not be too concerned if that takes a bit more time.

The society's model was different to that of other institutions but it was carefully considered. Notwithstanding the comments made to date, I believe it was more prudent than that adopted by many of its competitors. Though it may jar with the popular narrative, the society had a prudent financial model. Its loan book was much shorter than others, with many of its loans, particularly in the UK, being for less than 18 months. This was clearly not understood by some of your witnesses. In the absence of the global crisis, the society would have been expected to be able to realise half its commercial book in 2009. The average loan duration in September 2008 was 30 months. Obviously, in perspective, bond issues were typically for five years. Secondly, the society was very different in terms of liquidity. It was a net supplier of funds to the interbank market, both before and after the liquidity squeeze caused by the Reuters story.

On the night of the guarantee the society had over €3 billion of cash on deposit with other banks. Unlike others, the society didn't require emergency liquidity or funding and that position should be contrasted with both ILP and Anglo who, as you've been told on a number of occasions, were both about to run out of funds and, in ILP's case, had been requiring ECB funding for about a year. The society was also different in not competing for unprofitable mortgage business. Again, as a number of witnesses have testified, a small institution competing for this, at best marginal mortgage business, was ultimately going to have too much gearing and too little capital. By way of direct comparison, there was only one other stand-alone building society, EBS. In the period 2003 to 2008, INBS maintained its loan-to-capital ratio always between 10% and 13%. In contrast in EBS, by 2008 that ratio had fallen to just over 3%.

I have just noted - at a balance sheet level - INBS had a strong capital base and its gearing was less than half its peers. Despite what you might think, it had more conservative lending growth rates than many of its competitors. In the five years to the end of 2008, the society had a significantly lower lending growth rate than AIB, than Anglo, than Bank of Scotland Ireland and Ulster if you focus on the combined property, construction and mortgage areas, all of which became highly correlated due to the credit bubble and the crisis.

In summary, Chairman, the society stuck to its strengths, it focused on its key areas of competitive advantage. It didn't seek to turn treasury into a profit centre. There were no exotics, no structured products and money was placed with board-approved institutions. As a result, in early September 2008 the society had sufficient liquidity to meet all its bond repayment obligations through to the beginning of 2010. Indeed, but for the global credit crisis, the society would have been sold in late 2007, probably at a valuation between €1.5 billion and €2 billion.

The society's core business was funding property - its area of expertise. Ultimately, with the gradual decline in property values, by 2010 many of these loans were non-performing. However, as is evident from the NAMA transfers, there was no significant difference between the discounts applied to AIB, to Anglo, to EBS and to the society. In your deliberations, Chairman, you may also want to consider that, for a true comparison and to get a full picture across institutions, you need to examine what would have happened if a policy similar to NAMA had been taken in relation to other categories of loans and not just commercial loans. For example, in 2009 the mark-to-market loss on much of the new mortgage business which was entered by various institutions in 2006 and 2007 ... the loss on that group of loans would have been similar to the levels experienced in commercial property. In other words, about 60%.

The society failed as, with all others, it didn't anticipate the impact of the global credit squeeze sufficiently early. This made the refinancing of its short-duration loans impossible. However, the society wasn't asleep. It did monitor the economic development and took steps to adapt the business model accordingly. The society was the first of all Irish lending institutions to anticipate and respond to the changed market circumstances in late 2007. As non-executive chairman, I believed the Irish banking system was over-exposed and immediate retrenchment was required. The board agreed and in December 2007 the board decided to reverse engines, cancel the trade sale, decided to minimise lending and to build liquidity. Immediately after the board took that decision, my first port of call was the regulator. I was anxious to share both my analysis and the society's actions. In my analysis, the emerging threats to the banking system in Ireland and elsewhere should have caused concern. The society was willingly ceding market share to its direct competitors who were, in many cases, also under the control of the regulator. The decision by the society was taken over nine months before the State guarantee. Months later, the bank ... the Central Bank and the ESRI were still forecasting significant economic growth for 2008 and 2009. Indeed, internationally, in June .... July 2008, sorry, the ECB even raised interest rates. However, despite prompting, the leadership that I felt was required from the regulator never came. I took the opportunity of a meeting, in early May 2008, with the regulator and his senior staff to relay, both orally and in writing, the need for urgent leadership and, indeed, action to save the Irish financial system.

In summary, Chairman, my key messages were, and I quote them directly:

[One,] Leadership is required from the Financial Regulator/Central Bank. Because of the differing competitive positions between the institutions no consensus will be achieved without the leadership of the Financial Regulator/Central Bank.

[The second key message was on similar enough lines] In the absence of intervention, problems are inevitable as the Irish growth story has been funded by the capital markets and these are no longer available to meet redemptions. The sooner the intervention the lower the cost.

To this day, I cannot understand why the authorities did not intervene in the markets before the financial crisis broke months later. The inquiry has heard that the authorities were working on contingency plans but didn't activate those plans until the crisis broke and by then it was too late. Indeed, I was surprised to hear evidence from a senior Department of Finance witness that the Department appears to have welcomed the immediate crisis caused by the false Reuters story as it gave them, finally, the impetus necessary to begin to take action.

I'd like to talk briefly about the society and its relationship with the Central Bank and the regulator. During my time as non-executive chairman, the Central Bank raised routine issues with the society. The board took all issues raised by the Central Bank or the Financial Regulator very seriously and I and the other directors - and one in particular, along with myself - maintained very close relationships with the Central Bank and sought to get management to continually enhance systems. The Central Bank became the society's regulator in 1990. Under the building society legislation, the Central Bank had much more power in relation to building societies than in relation to banks. The legislation specifically conferred a duty on the Central Bank to protect both depositors and to protect the stability of the societies. Commensurate with that duty, the legislation gave the Central Bank the power to do whatever the Central Bank deemed necessary to comply with its duty.

Those powers existed from 1990, and in my experience the Central Bank had no hesitation in using its powers where it deemed necessary. For example, in 2006 the Central Bank-regulator threatened to remove the society’s licence if the society didn't hold an election for a non-executive position on the board. This threat wasn't made to protect depositors. It wasn't made to ensure stability. It was not made in relation to lending. It wasn't made in relation to controls or indeed any prudential issue. This threat was to facilitate an individual who wished once again to go forward as a non-executive board candidate. I believed then - I believe now - that threat was irresponsible, but none the less a clear indication of the powers of the Central Bank and the regulator and its willingness to use them. At no stage after 2004 did the CB-FR seek to take any meaningful action in relation to lending or lending-related issues. On the contrary, the regulator approved a reduction in the society’s deposit ratio in June 2007, which would have facilitated substantial further lending growth if the society, without any prompting, had not decided to reverse engines. In summary, contrary to what some have suggested, from 1990 the Central Bank and the regulator had extensive legal supervisory powers to do whatever it deemed necessary to protect depositors and the stability of the societies. Through their expert inspection teams they had direct access to and detailed knowledge of the inner workings of the society and indeed every institution.

Finally, if I just briefly turn to the liquidity and solvency debate. Within my statement I have dealt with the issues raised by the banking inquiry in relation to liquidity and solvency. The society was solvent in September 2008 and there is contemporaneous e-mail traffic which confirms this. Furthermore, I have attached key minutes of society meetings which took place in March 2009, some time after I had resigned. The minutes of those meetings record the views in March 2009 of the society's auditors, the society's legal advisers. Even more importantly those minutes in particular reference the attitude of the Financial Regulator and the Department of Finance at the time. Whatever the situation in September 2008, by March 2009 the authorities had full detail on each organisation, and in aggregate certainly more than any non-executive director in any one institution. In March 2009, following full consideration, the new INBS board confirmed that the society was solvent. Chairman, members, thank you for your time. As I said earlier, I deeply regret that we didn't foresee the market instability at a much earlier stage, which would have resulted in earlier action by the society and potentially other institutions, and a situation where perhaps at least the society, due to the short duration of its loan book, its high liquidity and strong capital base, could have avoided being a cost to the Irish taxpayer. Thank you.