Mr. David Went:

Thank you Chairman. Well, I've reviewed in detail the contents of the core books provided to me by the joint committee and while I hope to assist the committee in so far as possible, I would like it noted that much of the material provided to me in the core books relates to events which took place after my retirement from Permanent TSB, or from Irish Life and Permanent. I hope and expect to be in a position to answer any questions the committee may have from 1998 up to my retirement at May 2007; however, I may be unable to comment on matters that occurred after my retirement for obvious reasons.

I will now comment on the lines of inquiry that you asked me. First of all, the composition, skills and experience of the board members. The merger of Irish Life and Irish Permanent in April 1999 was effected by the purchase of Irish Life by Irish Permanent. Irish Permanent became the holding company for the new corporate group, as well as a licensed bank, and the merged board became not just the board of the bank but the group board of the enlarged entity. I became group chief executive of ILP in 2000. The bank chief executive became an executive director on the group board reporting directly to me. The initial ... it was recognised that the initial composition of the board would require adjustment over a two to three-year period and over the years to 2006, a non-executive nominations committee reviewed the composition, increasingly with external assistance, and directors were appointed with a wide range of skills and experience. There was always a majority of non-executive directors and my view is that we had a suitably skilled, inquisitive and challenging board, fully capable to supervise the business in a fully effective manner. Board evaluation of performance was carried out regularly with external assistance.

Quality of the business model setting: following a strategic review of the business on my appointment in 1998, the board concluded that the acquisition of a banking customer base was a strategic imperative. The merger with Irish Permanent plc followed and the opportunity arose to acquire the Trustee Savings Bank in 2001. It increased customer numbers, had a substantial deposit base and permitted ILP to become a real participant in the current account market, regarded as a core product for bank assurers. Strategic planning was carried out through a series of strategic plans, usually over three-year periods, covering a SWOT analysis review of the economic and competitive environment, potential acquisitions, costs, challenges, etc. And a detailed annual budget focused on the operational implementation of the agreed strategy. Discussion of both strategic plans and annual budgets considered the capital strength of the group and bank, with an overriding objective of maintaining at all times a buffer over minimum regulatory requirements.

The board was fully involved in the process and external expertise was used better to inform the process.

ILP developed a very clear “Ireland First” strategy aimed at becoming a leading provider of personal financial services in Ireland. By the end of 2006 it consisted - with the exception of a relatively small centralised mortgage provider, CHL, in the UK - primarily on the provision of Irish house mortgages, both owner-occupier and buy-to-let, together with a significant car finance business and a commercial lending business. We did not become involved in large development or speculative property lending nor lending on raw land, due to a combination of restrained risk appetite and skill deficits in respect of those types of lending. The strategy focused on lower-risk, widely-spread portfolios of lending in an attractive home market where we had operated successfully for many years. We did not anticipate the savage downturn and the damage it would do to the chosen business model, especially when combined with the complete breakdown of funding options.

Adequacy of board oversight over internal controls - board oversight over internal controls was comprehensive and some of the regular reports that the board received are listed in my witness statement, and I will not go into them further here. There was a very detailed chief executive’s report covering the performance of all business units of the group, together with the latest available financial information. All of these reports were the subject of detailed discussion at board.

The appropriateness of property-related lending strategies and risk appetite - as I've said earlier, the lending strategy was focused around house mortgages, both for residential purposes and investment, and this accounted for the bulk of the loan portfolio, 88%. In addition, about 5.5% of total lending was accounted for by commercial loans for the purchase of investment property, generally with the benefit of a long-term lease. The objective was to build up a portfolio primarily consisting of a substantial number of relatively low ticket or small ... smallish residential loans, giving a wide spread of borrowers and locations with conservative loan-to-value ratios - average 71% at inception in 2006. However, in the event, the extent of the decline in residential property prices did not protect the portfolio on the downside.

Appropriateness of credit policies, delegated authorities and exception management - credit policies were reviewed regularly and changes required approval of the board and were advised to the regulator. LTV ratios were reasonable, averaging 71% for residential home loans, although first-time buyer loan-to-values reached 87% in 2006 following the introduction of 100% mortgages in 2005. Borrowers were tested for repayment capacity, including a stressed 2% interest test. Similar policies were applied to residential investment property loans, with both LTV and rental cover ratios for interest payments. Commercial loans policies primarily consisted of loan-to-value ratios to a maximum of 75% to 80%. Instalment credit loans were automatically credit scored using industry standard scorecards with suitable controls over exception approvals. Delegated authorities were determined on a tiered basis depending on the experience of the holder. Larger loans would require reference to a central credit unit under the supervision of a very experienced retail lender. Loans in excess of this discretion were referred to a group credit committee consisting of a number of experienced lenders, including the chief risk officer, and chaired by the group finance director. Exceptions to policy were approved on a case-by-case basis, generally on a "next higher" basis. The board received monthly reports on all loans in excess of €6.35 million and, in relation to loans approved as exceptions to policy, within the delegated discretion system. Similar arrangements applied to our business in the UK - CHL.

The stress test required by the Central Bank in 2006 included a house price reduction of approximately 22% over two years, with a modest recovery in year three, together with increased unemployment rising to 9.7% over the three years of the test. Housing completions were assumed at 50,000 per annum throughout. While none of the scenarios modelled indicated serious threat to the solvency of the bank, it should be noted that the actual extent of the price declines and rise in unemployment subsequently vastly exceeded those set. However, the most significant defect in these tests lay in the absence of tests involving stress on the funding side. Perhaps this was because of the now proven to be unfounded belief in the strength and durability of the sources of funding available to banks in Ireland. There were no specific warning signs and, indeed, global capital markets had come through many periods of severe stress over the past 20 to 30 years and at this time had never appeared so accommodating to reasonably rated borrowers. However, the deterioration in sentiment towards Ireland and the Irish banks post-2006 demonstrated quite clearly that there is effectively only one counterparty in wholesale markets as Professor Nyberg perceptively remarked in his report of 2011. Failure to anticipate this truth, in common with many others, remains, in my view, the single biggest error that was committed in our business plans.

Analysis of risk concentration in the base, adverse economic scenarios and the impact on capital structures - as I said earlier, the overall portfolio was very widely spread and remained largely unchanged in terms of concentration in the years 2001 to 2006, which underlined the consistency of our strategy. I've previously referred to the results of the 2006 stress test, which appeared satisfactory in terms of a robust response to economic shocks which were considered severe at that time but clearly, with hindsight, absolutely inadequate to model the actual impacts of the recession of 2008-2010.

Adequacy of the incentive and remuneration arrangements to promote sound risk governance - all remuneration arrangements for senior executives, including myself, required the approval of the remuneration committee, consisting entirely of non-executive directors. In the case of the senior executives - myself and those reporting directly to me - the package consisted of a base salary, a bonus opportunity up to 60% of salary, access to group share options up to a maximum multiple of salary and membership of various group defined benefit pension schemes. I did not become a member of a defined benefit pension scheme as I joined Irish Life at age 51, with an anticipated retirement age of 60.

Overall remuneration terms were reviewed regularly with the advice of international remuneration consultants. While at this remove total reward is substantial, it was not excessive relative to that scene in the Irish market. However, it is clear that public perception of remuneration in financial services at this time is that it was excessive and it's clear that this perception is reality for financial services executives, including myself, and I fully accept that. Bonus payments for those reporting directly to me were based on individually designed objectives agreed with the remuneration committee, reviewed at the half year, and performance overall was agreed at year end, with bonuses based on that performance. Monthly business reviews were held with those executives. I do not believe that the remuneration arrangements led to a culture of excessive risk taking, given the checks and balances within the overall credit approval system, including the group credit committee structure and the treasury policy, which I think you heard about this morning.

Impact of shareholder or lending relationships in promoting independent challenge by the board - ILP was a publicly quoted company with a very widely spread investor base, including a substantial retail element. As such, we met regularly with institutional shareholders in Ireland and overseas. These meetings involved exchanges of views on company performance, strategy, etc. While on occasion our overall performance was regarded quite unfavourably in comparison to a number of our competitors, particularly in relation to our non-involvement in large-scale property lending or lending to the SME sector, we did not change our stance on this as we lacked both risk appetite and the skills to undertake that business. We reported the feedback to the board and considered whether we should modify strategy to take account of these views. But in general terms, we maintained over this period a very consistent approach to the business in strategic terms. Because of our business model, we did not have lending relationships with borrowers of the nature that, I think, are ... is implied in this line of inquiry.

Appropriateness of the regulatory regime - the regulatory regime has been characterised as principles-based and light-touch. However, I would characterise it more as unbalanced, with a substantial, relatively well-resourced and quite intrusive, self-confident consumer focus contrasting markedly with an under-resourced and tentative low key prudential activity. This seemed to be confirmed by the ex officiodirectorship of the consumer director of the regulator in contrast to the position of the prudential director.

This misallocation led to an inability of the supervisor to analyse in a meaningful way the substantial flow of information that banks provided. In addition, when on-site inspections took place - and that was rarely - there was substantial delay in furnishing reports and dealing with bank responses. Responses to the submission of requested information on particular topics were also very slow.

While there was contact between the regulator and ILP group at a variety of levels, my contact was mainly restricted to twice-yearly visits to the regulator and the prudential director to review half-yearly and annual accounts. While these meetings were businesslike and professional, they contrasted markedly with meetings I had experienced elsewhere with other regulators. Clearly, my interactions with the regulator or certainly ... I'm sorry ... Certainly, my interactions with the regulator bore no resemblance to the extremely thorough reviews with rating agencies.

The regulator appeared reluctant to use its power of moral suasion that I believed it possessed, preferring to take a very legalistic view of its power. I recall contacting the regulator regarding the introduction of 100% mortgages, which I regarded as an unnecessary and unwelcome development, but it was made clear to me that the regulator regarded itself as powerless to intervene. It's my view that the regulator failed to fulfil its prudential function. It is, obviously, primarily a failure on the part of management and boards of banks that was responsible for the crisis that emerged. However, as with all participants in the creation of the crisis, I'm sure that different decisions at different times by the regulator could have reduced the severity of events.

The nature and appropriateness of the relationship between the Central Bank, the Department of Finance and banking institutions: I have no direct knowledge of the relationship between the Central Bank and the Department of Finance and, therefore, I don't consider it appropriate for me to speculate. I can recall only a couple of occasions when I would personally have contacted the regulator on a matter of concern and only one semi-social event - an in-house lunch with my chairman at the offices of the regulator. We were members of the Irish Bankers Federation and we tended to prefer interactions on industry issues to be conducted by them. To the best of my knowledge, during this period I had no contact with the Minister for Finance, the Secretary General of the Department and other senior civil servants unless perhaps at industry gatherings - Institute of Bankers' functions, IBEC, etc.

Appropriateness of the relationships between Government, the Oireachtas, the banking sector and the property sector: The committee has heard evidence from a number of witnesses in respect of these matters. I have no direct experience of the nature or appropriateness of these relationships and, therefore, I do not believe I can usefully comment.

Conclusion: In preparing for this appearance, I have reviewed thoroughly the last accounts for which I was responsible - 31 December 2006 - together with the economic backdrop at the time in order to explain the subsequent outcomes which contributed to such negative outcomes for staff, customers, shareholders and, of course, the Irish State and its people, all of which I deeply regret. While bank margins had declined over the period due to a combination of a very competitive mortgage market, including the introduction from the UK of tracker mortgages, together with an increased use of wholesale funding to fund customer lending, bank profits had more than doubled to €202 million, while capital remained sound with a risk asset ratio at 10.4% comfortably meeting the objective of exceeding regulatory minima.

The two issues which I think best demonstrate the sharp contrast between the time of my leaving and subsequent events are the mortgage portfolio and liquidity on 31 December 2006. Mortgage quality, which was 88% of the book on December 2006: aside from apparently healthy LTV ratios, which I have illustrated in some detail in my witness statement, the arrears position was healthy. Since 2002, cases in arrears had halved, from 7.1% to 3.4% of the portfolio and case numbers had reduced despite the increase of mortgage accounts by approximately 20%. The strong consensus of economic commentary, domestically and internationally, was that despite the rapid expansion of both credit and house prices the economy was fundamentally sound – the soft landing scenario.

We now know that in the period 2008 to 2010 the economy, partly from events abroad, encountered its worst recession ever, vastly exceeding the levels for which the regulator had stress tested in 2006, and, clearly, this was in the nature of the fabled 400-year flood. The liquidity position on December 31 2006: at the end of 2006, the bank appeared to be well funded, with very easy access to a variety of apparently liquid capital market sources; long-term debt repayments were very widely spread; there was a relatively low use of securitisation; and there was a significant availability of secured repo and ECB eligible collateral together with approximately 35% customer deposits. Long-term debt, securitisation and customer deposits together provided 65% of funding. Moody's rating agency increased the financial ... the ratings strength of ILP to AAA in early 2007 while S and P maintained a rating of A+ at end 2007. Events subsequently proved this funding model absolutely inadequate. External events, together with negative views on Irish credit portfolios ensured that very rapidly all capital markets were closed to IL P with the disastrous effects that we now know. The error here was clearly failing to recognise Professor Nyberg’s point that in the capital markets there is only one counterparty and, hence, if one source closes to a borrower, all will close simultaneously.

In summary, Chairman, from my perspective Irish Life and Permanent was a sound and well-run business when I retired and I was shocked and disappointed at the impact of subsequent events. I deeply regret the consequences for the staff, customers, shareholders of Irish Life and Permanent and, of course, for the Irish people. I hope my statement will assist the committee in its task.