Professor Alan Ahearne:

Thank you, Mr. Chairman. As you mentioned, Mr. Chairman, I served as special adviser to the late Minister for Finance, Brian Lenihan, from March 2009 to March 2011. In this role, I advised the Minister on economic, budgetary and financial policy in responding to the economic and financial crisis. Among other things, I played an advisory role in relation to three budgets during the period, the national recovery plan, the creation of the National Asset Management Agency, NAMA, and other measures to address the financial crisis. The three budgets during this period involved €15 billion of fiscal adjustments at an annual rate. These adjustments were aimed at reducing the Government's huge structural deficit, thereby restoring order to the public finances. Reducing the structural deficit, by definition, required discretionary measures as the structural deficit would not decline due to a cyclical recovery.

In dealing with the consequences of the bursting of the bubble for the Irish banking system, the Minister's focus was on stable ... on restoring financial stability by restructuring, recapitalising and deleveraging the banking sector. The Minister regarded the two main banks, AIB and Bank of Ireland, as core retail banks that would play important roles in Ireland's economic future. The banks required capital to remain in operation. The banks' capital positions were being eroded by loan losses and, therefore, the banks required recapitalisation. The Minister wanted to minimise the burden on the State of ensuring that AIB and Bank of Ireland were properly capitalised. For that reason, he afforded the banks the opportunity to raise private capital through, for example, rights issues involving shareholders. Ultimately, Bank of Ireland was successful in finding private sector solutions.

In the case of Anglo, the priority was to deleverage and de-risk the bank without damaging the rest of the banking system. The Minister had an open mind as to whether a small good bank could be carved out of Anglo, as proposed by the bank's management. Anglo had been included in the blanket bank guarantee and, therefore, the Government had to recapitalise Anglo to avoid a call by creditors on the guarantee. Moreover, Anglo required injections of capital to retain its banking licence and thereby maintain access to Central Bank funding.

In relation to the cost to the State of recapitalising the banks, the upfront costs were large by international standards. The Minister was confident that the State would recoup some of these outlays and wanted to spread the cost of the crisis over as long a period of time as possible. It's worth noting that although the cost of recapitalising Anglo and INBS added markedly to measured Government debt - about €35 billion - the way in which Anglo was recapitalised meant that the burden of servicing this debt is relatively low because the debt is largely held within the State sector, is long-term and can currently be financed in the market at a very low rate.

On the issue of right-sizing the banks, NAMA was established by the Government to help deleverage and de-risk the Irish banking ... the Irish banks. Asset management companies like NAMA have been used in many countries over recent decades during financial crisis to facilitate bank restructuring and to manage and dispose of troubled assets. Regarding the overall effectiveness of NAMA, in my testimony before this committee on 4 March last, I noted the assessment of NAMA in an independent study of the agency. On page 2, the study states, "First, the establishment of the bad asset agency, NAMA, serves as an international example of [the] successful management of bad assets." On page 24, the study states:

The establishment of NAMA was instrumental in the successful management of the Irish banking crisis. It allowed the banks to recognise fully the losses on these loans, and thus removed an important source of uncertainty for the banks. Next, the government set only overall targets for NAMA in [the] resolution of the bad assets. The relative freedom in running down the bad loan portfolio allowed NAMA to realise a relative good price for its assets disposals.

Also on the same page, the study draws a key policy lesson for other countries:

Ireland followed international best practice by setting up NAMA, [an] asset management agency to run down the bad assets of the Irish banks. Releasing bad assets from bank balance sheets is instrumental in the path [of the] recovery.

I share the study's view that the establishment of NAMA played a critical role in restoring financial stability in Ireland. I would note, however, that an asset management agency is not and cannot be expected to be a magic bullet to solve a banking crisis. No single policy measure on its own can do that. NAMA has been part of a set of policies that, together, have helped to restore order to the Irish banking system and contributed to the recovery in the Irish economy.

Notwithstanding the efforts to restore international investor confidence in Ireland and its banks, during the second half of 2010 the cost to the State of borrowing on international markets rose to unsustainable levels. Around the same time, funding in debt markets for the Irish banks dried up and the banks experienced large outflows of deposits, especially corporate deposits. These outflows replaced by borrowings from the euro system. The ECB and the Central Bank of Ireland provided invaluable liquidity assistance to the Irish banking system during the crisis. I believe, however, that the ECB in 2010-2011 underestimated the systemic nature of the crisis in the euro area. The ECB was overly anxious in the latter part of 2010 to reduce the amount of emergency loans that the euro system had extended to the Irish banking system. There are also question marks about the ECB’s communications with markets about individual member states. With no access to markets at affordable rates, the Irish Government was forced to borrow from the official sector. The EU-IMF-ECB programme of assistance provided the State with funds that were needed to finance the budget deficit and provide a functioning banking system.

Finally, Mr. Chairman, the large gains in international competitiveness recorded by the Irish economies ... Irish economy over the 2009-2010 period went a long way to creating conditions in the economy for key sectors of our economy to grow, gain market share and expand employment. Without these gains in competitiveness, the Irish economy would not be registering the fast growth rates that we see today. Thank you, Mr. Chairman. That concludes my prepared remarks.