Peter Mathews (Dublin South, Independent)
Link to this: Individually | In context | Oireachtas source

I thank the Vice Chairman for noticing me. I thank Professor Honohan for attending. I am not formally a member of the committee any more for reasons which have nothing to do with finance or financial analysis but involve party Whips and how they are applied in the country.

Professor Honohan will recall that in the summer of 2009, the late Mr. Brian Lenihan, who was then Minister for Finance, had asked PricewaterhouseCoopers to do a listing of bills of lading of loans for transfer to NAMA. I want to give a chronology and at points along it to ask a question. I hope it will be a good prompt and an opportunity to ask questions.

We met in the summer of 2008 in Professor Honohan's offices in Trinity College. I remember having done a bit of analysis on the six Irish-owned institutions and a very clear picture emerged as to how they stood at the time the music stopped and where they had come from over the preceding four years. There had been €200 billion of turbo-charged lending. As Professor Honohan stated in one of his answers earlier, it was a credit-fuelled bust, which is something which had not happened before at this scale. The €200 billion on what was the starting €200 billion was a 100% increase in the size of the balance sheets of the six Irish-owned institutions in less than four years. That is red hot. It is like looking at the needle in the thermometer of one's car going into the extreme of red. Does Professor Honohan agree that the boards of banks, on which sit the people of probity to run banks under a licence to take deposits given by the Central Bank, should have been aware at an early stage that there had been an abandonment of prudential balance sheet management? It is measurable in 2008 by looking at the loan-to-customer deposit ratios of the six Irish-owned institutions, which were AIB, Bank of Ireland, PTSB, Irish Nationwide Building Society, EBS and Anglo Irish Bank. The ratio stood at a weighted average of 173%, which was 83% above the prudential norm of 90% that should apply to high street banks. That is a form of measurement of the contribution of the banks and their boards to the asset price bubble which was built on the credit bubble. As a proportion of 90%, 82% is 92%. It is measurably and objectively right to say that the Irish-owned banking sector created 92% of the asset-price bubble.

When the bubble collapsed, like a Ponzi scheme, the question was: "What is left?" It was the wreckage of assets and the banks' insistence on collecting all the credit they had advanced into the asset price bubble.

To me, that is all wrong and I hope Professor Honohan agrees.
When I met Professor Honohan in October 2009 after his appointment, I said that it was apparent from the balance sheets of the banks that losses of the order of €50 billion would probably need to be pencilled in for just the commercial and land development bubble and that in addition to that, there could be up to €35 billion on the mortgage loan books, and give or take that we were going to be in the order of €92 billion to €100 billion. Five years later, that is exactly where we are. Yet back in March 2010 at the time that the first prudential capital asset review was carried out, Mr. Elderfield insisted that the modelling of the three B's - Blackrock, Boston and Barclays - indicated that their model was very reliable and showed that AIB would need €6.7 billion before the year end, that Bank of Ireland would need €3.5 billion and that AIB would sell off the Polish bank, which was the best capitalised part of the group and was cash-flow sustainable, into an economy that was not asset price-blown by a credit price bubble. That was the decision. The Pied Piper story was told and everybody fell for it. Fast forward to March 2011 when there had to be another prudential capital asset review. This was going to be final because on 30 September 2010, the final figures had emerged. The late Brian Lenihan said it was €50 billion but it was wrong again.
All this could have been avoided if people stopped and looked at the balance sheets and the recoverability of assets that had been created out of a credit-fuelled bubble. Let us take the example of Bank of Ireland. How much of the funding for Bank of Ireland's balance sheet in 2008 was from senior secured bonds alone, leaving aside the subordinated loans? The answer is €61 billion. That is 40-something percent of the Irish national income. It is mind-blowing and is on top of the 173% of loans to customers' deposits.
Today we hear that a Chairman for the impending banking inquiry has been appointed. I might be excluded from the inquiry. It is not that I wanted to do it but somebody who understands these things needs to be on the committee to say, "Here are the balance sheets of the banks from 2001 to 2008. Let's calibrate them and see what was the credit creation, what was the funding behind that asset bubble and where do the responsibilities and accountabilities lie?" I do not want scalps or people shot at dawn. I want boards of directors who are in situand getting very good fees to talk and perhaps look thick if they do not know the answer to the question of why they abandoned the policy of fractional reserving. It needs to be done. It is a simple exercise. We do not need a Nyberg report and with respect, we do not need Professor Honohan and his team to carry out a big exercise. Nor do we need a Watson or Regling report. The balance sheets give the answers. That is what frustrates me.
When we come back to macro-prudential rules, they are the ones that will stop a credit bubble. The Danish economist Niels Thygesen swivels around the world visiting all the prudential meetings of the banks and various countries. Do members remember the meeting in The Four Seasons hotel about three years ago? At lunch time, I asked Mr. Thygesen about what could have happened if at meetings with the banks, he and his regulator colleagues had asked to look at the short-form balance sheets of the banks and loans to customers' deposits. I asked him whether if they had been kept at below 100%, this massive credit bubble could have occurred like it did. He said "No" and I agreed. One knows mathematically that one keeps back 10% of a deposit that comes in, one lends out 90%, that 90% comes back, one lends out 81% and one keeps back 9% and so on. Add them all up and it comes to the original deposit of 100% and one has lent out 641%. That is it. If on top of that, one adds something like three and a half times' income as a macro-prudential rule for preventing a credit-fuelled asset price bubble, this is the sustainable income of the customers because there is now so much short-term contract employment that one does not know what can be maintained. One could take another approach in terms of loan-to-value ratios when the value of a property is the consideration.