Oireachtas Joint and Select Committees

Wednesday, 6 May 2015

Committee of Inquiry into the Banking Crisis

Nexus Phase

Bank of Ireland - Mr. Richie Boucher

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

I propose that we go into public session, is that agreed? Agreed. As we have a quorum, the Joint Committee of Inquiry into the Banking Crisis is now in public session. Can I remind members and those in public Gallery to ensure that their mobile devices are switched off?

Todays' session 1 is a public hearing discussion with Mr. Richie Boucher, group chief executive of Bank of Ireland. In doing so, I would like to welcome everyone to the 23rd public hearing of the Joint Committee of Inquiry into the Banking Crisis. Today we continue our hearings with senior bank executives who had roles during and after the crisis. This morning we will hear from Mr. Richie Boucher, group chief executive, Bank of Ireland. Mr. Boucher joined Bank of Ireland as chief executive of corporate banking from the Royal Bank of Scotland in December 2003. He was appointed chief executive of retail financial services Ireland in January 2005. He has been the group chief executive officer since February 2009. He is the past president of the Institute of Banking in Ireland and of the Irish Banking Federation. Mr. Boucher you are welcome before the inquiry this morning.

Before I hear from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry, which overlap with the subject matter of the inquiry. The utmost caution should therefore be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, those documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and should not publish any of the documents so displayed.

The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis and you have been furnished with booklets of core documents. These are before the committee and will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Mr. Boucher.

The following witness was sworn in by the Clerk to the Committee: Mr. Richie Boucher, Group Chief Executive, Bank of Ireland.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, with that said, I now invite Mr. Boucher to make his opening remarks. Mr. Boucher.

Mr. Richie Boucher:

Chairman, members of the joint committee my name is Richie Boucher. I'm currently the group chief executive officer of Bank of Ireland Group, a position I've held since February 2009. From January 2006 to February 2009 I was chief executive of Bank of Ireland's retail financial services Ireland division. From March 2004 to December 2005, I was chief executive of Bank of Ireland's corporate banking business. The inquiry directed me to attend the committee and be available to it with respect to certain themes in the context of the three roles I hold, or held, with the group for the relevant dates. I was also required to provide a written statement in relation to those themes. The Chairman's opening remarks to the inquiry in December 2014 identified that the purpose of the inquiry was to identify mistakes which were made, to learn from these and to avoid their recurrence. I've provided the inquiry with a comprehensive written statement and have provided documents within, and not within, the public domain relating to my written submission.

Chairman, may I suggest that if yourself and the committee feel that it would be the most productive use of your time, rather than me continuing on a prepared a statement I could move straight to questions and answers.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, Mr. Boucher, and just to inform you as well, the committee will be publishing your statement in full so we can take that as being read this morning, with your agreement.

Mr. Richie Boucher:

Yes, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay. Thank you. Deputy Murphy, you have 25 minutes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Thank you, Chairman, and thank you, Mr. Boucher, you're very welcome. I'd like to begin, if I may, with the BOI group liquidity committee minutes from 29 September 2008. Your reference is BOI - C3b, pages 19 to 21. Do you have that document?

Mr. Richie Boucher:

I am familiar with the document.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Familiar with the document. Okay, great. That meeting was the day of the 29th. Can you remember when it was convened and how long it lasted?

Mr. Richie Boucher:

I can't remember exactly when it was convened but I believe it was the late afternoon, I think somewhere between about 4 p.m. and 5.30 p.m. I think it went on for about 25 to 30 minutes. My memory of that was influenced by the fact that I had discussions straight afterwards with colleagues of mine in our retail division ... so it was late evening, late afternoon Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay, thank you. And it lasted for about 25 or 30 minutes?

Mr. Richie Boucher:

I think so, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And you were informed by Mr. Goggin that a meeting had been arranged in Government Buildings later that evening on the possibility of a guarantee being provided for all borrowings by Irish institutions, and that's noted in the minute. Did you know Bank of Ireland's position at that time in relation to customers' deposits, interbank borrowings or debt securities issued?

Mr. Richie Boucher:

I think the focus was primarily on the ... what was happening in the ... interbank markets and with the funding. I think the minutes of the meeting and previous minutes of previous meetings ... if I could just say these were quite informal meetings ... it was really updates ... would have shown that we were funding reasonably well, we were rolling over in the interbank markets but the rolling over was becoming much more short dated as it was happening. We had some pressure on corporate deposits but the retail deposits were reasonable and the UK deposit base was relatively strong.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The minutes indicate that Mr. Goggin was aware that the guarantee might include Bank of Ireland so was anyone asked to pull together the relevant information as to what would be covered under such a guarantee?

Mr. Richie Boucher:

No, not to my recollection and ... no.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. The minutes also state that a draft guarantee was prepared by the committee ... according to the note of the meeting it says that. But Mr. Goggin has told us in evidence that this is incorrect, that there was no draft of such a guarantee, or listed institutions that it should cover, prepared for Mr. Goggin for use at a meeting in Government Buildings. Is this correct?

Mr. Richie Boucher:

That is my recollection as well, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And was there any discussion at this meeting at all using a piece of paper or a note or something around which your discussions were based?

Mr. Richie Boucher:

I think if I can just give a context. Mr. Goggin came in I think towards the end of the meeting. He said that he was ... himself and some senior bankers ... were attending a meeting in Government Buildings. He said that one of the items which would be ... discussion was some form of a guarantee. But the meeting, to my recollection, kind of broke up ... as I said earlier these were quite informal, we were just gathering together, updating each other on what was happening. It wasn't a decision-making forum. But I have no recollection of a guarantee. I think that's subsequently corroborated by the fact that one of the businesses for which I was responsible, licensed subsidiary ICS, had been omitted from the list of guaranteed institutions and that was causing some problems for customers in ICS and we had to engage with the authorities in the following week to try and get ICS included.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Just tell me a bit, if you could, how minutes are drafted. Was someone in the room to take minutes?

Mr. Richie Boucher:

There was kind of ... again, it was a ... it wasn't a committee which required a quorum or that, but there was generally someone who was taking it if there was action points-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

-----but we were taking, also, our own notes of our own action points.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And before minutes like these would be circulated, would someone sign off on them? Would someone check them?

Mr. Richie Boucher:

Would the ... from what ... first of all, I should say, Deputy, I had not seen that particular document until the inquiry. It is a ... it's headed "A draft", so I've no recollection of it being circulated to me as a draft and certainly we ... my understanding is my colleagues could not find a non-draft version.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Also in the minutes from that meeting it says that you stated that the group should make the point, wherever possible, that it did not request the guarantee and did not require it. Can you just elaborate on that point? What do you mean? And make the point to whom? And was this point about fact or about presentation?

Mr. Richie Boucher:

Deputy, if I could point out, I think there may be some confusion. I think there's been a copying of a minute from 30 September. The back page of that minute is attached to one of 29 September. I can provide to the committee the actual minutes of the 29th and the 30th, both in draft form. So the comment I made was on 30 September. I recall that comment. It was the day after the guarantee. And there were particular issues which were emerging that certain banks, we were aware, were starting to say that it was Bank of Ireland had asked for the guarantee for themselves. I was at a meeting of the Irish Bankers Federation that morning and the meeting had been requested to be ... in particular, to focus on things that ... like we were not permitted to market the guarantee and there was a request from the Irish Bankers Federation. One or two of the people from a couple of other banks had mentioned that, "We heard you guys went in and asked for a guarantee for yourselves." And we were hearing from some of our dealers that that rumour was going around in the market. I was annoyed and also I felt it was appropriate and necessary that we made it clear in the market that Bank of Ireland hadn't gone in and asked for a guarantee for itself.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Sorry, can I just invite you to come a bit closer to the microphone?

Mr. Richie Boucher:

I beg your pardon, Chairman. I'm sorry.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes, yes, just closer to the microphone. Thank you.

Mr. Richie Boucher:

I'm sorry. Chairman, would you like me to repeat anything I said?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

No, no, you're fine, you're fine.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Just to clarify that, Mr. Boucher ... and if we accept that that minute is from a meeting of the 30th, did the bank need a guarantee on the night of the 29th?

Mr. Richie Boucher:

We didn't feel that we needed a guarantee in terms of the pressures we were facing on the markets. I think one of the things that we felt, and subsequently proved to have been correct, is that we had very significant collateral ourselves. So we had about 50% of our assets were in mortgages, Irish and UK mortgages. So we had quite a lot of eligible collateral but I can't ... I can't say in three-four weeks' time, if the markets had continued to be very tough ... you know, if events continued ... in the absence of a guarantee, would we have needed one, I can't say that. On the night of the ... on the afternoon of the 29th, night of the 29th, Bank of Ireland didn't feel that it needed a guarantee in its own right. I think that's also corroborated by the minutes of other meetings that we provided. We didn't identify a guarantee.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

Our focus and engagement, in particular, in that period of time ... I wasn't involved directly in the engagement but there was engagement with the Central Bank and others to try to ensure that the ECB and other authorities would be widening collateral criteria, and that was our focus.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Thank you. Can we just turn to your statement briefly then on pages 8 and 9, if I may? Because in that you recount some details then from later on on that evening when Mr. Goggin goes to Government Buildings. You were asked to remain in Bank of Ireland. Is that correct?

Mr. Richie Boucher:

No, I decided to ... I think there was a number of us decided to stay. We have to remember it was the night of the 29th. There was an awful lot going on. Amongst other things, one of my jobs was to ensure, for example, that our branches were properly staffed. We were not putting through any IT changes. We were making sure our ATMs were heavily loaded, because if there had been an incident which would have perceived that we had a lack of cash, that could have been very difficult. I was organising that staff would ... who were on part time would come into branches, etc. So I was there because it was necessary for my role as head of retail Ireland, but also, obviously, there was a lot going on. The TARP was going through Congress and obviously we were looking at our exposures to US banks and our exposures in investment markets.

We gathered together ... myself, head of strategy, the chief financial officer, chief risk officer, the head of wholesale markets and some other colleagues gathered in a meeting room we have in the executive floor and we were awaiting communication from Mr. Goggin as to what was happening.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And he phoned you three times. Is that correct?

Mr. Richie Boucher:

Directly into the conference room, that is my memory. Three times.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Did you receive any personal calls or direct calls?

Mr. Richie Boucher:

From Mr. Goggin, not directly. I know that Mr. Goggin was also in communication with some of our colleagues at a more middle management level on certain technical and other issues.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. The second phone call, I think, according to your statement advised of a systemic guarantee. Can you recall at what point in the evening this was?

Mr. Richie Boucher:

We were asked ... we were asked about ...to provide ... if we could provide support to Anglo Irish. From memory that was about 11 p.m., 11.30 p.m. We had a credit committee to decide the basis that we would be willing to provide that. Mr. Goggin participated in that. It was a formal credit committee because, obviously, it was a large exposure. Then Mr. Goggin came back, from memory Deputy, I would say around about 45 minutes, maybe an hour later. So slightly after midnight, I cannot remember exactly, but around about that time, to advise us that the Government had decided there was a guarantee for all of the banks. And at that stage then, you know, there were questions about were subsidiaries included, etc., what was included, what was not. And a couple of our colleagues, including our chief law officer, were asked to just confirm the licensed subsidiaries we had, i.e. licensed depositors and all that for inclusion in the discussions that Mr. Goggin was having.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Just my final question at this point-----

Mr. Richie Boucher:

If I could just say, my clear understanding is that there was a systemic guarantee.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

My final question then is: was Mr. Goggin aware of the bank's total exposure to this point when you were informed of a systemic guarantee that would cover your bank? Did he know the full position of the bank in that meeting?

Mr. Richie Boucher:

I must presume he did, yes. We had been looking at on an ongoing basis, a daily basis, we had been looking at our liabilities in different markets, etc. I presume as the chief executive he would have been aware of that.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Including the subordinated liabilities.

Mr. Richie Boucher:

I suspect so. I think we were all probably slightly more focused on those liabilities which were potentially leaving the bank but I presume he was, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I will move on if I may, Mr. Boucher?

Mr. Richie Boucher:

Yes, sorry, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I want to go back to 2003 when you joined the bank. You moved into corporate banking. Is that correct?

Mr. Richie Boucher:

That's correct.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The bank was traditionally viewed as a conservative bank, as Mr. Goggin stated himself. Would you have agreed that the bank was a more conservative bank than other lenders in the Irish market at the time?

Mr. Richie Boucher:

Yes. I mean, I had ... when I joined the bank I felt there were certain gaps in where the bank was. It had been .... yes, the Bank of Ireland had an image of being a relatively conservative bank, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Did the culture of the bank change during your time there?

Mr. Richie Boucher:

I am not conscious of they had like some kind of step change, but I think over a period it did evolve over a five to six year period, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Did you ever feel that the bank was under pressure to change its model or its business, given the apparently rapid success of banks like Anglo Irish Bank?

Mr. Richie Boucher:

No. I think there was ... For our businesses, you know, Anglo wasn't ... I mean Anglo was a competitor, but it wasn't a competitor across the range of businesses we had. What I was conscious of, even though I wasn't directly interacting with the markets and investors, albeit I met them, was a perception of Anglo ... so like, not a direct competitor, well, it was a competitor but not across all of our businesses. Certainly, there was a market perception that Anglo, their price earnings multiple, i.e. what the market was prepared to pay for their stock as a multiple of their shares, was higher than the bank's. We were hearing that they had a much cleaner business model, that the management were very focused, that they had a great visibility on things like their pipeline of deals, etc. So it was ... the Anglo thing was more about a market perception rather than, I think, interactions and individual parts of our business, with the exception of our property lending activities, at the higher end.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I'll come to that then because in July 2001, that was before you were in the bank, the group risk committee set up a trial initiative for specialised property financing unit within business banking and the purpose was to provide higher risk higher return property transactions. Now in January 2003 when you were there - and sorry the reference for this is BOI - B1, page 55 - in 2003, in January, it was recommend to the committee that the initiative be established on a permanent basis with a confirmed limit of €100 million, the objective of it being to allow business banking compete more effectively in particular with Anglo Irish Bank. Is this an example of Bank of Ireland changing its business practice to compete with Anglo?

Mr. Richie Boucher:

If I could just point out to the Deputy that I didn't join the bank until December 2003.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I beg your pardon.

Mr. Richie Boucher:

But if I could expand, when I joined their corporate bank there was confusion in the bank about property lending. I found that the corporate bank there were certain structures. There was a lack of focus on, say, family owned, large mid-corporate businesses. There was confusion about responsibilities for different sectors and I recommended to the group that we establish within corporate and we bring into corporate a lot more of the higher volume and certain types of more risky lending that was going on in retail Ireland to bring it into corporate, where we thought there was a greater focus and skill set. So that unit that you referred to was brought into corporate.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

This happened in November 2004, the dedicated property unit. Is that your recollection?

Mr. Richie Boucher:

It would have been yes, like I think the second half. I made recommendations to changes of the structure in the first half.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

We have a minute on this and it's in BOI - B2, page 23, and it is from a meeting from the 9 November 2004 and it talks about this establishment of a dedicated property unit. The rationale it gives in that minute is that, "In the past five years we have under performed in this top end market, which has been dominated by Banks with specialist property units, most notably Anglo Irish Bank". So is this an example of Bank of Ireland changing its business practice to compete with Anglo?

Mr. Richie Boucher:

I think it would be an example of us bringing more focus, probably more marketing to it, whether it was Anglo or Bank of Scotland, yes. I think I'd probably just mention again, Deputy, you know, we restructured the corporate bank at that time. We had a lack of focus on family owned, large businesses. I brought in people from Ulster Bank to specialise that and I with the ... I recommended a restructure of the group and that's what we did but, certainly, we did compete with Anglo at the higher end ... corporate property market.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And this was your initiative this new unit?

Mr. Richie Boucher:

The restructuring of corporate was my recommendation, which was a total restructuring of corporate to focus on different areas.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And did you continue to have a role once you moved into head of retail?

Mr. Richie Boucher:

In that, no, I didn't, the corporate was responsible for corporate lending and that type of activity.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

But in terms of the dedicated property unit were you still involved?

Mr. Richie Boucher:

Allow me to give ... No, I didn't have a direct role. I was a member of credit committees where large transactions came to the credit committee so I had a role in either the declining or authorising large transactions that had been recommended by business units.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Did you personally manage relationships then with clients who had exposures over €30 million?

Mr. Richie Boucher:

No.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

You didn't manage any relationships with any developers?

Mr. Richie Boucher:

I would have relationships with customers across the group so I would have been involved in marketing or meetings with customers as the head of ... more in corporate really. In retail, I wouldn't have. So, in corporate, yes, I would have met customers.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

So you would have managed relationships with -----

Mr. Richie Boucher:

I didn't, I wouldn't ... so the structure, Deputy, was that ... you know, we had relationship managers who would report into sectoral or unit heads and for our large customers, I would have been involved in meetings with those customers from a marketing or to give ... or if it was felt it was necessary to give the customer certain feedback on things that we couldn't give.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Would you ever have helped large customers in other transactions, ones that were perhaps not with your bank or outside of banking?

Mr. Richie Boucher:

From time to time customers would ring me and look for advice.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. For example, would you have ever written in support of a planning application for a large customer?

Mr. Richie Boucher:

As a matter of record I did, but that was not in support of a transaction we were involved in.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

No. Do you think that's appropriate?

Mr. Richie Boucher:

No.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

You don't think it's appropriate?

Mr. Richie Boucher:

No, it was a mistake.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. On your appointment as group CEO in 2009, a significant shareholder of the bank said that you must have been responsible for fatal errors of judgment, including advancing loans to developers on the strength of over stated land values and insufficient security. Were you?

Mr. Richie Boucher:

I was member of a ... I was a member of a management team that was involved in making mistakes, including to property.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

On the point that was made at the time in 2009, do you accept that there was an impression that you were too close to certain clients in the bank?

Mr. Richie Boucher:

I don't accept that.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

People write all sorts of letters. Ultimately, if I do have a recollection, when I was appointed as chief executive, I went before the shareholders of the bank and 99% of the shareholders of the bank voted for me. Certain shareholders didn't.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. In correlation with the new unit, which was targeted at the main players, as it was described in the minute, in the property sector, in mortgage lending, growth moved from €27.6 billion to €60.8 billion between 2001 and 2008, and if we go to reference document BOI - B2, page 10, we'll see that policy changes ... there was a number of policy changes for mortgage lending at the time. Income multiples changed, loan-to-value policies changed, 1st Start mortgages were introduced, and more flexibility was allowed to seasoned multi-property borrowers. Do you think these changes were appropriate, and is this an example of you changing your business practices to chase the competition?

Mr. Richie Boucher:

Yes, again, I would point out that a lot of data that you referred to was prior to my joining the Bank of Ireland, but with ... as we look now, in hindsight, that visioning of some of our criteria ultimately proved to be costly for ... for us, for our customers, and for our other stakeholders.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

In July 2005, you introduced 100% mortgages. And the reason that's stated in BOI - B2, page 17, was "...in response to moves by key competitors, First Active, Ulster Bank, and PTSB....". Again, is this an example of you chasing ... changing your business practices to chase the competition?

Mr. Richie Boucher:

Again, that was before I joined the retail division, but I would then add that I joined the retail division in 2006 so I could have stopped it.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Were you on the credit committee in July 2005?

Mr. Richie Boucher:

I wasn't on the group risk policy committee in ... I joined the group risk policy committee in February 2006 as a member of the group executive.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

But I would ... the 100% mortgages was wrong.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

100% mortgages was wrong. Thank you. Concerns were expressed by the Financial Regulator in ... as early as July 2003, before you were at the bank, and the reference is BOI - B1, page 67. They did an examination and the examination raises questions about the maintenance of lending standards in your institution and about your ongoing monitoring, management and control of risk in relation to residential mortgage credit. Can you explain to me how the Financial Regulator can express a concern like that following an examination and then, in 2004 and 2005, the bank might continue to actually relax its policies and standards in relation to mortgage lending?

Mr. Richie Boucher:

Again, it was prior to my involvement, but there was interaction ... we've also disclosed to the committee other documents which would have been our ... the bank at that time's answers to that. But, ultimately, like I've said, Deputy, whereas I think we probably followed the market too much in relaxing our standards, yes, I would concur with that. Whether or not it was taken prior to my arrival or after my arrival, the decisions we took were wrong.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

But in making those decisions, or at least being aware of the decisions, and being in the bank then subsequently, were you aware that the Financial Regulator had been expressing concerns, or what ... whether there was concerns?

Mr. Richie Boucher:

I wasn't aware ... I wasn't aware of the specific concerns there. I was aware that ... when the 100% mortgages were coming, there was interaction between several of my colleagues and the regulator at that time. The bank was uncomfortable with this market practice. The bank sought engagement as to whether or not the regulator felt that they could do something about it, but again I would note that, and I was part of that team, if we had felt so very, very strongly, we could have not participated in that part of the market.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. You came onto the board in 2006. Do you think there was an appropriate level of reporting to the board on the concentration risk being faced by Bank of Ireland?

Mr. Richie Boucher:

No, there was not.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

There was not?

Mr. Richie Boucher:

No.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And what role did the group credit committee and other committees like that have in terms of taking over control, if you like, of the bank?

Mr. Richie Boucher:

Well, the board had decided to delegate to the group risk policy committee and the group credit committee certain decision-making powers. If I look now at the level of reporting, understanding the board has, of credit risk develop, concentration risks, a wide range of risks, the decision-making process that's involved in our risk assessment, if I compare our ICAAP document of 2013, which I provided to committee, to what was provided in the past in the board, there was ... the board didn't seek, and the board was not provided with, a sufficient level of information to make informed decisions on the risks that were being taken.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Why wasn't the board provided with this information?

Mr. Richie Boucher:

I don't think it was sought ... I mean, I don't know if there was a conscious decision not to seek it but there were gaps ... I don't think that our information was so lax but if I compare what it is now to ... compared to it, it was light and day ... oh, sorry, night and day.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

So was it insufficient oversight then on the part of the board, is that how you'd describe it?

Mr. Richie Boucher:

Yes I think so.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. So when we then look-----

Mr. Richie Boucher:

And I was a member of that board.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Yes. But as a member of the board and also then, you know, a senior manager, how did you reconcile that position of information not being sought or information not being provided?

Mr. Richie Boucher:

I think it was ... I mean, practices have changed, policies have changed, the world has changed very substantially as to what it is now and what it was then. I think that people genuinely felt that they were getting sufficient information. As it transpired, they weren't. So I don't think there was a conscious decision not to seek information. I think that there was less ... there was less focus on the understanding of risk. I think that was absolutely clear.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And the time you were on the board, you were also on the group risk credit committee-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Last question now, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

-----group risk committee?

Mr. Richie Boucher:

Yes. In terms of sequence, Deputy, I was on the ... I joined the group risk policy ... I joined the group credit committee in December or January 2004, as head of corporate banking. I joined the ... that is a committee of about 24 people which would look at transactions - on a weekly basis - over certain limits and levels. I joined the group risk policy committee which was a policy committee when I became a member of the group executive, and that was in February 2006 and I joined the board of the bank in October 2006.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

You were involved with the group risk policy committee from 2006 and then on the board as well, subsequently, in 2006?

Mr. Richie Boucher:

You know, from-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Deputy, you're out of time.

Mr. Richie Boucher:

In ... In the-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

I'll bring you back in, you're out of time.

Mr. Richie Boucher:

Within the same year, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. Thank you. Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Just to clear up on that issue there before I bring in Deputy McGrath. On the board, are you on record this morning, Mr. Boucher, saying that the board were not seeking that type of information?

Mr. Richie Boucher:

No, I don't think it ... I don't think that they were ... that level of information was either provided or sought as sufficiently as it should be.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Which brings me to the other question. Would it not have been the case that it would have been a responsibility, or not, of senior experienced staff to actually bring that information to the board?

Mr. Richie Boucher:

I think if I look back on where we are now and where we were, I think people believed they were providing sufficient information. I don't ... and I believe the board thought they were getting sufficient information. As it transpired, they clearly weren't.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you. Deputy McGrath.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Thank you, Chair. You're very welcome, Mr. Boucher. Thank you for your attendance. Can I just start by asking you, during your three years as CEO of retail financial services Ireland within the bank, what involvement would you have had during those three years in the lending to the land and property development sector?

Mr. Richie Boucher:

It wouldn't have been a very large part of my job. We were lending to land and property, it was done within ... it was a component of the lending ... too high a component of the lending in business banking. So I had six or seven business units which reported in to me, so it was done ... the-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

It was done ... I had a sanctioning authority. So deals of a certain size which were recommended by a credit function ... I had a sanctioning authority, so I could approve of or-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

-----or decline. And-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

But the big loans-----

Mr. Richie Boucher:

But then ... and then I was a member of the group credit committee where larger transactions would've come from different business units.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Sure.

Mr. Richie Boucher:

Typically corporate-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

They were the direct responsibility of corporate that had been ... that had been moved to the new unit within corporate, in terms of land and property-----

Mr. Richie Boucher:

But just to confirm, Deputy, like, there was smaller property lending done within business banking, but the larger transactions were-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. Was it up to a certain value, was there a threshold with which it moved across to corporate?

Mr. Richie Boucher:

Roughly about ten ... about between €10 million and €15 million, however, if there were certain connections where it made much more sense for it to be in retail, it would be done.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

It was part of a wider customer connection.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. Can I ask, Mr. Boucher, how does the bank monitor the performance and increased risk of loans involved by allowing interest roll-up facilities?

Mr. Richie Boucher:

Primarily done through the committee structures. So on a transaction-by-transaction basis.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. Can I take you to the group risk policy committee meeting of 17 April 2008? So it's at BOI - B2, Vol. 1, page 99.

So, at this meeting, Mr. Boucher, there was a proposal made that the limit would be increased by €100 million in respect of lending to the landbank book within business banking, ROI, and that was opposed by the head of group credit at the time, who declined to support the proposal, but it was voted through by majority decision at that meeting, and you were to be given the power of overseeing the distribution of that €100 million. Can you recall that meeting?

Mr. Richie Boucher:

I can recall basic points of it. I can't recall it all but I can recall basic issues if you-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And can you understand what the rationale was for overruling the head of group credit?

Mr. Richie Boucher:

Yes. What I recall is that there was a discussion, it was quite a long discussion. It was noted that whereas the original proposition to lend it for a certain purpose, it then evolved during the meeting. So during the course of the meeting, it was then discussed that one of our issues was going to be finishing out sites or overseeing where ... if we were looking for, to get out of certain positions, and then it was ... it then evolved that the limit would be used where it was to mitigate or reduce risk and I can't remember whether I volunteered or I was requested to ensure that the spirit of that was done, that it was to reduce and mitigate risk. The head of group credit still felt that, notwithstanding that that was a different proposal, as a matter of principle he didn't want limits on property lending increased.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes. And just to read an extract from that meeting - the business banking ROI, "highlighted that customers are seeing significant opportunities to acquire land at relatively good prices and the Group needs to be positioned to support the better clients". So this was in April 2008, well beyond the peak at this stage, and the bank was, apparently, speculating on the value of land at the time and effectively overruled the head of group credit to extend additional loans to land speculation.

Mr. Richie Boucher:

As I've outlined in my answer to the question that you put to me earlier, Deputy, what happened in that committee meeting was an evolution of the purpose, which was to mitigate risk. It was decided that we would not take on new customers, and I was asked to ... I was asked or I volunteered to ensure the spirit of it was ... it would mitigate risk. And that would include finishing out sites, or having sites bought by other people but it was our own ... but we had our own land bank and to finish it out. And I either volunteered, or I was asked to oversee that, which would be unusual, and to reflect the debate that had taken place in the committee, where it wouldn't be provided to new customers.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And was it the correct decision to extend additional lending to land speculation in April 2008?

Mr. Richie Boucher:

As it transpired, the limit was used for the purpose, which was ... which was to mitigate risk and existing exposures, including, like I said-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

-----putting infrastructure into sites and that to enhance their value, because we saw a downturn coming, we didn't see the extent of the downturn. As has been demonstrated as we transferred loans to NAMA, the haircuts we had were different, partly because we had less unfinished property.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And would it have been a common occurrence for the head of group credit to be overruled by the risk committee?

Mr. Richie Boucher:

Not often, no. I mean, not often, I think, but there was debate and challenge but not often.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

At that point the lending limit in business banking was €2 billion in respect of landbank, the landbank limit was €2 billion, and at that stage it was at €1.95 billion. And it's noted in the minutes that without any new deals, that book is generating an additional €50 million in exposure every six months as interest roll-up facilities accumulate into principal balances. So without even extending any new loans, the limit would have been breached by virtue of interest just continuing to roll up on existing credit facilities.

Mr. Richie Boucher:

Yes. And that was one of the points that was noted and discussed, that notwithstanding a limit, there was going to be a problem in monitoring in general, so that was one of the things that was noted.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Sure.

Mr. Richie Boucher:

And it was ... I think correctly brought out in the minutes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Sure.

As you know Mr. Boucher, we have had sight of Project Atlas, or certain extracts from it at least in BOI, Vol. 2, pages 27-31, and we've gone through the figures recently with Mr. Goggin. Do you believe now, in hindsight, that there was an over-dependence on lending on one particular sector? And an over concentration of risk by the bank in land, property development and construction?

Mr. Richie Boucher:

Absolutely.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

To what extent?

Mr. Richie Boucher:

It's hard to be...kind of ... with mathematical precision about it Deputy, but we certainly were over-exposed. We believed that as a proportion of our group balance sheet, that was manageable. We believed that it was diversified so there was a bigger ... a bigger proportion outside Ireland. We didn't take sufficient recognition of the potential correlation between property markets in Ireland and the UK and the rest of the world. And in our submission to the European Commission as to one of the mistakes that Bank of Ireland made, we said that we had too heavy of an exposure. I think we took too much comfort from proportion rather than absolute hard limits and now we have hard limits.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

So are you of the view that the issue was the quantum of lending rather than the proportion? It was the actual nominal figures involved.

Mr. Richie Boucher:

Yes, I think you can be very ... ratios and percentages can become ... you can have an over-dependence on mathematical formulas in relation to dependence. Absolute amount of money is what gets you into trouble, notwithstanding that it could be a big proportion or a small proportion. You could have a small proportion of a sector that goes really bad and you get ... you take big hits.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And can you put your finger on the single most important reason why, such a mistake was made in lending too much money to one risky sector?

Mr. Richie Boucher:

I don't think there was one singular decision that even got us into that position. I think it was an evolution over ten to 15 years of very strong economic conditions, a sector that was seen to perform. So I can't say, and I have obviously thought about this carefully and I think about it in my current role ...in like the six years in my current role. Is there one particular time or point in time when... you know, one makes a deliberate decision to change gear or change a direction? No, I don't, I think it was more evolved over a long period of time, Deputy.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

What is an appropriate loan-to-deposit ratio for a bank of your size?

Mr. Richie Boucher:

I think if we look at for us... we look at a wide range of ratios, Deputy. Loan to deposit, but we also look very much at liquidity-coverage ratio, which means your coverage if, you know, you are locked out of the markets for 90 days, 180 days, 30 days. So we have scenarios. But I would feel that about 110% to 115%. But I think again, if we come to ratios, again there can be confusion. I look at it in very simple terms from our perspective and that is the way that I express it and then the ratios follow. For our business model, our capital, all our shareholders' capital plus customer deposits, should equate to customer loans. And then, because you take customer deposits you have liquid assets, which are Government bonds or very highly rated assets. And they should be financed in the wholesale markets and in the wholesale markets, they should be financed by different programmes, so a variety of programmes that ... so, I think it reflects both your business model. So we are a retail commercial bank, our businesses... our model now is our businesses must be self-sufficient in funding or have a very high margin and a very high quality of liquid assets-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

----- so that they can be funded on the wholesale markets.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And what was the rationale in allowing that ratio, loan to deposit, going as high as 176%?

Mr. Richie Boucher:

I think there was a belief in the markets at that time. We were not an outlier, is that securitisation markets were an ability to grow assets outside your natural home territories ... we didn't have a natural deposit base. Securitisation was seen to be a very appropriate and good model. I think we grew ... my personal belief Deputy and there would be a number... my personal belief is the single biggest mistake we made as a bank was to grow our UK mortgage business without a natural deposit base. To grow it in securitisations and there is a particular feature.

Sterling is a natural short currency, so it is not a currency that there is ... big volumes. So, as it transpired and as it became apparent, the sterling securitisation was really being financed by the dollar markets, in particular by US mutual funds. So, when you had the crisis developing, the US mutual funds started to pull back very quickly and the sterling securitisation markets locked down very quickly and we were badly exposed. So that reliance on securitisation, notwithstanding that a lot of people were doing it ... it seemed to be a new business model. It strayed too far away from traditional banking where you must finance your asset base by natural customer deposits, so it was a bad mistake.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

On page 8 of your opening statement you make reference to a meeting on the weekend of 6-7 September 2008, where, at the request of the Central Bank, a colleague and yourself attended a series of meetings in the Central Bank to discuss potential liquidity support from BOI and AIB for INBS. And you say, "I recall being shocked and shaken by the lack of information available to the executives of INBS and the Central Bank of Ireland on the liquidity position of INBS". "Shocked and shaken" - why Mr. Boucher?

Mr. Richie Boucher:

I would say that weekend was a weekend when, on a personal basis, I realised the extent of the issues in the system were very, very serious. I was ... I believe ... I can't remember exactly ... our chief executive got a phone call from the Central Bank asking if we could provide ... if we could have people available to the meeting ... to a series of meetings to discuss support for Irish Nation ... sorry ... a building society and the chief executive asked myself and ... obviously because I was at retail in Ireland and had experience ... and also a colleague of mine who was head of our wholesale division and would've had a good understanding of treasury markets, etc. Prior to the meeting, I asked my chief executive whether we were provided with any information to help us analyse the problem before we went to the meeting. I went to the meeting ... it was primarily ... the meetings primarily took place on the Sunday of the 7th.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Can you advise who was at the meeting? From memory?

Mr. Richie Boucher:

There were various officials from the Financial Regulator, including Mr. Neary, there was the company secretary and what was described as the group treasurer of the building society. The chief executive wasn't available.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And was a specific request made of Bank of Ireland at that meeting to provide support for INBS at that stage?

Mr. Richie Boucher:

I remember a series of meetings where we in particular asked what was the problem, you know, what was the roll-down, what was the cash flows, what was their market position - things that we would've in the back of our head with the bank. There were pieces of paper being flown ... thrown around the place. There was no coherent position ... of the problem we were being asked to solve at that moment or the extent of the problem going forward. I have to admit at some stage I said to my colleague, "We should leave this meeting". We said, "We can't carry on this discussion". So, I was extremely surprised and shocked to be honest about it. I'm not saying that we were perfect but the lack of understanding of the problem ... during the course of the afternoon it was more and more teased out as to, you know, what may or may not be the potential liquidity requirement. Eventually, we were asked to look at, from memory, I think a quantum of around about €4 billion and we fed back to the regulator that we weren't comfortable, that wasn't an accurate picture of what was needed, but even if it was, that we wouldn't be in a position to provide that - we were very uncomfortable taking on an exposure to that entity.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And these meeting were over two successive days?

Mr. Richie Boucher:

My memory, Deputy, is, they were ... primarily took place on the Sunday. There may have been a preliminary meeting but my memory is more on the Sunday which was the 7th.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And what conclusion did you draw from that meeting?

Mr. Richie Boucher:

That-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Was the gravity of the situation------

Mr. Richie Boucher:

-----the system-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

-----facing INBS becoming clear to you at that stage?

Mr. Richie Boucher:

-----the system was in much bigger trouble than I had envisaged. There was a lack of understanding or information of the liquidity position of individual businesses by the businesses themselves and the regulator. That was the clear ... and I remember being extremely shaken by that.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Was Anglo mentioned at that meeting?

Mr. Richie Boucher:

There was no discussion about ... there was no discussion ... albeit I did ask why they weren't at the meeting and why Irish Permanent weren't at the meeting, why was it was just us.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And was AIB present?

Mr. Richie Boucher:

Yes, AIB were present at virtually all the meetings that took place later.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

And then AIB and ourselves asked for time out to discuss various issues as to what we were being requested.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. And this was still three weeks or so away from the bank guarantee. Were you involved in any further discussions with the authorities concerning INBS in the intervening period?

Mr. Richie Boucher:

Personally I wasn't, no.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. Can I ask you, Mr. Boucher, about the issue of subordinated debt being included in the bank guarantee at the end of September, because you make reference to that issue in your opening statement again, towards the bottom of page 8, and you give the clear impression that you were opposed to the inclusion of subordinated debt. Can you elaborate on that and distinguish between dated and undated subordinated debt? You expressed surprise at the inclusion of certain subordinated debt in the guarantee.

Mr. Richie Boucher:

Yes, I mean again what I was trying to do is to give my impression of the matters that I was involved in to the committee-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

-----which I felt was the responsibility I had. So, we were in the ... you know, in this room we were getting calls. We first of all got a call that it was a blanket guarantee and then obviously there was questions to the chief executive - "What does a blanket guarantee mean?", "Were subsidiaries included?" etc., etc., - because each of us obviously was mentally thinking, "Okay, what's our communication tomorrow?" You know, "What's our action plan---

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

-----must we make?" I think about an hour, I can't remember exactly, but there was a third phone call where we were told subordinated debt was being included. I remember being a little bit surprised about that and talking to a couple of my other colleagues, who would have had quite a lot of strategic experience in the markets. We recognised, as a bank, certain of us and I think the bank as a whole was recognising that we would need to generate capital. I had been involved in parts of my career as a ... in specialist work-out teams and we saw that liability management can often generate capital. So, if we're owed ... if we owe a bondholder €100, the bond starts trading in the market at, say, €50-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

-----and we buy back that bond at €60. So, the person has bought the bond at €50, we offer €60, they make a profit and we have generated capital of the difference between what we ostensibly owed and now what we bought the bond back in, or swapped it for equity.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

So, it was a well-trusted mechanism of generating capital and you were dealing with, shall we say, consenting adults. You're dealing with bondholders on a voluntary basis. I was surprised that this decision had been taken to incorporate it and I did have a discussion with a couple of colleagues and I said, "I don't know if this actually suits us as a bank."

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

So, just to clarify, you were surprised that the guarantee included dated subordinated debt?

Mr. Richie Boucher:

I was surprised it went beyond senior debt, to be honest.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

But are you surprised then that your CEO, Mr. Goggin, lobbied to have dated subordinated debt included in the guarantee that night?

Mr. Richie Boucher:

I was surprised to hear his testimony that it was him. It wasn't discussed with the group. There was no strategic decision taken as to whether or not it was a good or a bad idea. In fairness though, Deputy, even in my testimony what I was trying to convey was that, you know, there was a lot of phone calls happening, there was a lot happening, people were in quite a stressed situation and Mr. Goggin has explained to you a distressed situation. There were technical calls. What my feeling is inside, it's not for me to say what happened to people who were on the pitch at the time - I was more in the dugout in that - but I was thinking more about implementation, rather than technical details.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

But, Mr. Boucher-----

Mr. Richie Boucher:

But I would ... Deputy, I would have been very conscious in my own mind of the hierarchy of debt.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes. But just to be clear, Mr. Goggin and Mr. Burrows were in Government Buildings. You were back at HQ with others and there was contact over the course of the evening by teleconference call. He was in Government Buildings, requesting that dated subordinated debt be included in the guarantee. You were in HQ and you were opposed to the inclusion of dated subordinated debt. Was this issue not teased out and discussed during the course of the evening?

Mr. Richie Boucher:

No, like I said, it was a surprise but, you know-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Was it a mistake, in hindsight? Could the bank have achieved greater burden sharing and improved its capital position further by imposing losses-----

Mr. Richie Boucher:

No, I-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

-----on subordinated bondholders?

Mr. Richie Boucher:

I think again I think that's an interesting question. I don't think, in the end-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Which could potentially have saved the taxpayers' money.

Mr. Richie Boucher:

I don't think it made a big difference for us in Bank of Ireland, Deputy. We generated, we've generated, as has been publicly disclosed, we've generated, from the subordinated debt that was in issue at September 2008-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

-----or were subsequently issued, we generated €5 billion of capital-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Sure, yes.

Mr. Richie Boucher:

-----from liability management exercises of which, from memory, €2 billion came from debt that had been included in the period up to September 2010 and about €2 billion came from the ... that that had been excluded. Whether or not we would have been able to move more quickly on the liability management of the debt that had been covered-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

-----prior to September 2010, remembering I think that about €750 million, so we could have dealt with that €750 million-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

-----more quickly, I don't know. It might have altered our strategy, but I would say that the maximum amount ... we reached the maximum amount of our capital we could raise from liability as about €5 billion. I can't comment on what would have happened to other institutions.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

But, just to clarify, there was no decision made at corporate level by Bank of Ireland, going into those crisis meetings, that the bank was in favour of including subordinated debt?

Mr. Richie Boucher:

There was no corporate decision taken to do that.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Just-----

Mr. Richie Boucher:

And I beg your pardon, just to ... there wasn't a discussion about that.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. Just to clarify, Mr. Goggin's rationale when he was asked about this was:

The reason that we suggested that junior dated should be included was that we were concerned about the crossover between junior dated [...] and senior bondholders, senior creditors. We were also concerned that that very same population, it was a crossover to the sovereign.

That was his logic.

Mr. Richie Boucher:

I think there was a ... there was a ... there was a ... this was a ... there is a logic to that. There's a logic to ... in business, and a lot of things in life, I'm not sure whether there's ever an absolute black-and-white answer.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

But was there greater logic, from the bank's point of view, not to have them included?

Mr. Richie Boucher:

That was my personal view, Deputy, but there would be colleagues could have had different views and, you know, like I said, it's very rare that there's a decision that is, you know, absolutely right or absolutely wrong.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

That was a personal view. It was based on my personal experience of work-outs.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Mr. Boucher, you're the most senior bank executive in Ireland to have survived the banking crisis. What makes you different from all the rest?

Mr. Richie Boucher:

I don't really know, Deputy. I mean, what I go through is the process as to why I'm in my job is I stood before the shareholders every year, the shareholders voted in 2009, '10, '11, '12, '13, '14 and '15, every year as to whether I stay in my job. I've been under very significant regulatory scrutiny. I'm one of the few people that has had a ... I had a six-month investigation of my role in the crisis and my doing my job, that was done by an independent third party on behalf of the regulator. The regulator wrote to me afterwards, as I've disclosed to the committee, thanking me for my sense of responsibility and my engagement with the Central Bank, notwithstanding that I was going through this third-party process.

I focus on my job, to do my job to the best of my ability. I've had a huge focus on repaying the taxpayers. We in Bank of Ireland should never have got our position where we needed taxpayer support. It was wrong and a huge driving factor by me has been a recognition I was a member of a management team that made mistakes, made bad judgments that cost people money and I've had a huge focus on trying to rectify that.

I believe that we have made a lot of progress in doing that. But I don't know whether it's my personality, or my experience, or whatever. What I've tried to describe is the process as to why I moved from my role to where I am today and the scrutiny I've been under. I've also had huge scrutiny from the investors and the private sector investors that I persuaded to believe in Ireland and to believe in the recovery of the bank, the capital we've raised on that and a very, very significant question from the investors who were putting up new cash was an understanding of my role in the mistakes we'd made and what I was going to do to fix them and how I'd make money in so doing.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you very much, Deputy McGrath. If I could maybe just return to one matter, Mr. Boucher, and that's to do with the NAMA discounts and in relation to loans acquired by the bank from ... when NAMA actually took over your loan book. The discount overall amounted to something like 43% to Bank of Ireland.

Mr. Richie Boucher:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Not the highest; some banks went up to 63%.

Could you offer possible explanations for such a high figure and why it was not reflective of the bank's provisioning policy up to the time of NAMA acquiring the loans? Quite simply, you had these loans valued at one figure and when NAMA got sight of them, it came out completely different.

Mr. Richie Boucher:

Well, first of all, I'm not an accountant, and in fact some members of the committee are accountants, but under the accounting rules you can have models for mortgage businesses and other businesses. You are not allowed to make loss estimates. It's an incurred model. So your provisioning is an incurred model.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

As to what you would do in that basis, so the provisioning is very different from what you might get on a mark-to-market basis.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

Balance sheets can't be mark-to-market, because they change the whole time. When you're selling assets you're obviously selling on a mark-to-market and you recognise that. So in our disclosures to the market, Chairman, we had a very significant responsibility, in particular because people were buying and selling the shares, that we were still a public company, but also we were raising capital, so we had to make our best estimate of what we thought the cost of NAMA would be. So we showed in our accounts on a provisioning policy and then we disclosed to the market. We had to get permission from our shareholders, where we said we thought, based on our understanding of the models, so I was chief executive at the time, I pulled in people from all parts of our group, in particular people who understood securitisations, like, you know, we had quite a lot of experience, unfortunately too much experience in doing too much securitisation, but we had kept those skills. So we were able to tell the shareholders, when they were voting for NAMA, when they were trading our shares, and when they decided to invest in the company, what we thought was the best estimate of the absolute loss the bank would face by participation in NAMA. We gave a range, we gave a range between €4.2 billion and €4.8 billion. We said it depended on the absolute quantum of the loans transferred. But we had a pretty good understanding of the mark-to-market model that NAMA was operating, and-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Do you think the NAMA valuations were inaccurate or an accurate reading of what the valuations were when they got sight of those?

Mr. Richie Boucher:

We have to understand the methodology that was used.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

I know that you've expressed the flaw with the methodology-----

Mr. Richie Boucher:

There was also a different thing in the mark-to-market as well, which is the discount factor. So the discount rate was a big issue. The bank took a ... the bank's shareholders had to take a decision as to whether or not to participate in NAMA. I don't think we would have had a real choice and we recommended to the shareholders they didn't have a real choice.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

You know, they had a vote to make, but we strongly recommended that we didn't feel we had an alternative choice.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

And was there any relationship between the valuation placed upon NAMA and the level of concentration that Bank of Ireland actually had in the sector?

Mr. Richie Boucher:

I think the valuations became a function of the concentration across the entire sector and the fact that the property market had crashed. So we had valuers who had given us a valuation of, you know, I remember looking at cases where they would have given us a valuation of a property 18 months previously at €75 million, and then they were valuing it for NAMA at €7.5 million or €10 million. So there was a huge concentration of property lending in the US, in the UK, in Ireland, and therefore that volume of property lending was a factor. I expressed an opinion at the time that NAMA would make money from the loans that Bank of Ireland transferred, and I said, "Good luck to them." And we did a deal, we knew what we were getting into, we gave our best estimate as possible to the shareholders of what implications it involved, and our best estimate, very early in the process, turned out to be accurate.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay. Besides you talk about maybe fundamental difficulties with the accountancy processes and so forth, as to how the valuation of it would be done, but in Mr. Daly's testimony to the inquiry a number of weeks ago from NAMA, Mr. Boucher, he put out, I can go through it in depth, but I can maybe just summarise it for you, where he was saying that the equity growth in the purchase of one development was being used as the security for another purchase and this was having a compound effect. Was that a practice that was reflective of how Bank of Ireland were engaging with the sector?

Mr. Richie Boucher:

We did. We didn't, like a lot of things, we didn't do it to the extent of other people, but we did. That was a mistake and that's a ... in our new approach that's not permitted.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

And at that time, was the bank looking at, if a particular developer was acquiring a substantial loan from Bank of Ireland, were you looking at other liabilities that they may have had with financial institutions or issues across securitisation or situations where maybe a personal guarantee was being used in a multiple of circumstances?

Mr. Richie Boucher:

We did, but I don't think we understood it to the extent we should have.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

How do you understand it now?

Mr. Richie Boucher:

Well, I think what we often looked at was that our particular deal was ring-fenced. So we looked at a particular transaction, we said, you know, okay, this is how it should work out, and in a downside this is what we would do. What we didn't take enough of a recognition of was the systemic issues. I feel that in the bank in the past, we lacked some peripheral vision of what was happening in the market. I think it can happen in a big bank in a small economy. One of my executives subsequently described it as that we spent a lot of time having meetings with our backs to the windows instead of looking out more. So I don't think we had a proper appreciation of correlation risk and the extent that, notwithstanding you go into a deal you think this is how it'll work out for us, if the rest of the building is on fire the room you're in could ... is going to catch fire as well.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Final question on that before I bring in Deputy O'Donnell. In the context of Bank of Ireland, do you believe that NAMA was required?

Mr. Richie Boucher:

In the context of, yes, I believed it was. We made an informed decision. And so I was the chief executive, with the chairman I recommended to our board we participated. I felt that, going back to the issue, and again it was partially influenced by my previous experience in work-outs, is basically unless all the keys are put in the middle of the table, you really find it very hard to work out your part of a deal. It all has to be brought together. It all has to be dealt with in a certain way. I thought ... I said at the time, when I was asked by shareholders and investors, I felt it was a good solution. It provided liquidity. It brought everything into the middle. It enabled people with expertise to look at the ... to forget about an individual bank's situation, how it would work out generally. So I felt that ... I recommended to our shareholders that NAMA ... we participate in NAMA. I said at the time that I thought NAMA could make money out of what it ... but, you know, we sell assets, we accept a price for it. If other people make money that's business. I'm happy. A good deal is a deal where both sides walk away happy.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you, Mr. Boucher. Deputy O'Donnell.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Thanks, Chairman. Welcome, Mr. Boucher. Mr. Boucher, in the bank's strategy between '04 and '09 you were looking at an earnings per share growth of 15% per annum. And was that very ambitious in the market that you were operating in?

Mr. Richie Boucher:

I think we felt we could get enhanced growth by diversification. We recognised we had large market positions in Ireland. The Irish economy was still growing at 5% to 6%. Certain of our businesses, like our life business and our fund management business, were particularly benefitting from good markets. And then we felt we could diversify in corporate division by getting into different asset classes. As it transpired, that was a right decision for the quality of the assets but we couldn't fund them or provide the capital subsequently. And we felt we could grow our UK business at a quicker pace. That earnings per share growth was kind of middle of the pack, upper quartile as to what we saw other banks were forecasting. It was overly ambitious in terms of the strain it put on our capital and liquidity and our infrastructure.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I go back? You took over as CEO of retail banking in Ireland on 1 January 2006, is that correct, Mr. Boucher?

Mr. Richie Boucher:

In January. I can't remember the exact date.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And within that position, you would have been in charge of property and construction loans within the bank. Would I be correct that loan-----

Mr. Richie Boucher:

No, Deputy.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

What area would you have been in charge of?

Mr. Richie Boucher:

Property and construction lending done within business banking Ireland. We had three divisions, three ... we had a fourth division, which is the fund management business, but three businesses involved in lending: our UK division, our corporate division, and our retail Ireland division. But property and construction lending below certain customer limits, between €10 million and €15 million, was a component of our business bank.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

And also, sorry, Deputy, I should just, for the sake of clarity, there was some lending done to customers in our private banking unit, which was a------

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Well, in terms of your interaction with the property and construction loans within your role as CEO of retail banking, what areas of loans would you have had direct involvement with and control of?

Mr. Richie Boucher:

I would have ... if there was a loan above a discretion of a ... so the process was that we had relationship managers and business leaders in the different businesses -----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

If a loan was above a certain limit -----

Mr. Richie Boucher:

It would come recommended to me or to a credit committee.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

So if it was recommended, I could approve or decline. If it wasn't ... well, sorry it was unlikely to come to me if it was not recommended. On certain occasions for several loans, the underwriter would come and chat to me and say, ''Listen, you know this is a finely balanced decision?"

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

So above what limit would it have come to you?

Mr. Richie Boucher:

It depended on the credit grade as well.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

On average.

Mr. Richie Boucher:

Above €15 million to €20 million so there would have been ... I can't remember that exact number where I directly approved ... but for the sake of clarity on property lending, as a member of the group credit committee, I would have been a member of a credit committee where business banking and corporate loans would have come in.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

When you took ... you came in ... in the year ... if you look at the property loan book of Bank of Ireland between '05 and we will say '09 ... between ... in the year 2006 when you took over, property and construction lending jumped by 28%. The loan book increased by 28%. Your previous in '05 went up by 13%. Why did it jump to such an extent in 2006? There was an increase of roughly about €5 billion in that year in property and construction loans.

Mr. Richie Boucher:

In the group or in the business banking?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

It would be Bank of Ireland overall.

Mr. Richie Boucher:

In the group.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

Yes. I think there was the three divisions. There was a combination of three divisions. I think there was probably a higher component being done in our business bank ... in our, sorry, our UK division, as subsequently transpired by the breakdown. So we gave in our disclosure to the committee and including one of the core documents that you have provided to me it, shows the breakdown between our UK division, our corporate division and our Irish division. I can't recall exactly -----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I just ... in the limited time that I have, Project Atlas provides a very, very stark statistic that when it was ... they looked at the loan book in '08, Bank of Ireland had €5.4 billion of ... related to land bank ... land bank loans alone. And of that €5.4 billion, €3.2 billion, which is 60% of that loan book had no planning ... of that land. So you had €3.2 billion out for land that had no planning. How did that happen?

Mr. Richie Boucher:

From memory 90% of it, of the land of which just if I can recall ... the information that is provided and that you are referring to ... roughly 50%, maybe 55% to 60% of the land ... and land would also include where there are works or infrastructure put in ... roughly 50% of that ... sorry, 55% to 60% was in Ireland and 40% roughly outside Ireland. From memory 90% of the land either was zoned or had planning permission. There was about 10% unzoned.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

In terms of value, right ... what we were told it was €5.4 million there was €13.1 billion relating to land and development ... €5.4 billion to land bank. The land bank can be analysed as follows: €0.4 billion, unzoned lands, €2.8 billion, zoned lands with no planning permission ... so that's taken from Project Altas. The question I suppose I am asking very quickly is: how could you give out €3.2 billion of money ... in at the end ... it was in place at the end of '08, without planning?

Mr. Richie Boucher:

Because it was zoned. The lending -----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

It was zoned but no planning.

Mr. Richie Boucher:

But like, people were buying land which was zoned and then they were looking for planning permission for the particular transaction.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

So you were willing to give out money without the land ... because you could have looked for it to be subject to planning permission being granted. Why would you give money without planning permission being granted on land when you could have made it a condition of the providing the loan that it had to be subject to planning?

Mr. Richie Boucher:

Well, the position of the finance and the development would have been subject to planning. Like I have -----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

But clearly that's not the case here.

Mr. Richie Boucher:

Yes, Deputy, absolutely. That was a mistake.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

That was a mistake.

Mr. Richie Boucher:

And we do not do that now. So we do not finance landbank now.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I move on? In terms of the model ... the remuneration scheme that was in place. In 2007-2008 the bonus scheme that was in place for the top executives, 75% of the bonus related to earnings per share. And, Mr. Boucher, in the year in which you took over as ... you became a director ... for 31 March 2007 accounts, you made a bonus of two and a half times your basic salary, which was ... your basic salary was €242,000 and your bonus was €615,000. The following year in '08 you had a basic of €550,000 and you made a bonus of more or less the same amount. So the quick question I have to ask of you ... and thereafter your salary when you became the CEO overall at the ... in 2009, your salary jumped from €580,000 per annum to €690,000 per annum, an increase of 20%, €110,000. The questions I have was, the model that was put in place for bonuses, did it lead to irresponsible lending? Did lending, property lending become a quick fix for earnings per share growth in the bank? And how do you justify taking that level of salary in 2009 of €690,000 when the Irish taxpayer was putting €3.5 billion into your bank at that same time? So if you could deal with those points, Mr. Boucher ... how can you justify that level of salary?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

You have used a good bit of time now as well, Deputy.

Mr. Richie Boucher:

My salary was approved by the Minister for Finance at the time and was voted on by the shareholders who were paying for it and that continues to be the case. Every year I stand before the shareholders to be elected as to whether I stay in my job or not and the shareholders decide what I'm paid. I don't have anything further to say on that. Going back to the remuneration model ... yes, I mean like, there were bonuses paid. I don't think the percentages you have are right because I think you may be referring to the fact that my salary was disclosed for the period I was director where was the bonus. So it would have been somewhere between 150%, I think, if we do it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Still a significant amount of money, Mr. Boucher.

Mr. Richie Boucher:

Absolutely. My bonus in 2008, from the 2007 period, I bought Bank of Ireland shares. So maybe there was some poetic justice in that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Final question, Deputy.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The question is ... the model that was put in place in terms of the bonus scheme you had ... was property lending a quick fix for earnings per share growth in the bank?

Mr. Richie Boucher:

The earnings per share growth ... I don't think the property lending was a component, but what I would say, Deputy, is that there was not sufficient cognisance of risk in remuneration. We don't have bonus schemes in place. If and when they do arise in the future, then there will be significant processes for clawbacks, for deferrals, etc. because we have to recognise that loans we put on today, we won't know for three to four years as to whether or not it was the right decision, strategic decisions we take. So I wouldn't categorise, Deputy, that it was the property lending. The earnings per share was a focus, as Mr. Goggin has disclosed, in 2005 and 2006, it was primarily related to a cost programme. It was more related ... 75% to a earnings per share growth. In 2007 -----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

A very quick question Mr. Boucher -----

Mr. Richie Boucher:

But that was wrong.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, Deputy, sorry, you are way over time. I just want to finish off on the remuneration issue, Mr. Boucher. At the time do you believe the remuneration packages were actually merited and do you believe that there are ... you've outlined some reforms on remuneration in your comments. Do you have further comments on how you believe remuneration should be dealt with going in the future?

Mr. Richie Boucher:

We would be a strong subscriber to the fact that there should be greater risk measures. At the moment, while we don't have bonuses and we may or may not have them at some stage in the future, I would say that for our performance appraisals, so for everyone in the group, we have typically four quadrants they have to perform in as to ... for their performance rating, done on a six month or annual basis. There is a risk component and our chief risk officer must appear before the remuneration committee and must attest as to whether, in his view, the performance appraisals and the models and processes used for the year in question have a sufficient weighting towards risk.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

So final question on that. Under the new remuneration model, the banking operation through the crisis period using the new model, would the bonuses and remuneration packages for that time now be clawed back?

Mr. Richie Boucher:

I don't think so under the way that it was constructed at the time. I think -----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

It would be a new model now, you can't play them retrospectively but given the circumstances of the past, using the new model, could you claw some of them back -----

Mr. Richie Boucher:

The 2008, I think would have been clawed back.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

I think what we will have is ... if we were to have it in the future, you would have deferrals, automatic deferrals, and then you have claw-back.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you. What I now propose is that we suspend until 11.20 a.m. It is just coming up to 11 o'clock. The witness is reminded that once he begins giving evidence, he should not confer with any person other than his legal team in relation to their evidence on matters are being discussed before the committee. With that in mind, I now propose that we suspend the meeting until 11.20 a.m. and remind the witness that he is still under oath until we resume. Is that agreed? Agreed.

Sitting suspended at 11.01 a.m. and resumed at 11.27 a.m.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

I propose that we go back into public session and continue with our engagement with Mr. Boucher this morning. And in doing so I'd invite Deputy John Paul Phelan. Deputy, you have ten minutes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Thank you, Chair. Good morning, Mr. Boucher.

I want to at the start refer to exceptions to lending policy. There is a section in core document B2, pages 51 to 60 that deals specifically with it. Could you outline for the committee the level of agreement to exceptions to credit policy between the years 2004 and 2008 and perhaps explain why part of the solution at the time appears to have been there was a change in policy? And do you feel that those exceptions were sufficiently challenged at the time before they were agreed to?

Mr. Richie Boucher:

Well, I think they were sufficiently challenged at the time, but the challenge ... or some of the decisions were incorrect. It's absolutely clear that some of the lending we did turned out to not to work out well for the customers or for ourselves. The process of exceptions, as I think has been explained in the document and the volume, is often if there was a minor exception across a multiple transaction, the whole exposure to that customer would be included in an exception. What we... so I would go with the thesis that whether or not the lending was done on an exception or whether it was done within policy, some of the lending was mistaken. What we do now is that... we do still have exceptions. We give greater clarity to our board as to why exceptions will be taking place and part of it is that some of policies are quite tight deliberately. Because under an exception process you can, you can't have... say, for some corporate type transactions in particular, it's very hard to have a model that reflects the complexity of corporate transaction and if a policy exception is triggered, then it goes to a different level of decision-making, so it gets a higher level of scrutiny.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Previous speakers have referred to transfers from Bank of Ireland to NAMA. I've done a bit of investigation since that question was asked and it turns out that 73% of connections transferred across from Bank of Ireland to NAMA were subject to some sort of exception at the time, there was 191 connections, 139 exceptions, €8.8 billion worth of €9.8 billion transferred across were subject to some sort of exception. Can you explain for the committee maybe the relationship, the strong relationship that appears to exist between the transfers to NAMA and the fact that those loans were subject to exceptions?

Mr. Richie Boucher:

Well I think if we just go back to the NAMA requirement was that an entire asset class which was land and development and then connected invested property loans moved across to NAMA above a limit as the Deputy would be aware. So we didn't have a choice in a factor and it wasn't cherry picking, the entire volume moved up so I don't think there was a correlation between exceptions and NAMA transfers. What I think my ... in an answer to a request for an inquiry from the committee to explain the exceptions, and like I've touched on earlier, Deputy, you could have had €100 million of an exposure there could have been one part maybe a €3 million loan that was an exception, but the entire thing was counted as an exception, the entire €100 million. Like I said at the same time though, Deputy, they were decisions, whether they were made within policy or within exceptions which turned out not to work out.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I turn now to core document B2, page 3 it's a document that's entitled Annual Review of Credit .. or Annual Review of Mortgage Lending Group Credit Perspective. It was produced in December 2004, around the time I think your position changed and you became a member of a credit committee of the bank. There's a quote under the graphs which says, "Mortgage lending has increased from €21.4 bn in 1999 to €38.6 bn in 2004 [a virtual doubling], €19 bn of which has been written in the last 18 months." Can I ask how can you justify now or was there justification at the time for such a massive increase in concentration in lending in that particular sector?

Mr. Richie Boucher:

Well I think, as the Deputy will be aware, I was in corporate banking at the time but if I go back I think it should also be noted that a significant growth in the mortgage lending was done in the UK so when we came to the end of September 2008, the mortgage lending was roughly somewhere between €30 billion in Ireland, €30 billion in the UK. There'd been significant growth in The UK. The UK book turned out to be of better quality then the industry average but the mistake in the UK was that it had been grown through an inappropriate securitisation model.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I ask you, for the benefit of those who are operating the screens the following page, page 4, there's a reference that I want to refer to. Mr. Goggin when he was here ... by the way besides, I think it was Deputy McGrath asked you the question about the extent of the guarantee ... did you see the testimony Mr. Goggin gave to the committee and was there any other matters you disagreed with than on extent of what items were covered under or should be covered under the guarantee?

Mr. Richie Boucher:

I don't disagree with Mr. Goggin's testimony. Mr. Goggin, I think, gave his best recollections of what happened

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
Link to this: Individually | In context | Oireachtas source

You just said you had a difference -----

Mr. Richie Boucher:

There was a ... there was a ... when I heard I didn't necessarily think it was a good idea. And just to be clear, Deputy, that was in the context, I was asked to give a written statement in connection with the decisioning around the guarantee. I wasn't criticising Mr. Goggin I was just pointing out my recollections of issues at that time.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Mr. Goggin was asked in his testimony was there a contrarian view within the bank and he ... with regard to the policies that were going on, lending policies and he said that there wasn't. I want to refer to the first paragraph on page 4 of B2, it's a document that was produced by a man named Ronan M. Murphy, and at the bottom of the first paragraph there's a quote saying, "Going forward, the risk for the Bank is that we may be building up a higher risk portfolio the full extent of which will not emerge for 3-5 years as these loans mature." Now that's the end of 2004 that document was produced, a very prophetic document as things turned out. Do you agree I suppose with the analysis that he produced? Did you express any opinions on it at the time in your capacity as a member of the credit committee of the bank? Was there any actions taken following that fairly stark warning from Mr. Murphy in December 2004?

Mr. Richie Boucher:

Just to confirm again, Deputy, I was a member of the GRPC so ... that wasn't a thing ... however in commentary in general terms, I note having read the document that in the end there was a recommendation of continuation, so you, you've quoted one component the entire document was produced by Mr. Murphy. He tried to give a balanced view and he tried to give a recommendation at the end that's his job and that's all of our jobs. But in hindsight, the level of mortgage lending we did was too much. So whether or not I was involved in the original decision making there were times when I could have said, "We need to slow down", and I didn't say that. But I did do and as has been shown in the documents that has been provided in the core documents, is in mortgage lending in the Republic of Ireland in one of the documents you provided shows the level of exception reduced and the volume of lending reduced in 2007 and 2008 when we did take the decision to stand back from certain market sectors but we didn't stand back enough and we didn't do it quickly enough.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I want to, in my brief time that's left, reference mostly core document B4, pages 21 and 23. There's a continuous theme throughout a lot of the documents provided by Bank of Ireland that there was inadequate credit skills in the bank at precisely the time that credit was expanding rapidly. There's a quote on page 23 that I want to reference, near the bottom of that page, "A review of the Legal Services Unit identified a backlog of files, some with serious issues, which could expose the Bank to significant risk."

And again on page 23 it says that senior business managers and business managers the level of unsatisfactory reports had doubled, and further on, on the bottom of page 21, "A number of control issues were also identified within the Tele Media team within Corporate Banking." Can you remember what the serious legal issues were? Were they dealt with? There's also a reference to disciplinary issues having to be taken. Can you remember those being discussed at the time? The reference I think is in the middle of that page 21.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you Deputy.

Mr. Richie Boucher:

Deputy ... I have read the documents, my recollection is that the documents .. well they are from early 2006. I'd come into the position of chief executive retail there was certain issues about the volume of work to have done in legal services division which is an internal division in the bank and in particular, not more related to kind of business type loans. I think the documentation also says that I said at the second meeting that I wanted a much higher proportion of that legal work to be done externally because I felt it could be done to a higher standard and where people could be held more accountable because you were paying them to do that. That was done and that is reflected in the fact that, going back to one of the Chairman's and some of earlier questions about NAMA transfers. The level of discounts that we had for documentation were minimal. I think also in a question of ... the managers not tolerating excesses on accounts and that I think also in one of the disclosed documents provided in the core document, I think it's B4 page 25, its noted from 2008 there had been a significant improvement and that I had taken responsibility as chief executive in retail and I brought in skills from other banks which brought in a higher disciplinary process in terms of managers adhering to exceptions, training, etc. So we did make quite a lot of progress but we should have made more.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
Link to this: Individually | In context | Oireachtas source

What were the disciplinary issues, specifically there were referred to on page 21 -----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Last question, Deputy.

Mr. Richie Boucher:

There could have been a range of disciplinaries I don't think it was egregious issues but people not adhering to policies and standards, so that might have been to have money ... not have the documentation fully completed before recommending the loan is drawn down. Not adhering to policies and standards in that place, and we brought in a process to ensure that, that was better done. I brought in people to assist in that process.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you, Deputy Phelan. Senator Sean Barrett. Senator, ten minutes.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Thank you, Chairman, and welcome to Mr. Boucher. When you were answering my colleague, Deputy Phelan, on the exceptions for owner-occupier mortgages, 24,000 of them ... on page 55 of B2 ... you said that there were within the bank ... contesting and debate on these issues. But the then governor for most of that period, Mr. Crowley, said, "In particular, I do not recall any issues of imprudent lending being brought to a board by the executives of the bank, the internal auditors or the external auditors." Was it a very compliant kind of culture?

Mr. Richie Boucher:

I think we believed it was. That is a belief statement rather than a factual statement. We believed it was but if I look at what we do now and what we did then, as I gave in my answer to Deputy Phelan, there is a much higher level of embedded reporting on exceptions, reporting on the reasons for exceptions, gathering those together across the group. So it is a much more embedded, much more forensic process now than it was then.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Are there other major changes that you've introduced to change the bank from the one you inherited, because the committee has to come up with recommendations for the future conduct of banking in Ireland?

Mr. Richie Boucher:

I think, you know, I've had advice from people. I've had recommendations and I've ... my job is to make decisions and to implement the decisions or recommend them. The business model, I think, is the biggest change we've made. The business model and that we must fund ourselves ... must fund ourselves in the markets. It must only be in areas where we have a perceived market advantage. The level of capital, the level of liquidity that we have, very significant changes in the reporting and management information on risk ... on concentration and risk. I think I provided to you a contrast. And this is, you know, I was a member of the team so I must obviously must take responsibility for that, as well as what happened subsequently. The contrast, in particular, between the kind of strategic papers we would've produced and the focus in those strategic papers, which was earnings per share, etc., which would have been an eight or nine-page document, in particular the stress test document provided to Mr. Baron, deputy governor of the Central Bank in 2006, and the document we now provide, which is 175 pages, has a huge focus on stress testing, on liquidity testing, on capital under different scenarios and testing ourselves in different scenarios. So that's that. I think it's not confined to Bank of Ireland. I think those processes and policies, procedures, etc., are taking place in banks across the world. But, you know, we've put a much bigger focus ... but I think the biggest focus is on ... business model.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

And you mentioned the €6 billion that you've repaid. What's the loss of shareholder value from peak to trough for holders of Bank of Ireland shares?

Mr. Richie Boucher:

I think it's always hard to do that. As I said you've to look at ... the share price absolutely peaked at €19 but how many people bought their shares or sold their shares at that? There's been a massive loss in shareholder value. I can't say what it was or wasn't. Our market capitalisation peaked at around about €13 billion. It is around about €11.5 billion now but obviously we've generated new capital. One of the things that I would note is a lot of the ... some of the capital we generated and raised was to do with losses but also there's a significant increase in capital ratios. So capital ratios have moved from about 7% to 14%. So some of that capital is about strengthening rather than filling holes.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

How much did shareholders lose?

Mr. Richie Boucher:

It's an impossible question for me to answer, Senator, because I don't know what ... the position of individual shareholders. Shareholders made money and shareholders have lost. Some shareholders bought their shares at ten cents, some of them bought them at €19, some of them bought at €2, some of them sold at €3. It's an impossible question to ask.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

But wouldn't people who have your shares as pensions or, indeed, pension funds have an idea of what this has cost the wider society?

Mr. Richie Boucher:

I think one would have to ask an individual shareholder what price they bought the shares at and whether or not they hold them or lost them. Also, I think one of the questions in particular ... we've had two rights issues. So one of the things that we've focused on is the dilution impact in raising capital. We always gave an opportunity ... and shareholders can follow their money and if they follow their money they can ... if the capitalisation of the bank increases ... if they decide not to follow their money, they lose capital. I think, to go to your question, I would be very cognisant of the fact that institutions have a greater ability to follow their money in rights issues than individuals do. And that ... so I would say that the individual shareholder ... personal shareholder didn't have the ability or financial resources to follow the progress the bank has made and to participate in rights issues under which they've made money. So a shareholder that would've bought ... would've held shares ... would've bought shares maybe in 2007, if they had followed their rights, I'd say they'd probably break even at the moment. Shareholders who bought their shares in 2008 have made a lot of money. Shareholders who bought in 2011, including the State, have tripled their money. But I'd also ... you don't actually make your money until you cash out. You know, your share price, your bond price can go up, down. Ultimately, it's when you buy and when you sell.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

You mention ... in our papers ... B2, at pages 18 and 19, that the 100% mortgage was introduced in July 2005. And it's recorded that by November there was no formal response from the regulator. Now, we've heard from Mr. Goggin that there was misgivings within the bank and that he recommended 90% in discussions with the regulator. Did the regulator ever express an opinion after July 2005 when 100% mortgages were introduced?

Mr. Richie Boucher:

I'm not conscious that they did, but I also ... you know, I didn't have .... I had surprisingly little interaction with the regulator despite my roles over four years in the jobs I was in, which is very different now. As recently as last week, I'd a three-hour meeting with the regulators. But I would say that ... I'm conscious that colleagues did seek engagement with the regulator saying that this is a dangerous market practice. But like I've also said, if we absolutely, absolutely felt it was so bad, we could have decided not to.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Yes. Would you have expected him to come back at least by November when this practice started in July?

Mr. Richie Boucher:

They would be back to us today in a nanosecond. I don't think that timescale was evident in that period.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Residential investment property ... that's also ... it's 63, 67, in book B2. The residential investment property, RIP [I think there's irony in that] doubled within Bank of Ireland over 15 months from 2003 to September 2004. Was the risk associated with that appreciated?

Mr. Richie Boucher:

Again, like I've said ... like I wasn't ... that was outside of the roles I was in at that time but clearly, as hindsight has shown, it wasn't. I think there was a desire - and that was reflected in subsequent minutes - to, in particular, recognise there were risks ... or what we would have described as amateur investors. There was controls put on lending to people who had certain income levels, etc. And ... so there was a desire to limit the exposure to certain income brackets. That was a ... it was an enlightened self-interest rather than a social good issue, to be honest because we felt that the ... people mightn't have the ability to support the property if the rental didn't transpire.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Because, by 22 November 2004, the risk policy committee minutes says, "the book is relatively unseasoned and untested" ... "50% of [that] book is less than 12 months old". So that was a speculative era in property to a dangerous degree, I suppose, compared to what the bank had to correct later on.

Mr. Richie Boucher:

It was ... it's an absolutely true statement that the lending hadn't been seasoned, that there hadn't been sufficient experience of what would happen in a downturn. The models were tested for interest rates. So when we did a lending, we did a test for an interest rate assumption for ... income assumption. The buy-to-let book, which is what we now call it ... I think, as I've disclosed, is performing slightly better. But, in fact, I think the decision to move to more professional landlords who were connected, in particular, with the construction industry was the biggest exposure we had in that buy-to-let book and I've said that to the market.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Thank you very much, Mr. Boucher. Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Deputy Pearse Doherty. Ten minutes, Deputy.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Go raibh maith agat, a Chathaoirligh, agus fáilte roimh an t-Uasal Boucher chuig an coiste. Mr. Boucher, your institution showed an increased reliance on wholesale funding from 2005 on, to finance growth in the loan portfolio, and I'm referencing here core documents, BOI - B3, page 15, which shows that wholesale funding in March 2004 was 30% of the balance sheet and was forecasted to increase two years later to 44%. Given those quite dramatic increases over a short period of time, were you aware of the issues at that time and did you regard this as a fundamental risk to the bank?

Mr. Richie Boucher:

I don't think we recognised it as the risk it was, Deputy. I think we believed that what other banks were doing, what the markets were doing, what advisers were doing, that securitisation was safe. It was a good way to do it. There's not a problem with securitisation, there's an over-reliance. I've given in earlier testimony, if I look back, I think that was the biggest single mistake and I think there was a fundamental flow in the sterling securitisation markets of sterling being a natural short currency and it had actually been financed in reality, in dollar markets. A number of other banks that had financed UK mortgages found out a similar issue. So I would say the biggest ... we made a lot of mistakes, Deputy, but our biggest mistake was a liquidity mistake. As it transpired, when the authorities were able to provide liquidity against collateral, our ability to ride through the liquidity crisis was better because we had that collateral, but the business model was flawed.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

It was a flawed business model to lend money when you're not gathering customer deposits on the other side.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Okay. Mr. Boucher, I'd like to refer to book of evidence, BOI, Vol. 2, page 17, and the reference is BOI02042001. This is an extract from the minutes of the court of directors meeting on 21 October 2008 and it deals with a meeting between the Bank of Ireland executives and the Financial Regulator, at which the issue of recapitalisation was raised. The minutes say "Messrs. Goggin, O'Donovan and Donovan took the opportunity to outline the case for early recapitalisation by Government as set out in ... paper which has been circulated to the Court and the desirability of early consolidation." Can I ask you, Mr. Boucher, does the paper on recapitalisation by Government exist?

Mr. Richie Boucher:

I think we would've disclosed that ... if it did ... like I said, Deputy, I, for very obvious reasons, I haven't been involved in the disclosure process in our own bank, but there has been a high level of governance. If there was a paper, it would've been presented to the committee.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Why did Bank of Ireland make a case for recapitalisations, what I understand is three days before you signed up to the Government guarantee on 24 October?

Mr. Richie Boucher:

I think we recognised what we would ... recognise at that time, in the United States, in Belgium, in Holland, in France, and in particular in the UK which is the most contiguous market to us and where the capital markets look most closely, there had been a significant change in the market's perception of the level of capital needed in the bank. That, you know, banks just needed more capital, whether there was an absolute ratio but there was an absolute recognition you need more capital.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

And when did you come to this conclusion?

Mr. Richie Boucher:

I think over a period of probably from ... I would say from the summer, Deputy, there was an increasing recognition within the bank, that we were ... whereas we were adequately capitalised, we weren't sufficiently capitalised for a storm that could come and-or to pursue the business model.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

But when did you come to the conclusion that you needed Government recapitalisation?

Mr. Richie Boucher:

I think that there, what was a ... our desire was to explore what was happening elsewhere. Naturally, the markets at that time ... so what we were looking at, do we have a private sector solution? And what the markets were looking in particular, was Government intervention and Government-related solutions, so what my colleagues were trying to explore is, what was the approach, we were trying to get some feedback from the regulators because we were hearing from our investment bankers and our contacts that in the Bank of England, for example, was giving very, very clear guidance to the banks it regulated as to what capital levels it expected. There was no point in us starting a capital-raising exercise unless we were at a level of degree and be able to tell investors, "This is what we think the ratios are going to be required, this is a buffer and this is ... the Government is or isn't going to be involved."

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Okay. The minutes also record, and this is on page 18 of the same book that:

The Governor then reported that he had called his counterpart in AIB for a general discussion on the market and learned that AIB [did] not propose to approach the Government for capital but would be receptive to preference capital if available. However, DG expressed a distinct lack of enthusiasm for the idea that the Government might recapitalise all banks because, like the [Government] guarantee ..., it would sustain some which do not deserve to survive in his view.

For the record, was Bank of Ireland at the time arguing for the recapitalisation of all banks that were guaranteed?

Mr. Richie Boucher:

No, I don't ... I have no recollection of that, I mean, we were probably selfishly focused on ourself, but that was our job. It's a matter of public comment, public note and statements made. Bank of Ireland took a different view of their requirement to recapitalise than our biggest competitor. I have no recollection and I would be surprised if Bank of Ireland was advocating-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

For all-----

Mr. Richie Boucher:

-----either directly or indirectly for other banks to be capitalised.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Okay. Did Bank of Ireland share the view of AIB that, and DG which I assume is Dermot Gleeson, that not all banks deserve to survive?

Mr. Richie Boucher:

I don't think we had a ... I have no recollection of us having as direct a view on that. I think we felt it was inevitable that some wouldn't and there needed to be plans for those. But we weren't as focused on ... I've read Mr. Gleeson's testimony. His testimony said on 28 September, they had information that we didn't have, that two banks were going to be dealt with and four banks were going to be guaranteed. We didn't have that information. I don't recall us being as, I don't want to use the word pejoratively, as fixated on what ... we just ... you know, as to whether or not two other banks should survive, as AIB have testified. But at the same time, I would also be ... I don't have a personal recollection of AIB as being vehement, as has been reflected in the commentary to the committee.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Okay. Maybe just ... on the night of the guarantee, did you believe that Anglo or Nationwide were solvent or insolvent?

Mr. Richie Boucher:

I didn't ... I felt that it was a matter of record, Deputy, that I felt that Irish Nationwide had much bigger problems than the market and people realised. I got ... as I said, I was very shocked. I had been involved in an exercise back in 2006, late, I can't remember the exact date, where at that time, options were being considered for Irish Nationwide. One of the investment banks had approached us and said, "Would we be interested in looking at it?" Mr. Goggin asked me to, because obviously I was chief executive of retail. I had probably an afternoon of meetings by myself with the then chief executive of Irish Nationwide and his company secretary to discuss their business model to get an outline of the type of lending they did, in particular to understand the franchise value in their mortgage markets with small business lending markets. I got an understanding of what I felt the business model was. I went back to the chief executive and said I didn't feel that there was an opportunity for us and I didn't recommend we pursue it. I recognised as we were coming back up to the night that weekend, I recognised the liquidity problems were not as big. There was a discussion between ourselves and AIB, there was some commentary from the regulator that they felt, well, the haircut on Irish Nationwide's books would be, I don't know, a mid-teens per cent. Whether I had a justification to say it, but I do recollect I said, "Well, whatever they say, it's two or three times that."

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

So the AIB minutes that we've discussed with AIB reflect the meeting that you had, suggested that Bank of Ireland believed that the write-down would be 30% to 50%?

Mr. Richie Boucher:

Yes, but ... look, it was a ... there was no kind of, mathematical ... I said, "Whatever that is, it is going to be two or three times that."

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

And that was informed to the regulator at that time, three weeks before the guarantee?

Mr. Richie Boucher:

Whether or not that was directly said, we ... I just said, I mean, my ... I felt we couldn't support it. I didn't want to get in a position where we were having a discussion. I felt we ... to be honest, I felt we should get out of the building. I said, "We can't support these people. You don't have enough information to enable us." I didn't want us to get sucked into a discussion-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Okay. My final-----

Mr. Richie Boucher:

And that's being very honest.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Okay, I appreciate that. My final question, Mr. Boucher, in relation to Bank of Ireland and your entry to NAMA, the board considered a paper in relation to a proposed application for Bank of Ireland to become a participant institution of NAMA. In that paper I've seen, my apologies it is not in the book of evidence, but if you can recall it, it will be helpful.

Mr. Richie Boucher:

Yes, I can.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

It mentions that if the bank is unable to participate in NAMA the bank may ultimately face nationalisation. How ... was this, was this a major concern, a minor concern for the bank that if you didn't go into NAMA that you could be nationalised? And maybe if you could tell us about that-----

Mr. Richie Boucher:

Well, I mean I'm, I'm not sure, like it was a potential consequence were a concern. I recommended to the board ... that was my responsibility, you know, so once you become chief executive you take accountability and responsibility for everything you must recommend. Like I had tried to identify in an earlier question, I had had experience of work-outs. I said we are not going to be able to work out our property ourselves, we'll have a view on this. We're not going to be able to do it. I said we have to raise capital. The markets won't believe what our marks are on the property. We need to get these assets off our books. We might have a view that it'll work out okay - we might believe it, the markets won't. And if we don't raise capital, the only source of capital ... if we don't raise capital from the private markets, then the only other source of capital is from the Government. I think I used the phrases to the board "We're going to have to suck this up, we're going to have to participate in NAMA, we're going to have to persuade the shareholders it's a good idea because I don't think we can work it out if the whole system is in NAMA and we're not, the market won't believe that we'll be able to work it out." We could have believed it, and we could have been right, but I don't think it would have happened, and that's why I recommended to the shareholders ... I recommended to the board to recommend to the shareholders we had to participate in NAMA, because if we didn't, my view is the markets would just not have participated in the recapitalisation we had in 2010.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

So NAMA, in your view, and correct me if I'm wrong, saved you from being nationalised?

Mr. Richie Boucher:

I think NAMA was a process to enable us to deal with an issue and to raise private sector capital. I think the nationalisation was a consequence. I might have used it for dramatic effect with the board to say like you know, I doubt we have a choice. I said I don't think we can raise the ... if I was a market participant - because I was looking at it from the people I'd have to go and try to sell the bank to in terms of raising capital. I said if I'm spending nine tenths of the meeting explaining a property and construction book, and not talking about what the other aspects of the business, I said I'm losing; I'm losing before we start the discussion with these investors.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you. May I just clear up one matter as well, just the ... in regard to Bank of Ireland on the entry into the guarantee, just to clarify Mr. Boucher, do you believe that Bank of Ireland was solvent at that time, or not?

Mr. Richie Boucher:

Yes. I had a view that the bank was solvent and it subsequently transpired we were.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay. Thank you.

Mr. Richie Boucher:

But, sorry, Chairman, I forgot to say, on the night of the guarantee we believed that we could see ourselves through the liquidity issues. I can't do a counter-factual-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

-----as to what would have happened six weeks if the TARP hadn't happened, other things. We could have run out of money. It would have taken us much longer than other banks, but we could have run out of money. So the guarantee ... we made a decision to go into guarantee. I was a member of the committee that recommended we had made a decision. I didn't think we had a choice, and I think we would have been isolated.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

When you say you don't think you had choice, do you-----

Mr. Richie Boucher:

Like if the rest of the system had been guaranteed and we hadn't.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

Again, we would been spending our whole time explaining. You know, if you were talking to investors and you're explaining rather than pitching - you're losing. I think we could have guaranteed, and I think that is evidenced by an area of my personal responsibility, when inadvertently due to the scrambling on the night, a subsidiary of ours, a licensed subsidiary, ICS, was left out of the guarantee. And I think it was an accident whatever happened. And the records we've disclosed to the committee would show that I, I urged other colleagues who had engagement with Central Bank and with the Government, saying we need to get ICS in. So that could evidence that, you know, even a small subsidiary under the blanket of Bank of Ireland, which was specifically guaranteed, that I felt that, you know, we could have a problem in ICS if all the other Irish banks were guaranteed and our subsidiary wasn't. So, I advocated. Once the guarantee became available, once it became a guarantee that we couldn't ... we couldn't operate systemically.

Our other competitors, Ulster Bank, the main competitor, had been, effectively, nationalised by the British Government, so the depositors had an implicit guarantee. Rabobank was a very strong retail banker, so I thought we would be dealing in an isolated capacity, but that was ... once the decision had been taken to systemically guarantee. And I think, at a little bit to go to Deputy Doherty's question, once the decision had been taken to have NAMA it's very hard to take out a systemic decision. Just as you're going into a spiral, you can make your choices, you can decide I'm not going to be do this, I'm going to do ... it is harder, and you can get sucked into a systemic issue as well.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you, Mr. Boucher. Deputy Higgins, ten minutes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Mr. Boucher, at a group risk policy committee in January 2007, the minute states that within retail six senior business manager portfolios and 21 business manager portfolios were rated unsatisfactory - a doubling since March 2005, and the report emphasises a need for a structured credit training programme. Can you explain that, please?

Mr. Richie Boucher:

Well, there was credit reviews done. We would have had, in business banking - I'd just come into the role, as the Deputy's aware - we would have had somewhere between 250 and 300 managers that were rated on an ongoing basis, and we had a credit review who go and rated them, to credit stance, credit policies, the number had increased. That number, and the credit skills, were still lacking. During the course of 2006 we had had rapid growth, as of our testimony and is recorded in the documents of, I think it's B4, page 25. In 2008, it was noted there had been a significant improvement, and I bought in from Ulster Bank people I knew had skills to help.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Okay. So these senior business managers and business managers, their unsatisfactory rating, did that relate to property loans?

Mr. Richie Boucher:

I don't know if it related to property loans. It related to lending standards across their books. So it could have been to hairdressers, pubs and widget manufacturers could have ... there was not a, a delineation. Business bankers in retail, we didn't have a specialised property unit, so they could have been doing some property lending, but it could have been other lending.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Considering that property lending was beginning to take, or continuing to take such a high profile, should that not have been done at that meeting, to have a profile on exactly where the credit problems were with these people?

Mr. Richie Boucher:

Well, it was their adherence to credit standards, so it was their adherence to documentation issues and equity release, seeing preconditions, I believe, and I still believe now. So if I saw that information now today that it ... would I have said is it because ... is it specifically related to their lending to hairdressers, property, - no. I would just say like they're not adhering to credit standards, credit policies. We need to help them with their credit skills, and we need to put in more rigid processes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

So-----

Mr. Richie Boucher:

So one of the things that, as part of the rectification of those issues, I required that in business bank they put a higher part of a performance rating in adherence to credit standards.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Was the board made aware of this level of unsatisfactory reports regarding credit control?

Mr. Richie Boucher:

I'm not aware of that. But the GRPC, the group risk policy committee, minutes were provided to the board, whether it was specifically drawn to the board's attention in January 2006, I don't know, I wasn't on the board.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

The minute also states, Mr. Boucher, "A review of the Legal Services Unit identified a backlog of files, some with serious issues, which could expose the Bank to significant risks." Can you explain that?

Mr. Richie Boucher:

I think it's self-evident. There were ... the legal services unit was finding it difficult to deal with the volumes. It was also-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Which volumes? Property loans?

Mr. Richie Boucher:

Lending volumes in total. I don't ... I wouldn't characterise it as to do with property loans. As the minutes record or at a subsequent meeting, having come into the role, I said I wasn't comfortable and that I wanted much more. And in particular, what was happening was that some of the more complex business related loans - and some of them may be in property, some of them may be to export companies, etc., were taking up an inordinate amount of time in a legal services unit, which had been dealt with for more, say, bread and butter loans, and they were subsequently moved to external firms where there was a greater accountability, responsibility - we were paying them.

Going back to your point on property loans, as I've testified and as is evident, our haircuts we received on transfers to NAMA for documentation issues were extremely small. I think in the total context of €9.9 billion of transfers, our haircuts were about €20 million relating to documentation issues.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Okay. Yes, but the NAMA chairman in his evidence to this committee spoke about... I quote him:

The model did not appear to require a stringent approach by borrowers to analysing project feasibility. The safety zone of borrower equity usually existed only on paper. The result is that the borrower was typically not the first to lose.

Do you recognise the Bank of Ireland in here?

Mr. Richie Boucher:

I recognise components of the Bank of Ireland.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Components, yes. Can I move on rapidly, Mr. Boucher, perhaps? In relation to state aid, you've spoken that ... you said here today that NAMA would make a profit from loans to the Bank of Ireland. Do you mean that the €5.6 billion that was paid by NAMA, that they will get more back than that, is that what you mean?

Mr. Richie Boucher:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

But are you aware that NAMA, in testimony, said to this committee that it overpaid the banks by €10 billion, €32 billion in total, to all the concerned banks, rather than €22 billion if they had been left exposed in the capitalist marketplace?

Mr. Richie Boucher:

Well on a mark-to-market basis that would have happened, potentially. We don't know. I mean, no one ... I don't know how anyone can actually extrapolate the figure of something that didn't happen, but on a mark-to-market basis-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Well they gave quite a rationale in-----

Mr. Richie Boucher:

But ... I would say in a general term I don't ... I can't quality the figure. If all the property loans of all the banks ... that was recognised by the British Government, it was recognised by the TARP, it was recognised by support schemes, if all the banks balance sheets had been marked to market. But if you mark-to-market a bank's balance sheet today, you could have a problem. So like let's be clear about this.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Mr. Boucher, you say as well that you repaid the recapitalisation. That's been repaid to the State.

Mr. Richie Boucher:

We repaid the state aid.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

And that's, Deputy ... that's been ... the arbiter on state aid is the European Commissioner.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Yes. Would you accept, or not, Mr. Boucher, that that repayment is far ... far from makes up the collateral damage to the economy, in general, that was caused by the bubble, and the role of the banks in creating a crash in the crisis, for example, damage to public services, to Exchequer funding, austerity on citizens, that there was a much wider collateral damage caused by what happened in the banks? Is that true or not?

Mr. Richie Boucher:

Well my testimony is my job in Bank of Ireland. I can't speak for the banks as a whole. I recognise that I said it at the time when I came into the role. Taxpayers shouldn't have had to support Bank of Ireland, that taxpayer support that went to Bank of Ireland at that time. Notwithstanding, Deputy, as I should point out, that we also held Irish Government bonds, and when we got the NAMA money, we bought Irish Government bonds. We partially bought them as a hedge. So it was at least cash flow neutral to the State. But, Deputy, I am extremely conscious that at that time that the capitalisation was provided to Bank of Ireland, that that was taxpayers' money that could have been used for other things.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Yes. In relation to that, Mr. Boucher, then can I ask you, going into the future, where in the annual report 2014 Bank of Ireland you refer to €1.2 billion deferred tax asset and that you hoped that that would be recognised in full, does that mean that you can against the profits into the next several years, you can write off your losses by not paying corporation tax to the State?

Mr. Richie Boucher:

That's the accounting rules, yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Yes, so how much profit would you make then to ... before you have to start paying?

Mr. Richie Boucher:

Well, the corporation tax is 12.5%.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

But it's also a mix of UK and Ireland, so it's about one third UK, two thirds Ireland. In testimony to committee last week I pointed out that, outside of corporation tax, in 2014, Bank of Ireland would have paid directly to the State approximately €175 million in taxes through PRSI etc. and we would have collected seven hundred and-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

I know, but in relation to tax and profits, Mr. Boucher, would it be true to say that, roughly, the next €9 billion in profits ... you won't have to pay any tax because of the deferred tax asset of €1.2 billion?

Mr. Richie Boucher:

To ... in terms of our deferred tax assets in Ireland and the UK, if you've incurred a loss under the tax rules and the accounting rules, then you can ... you get an alleviation for that loss. That's the system.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Yes. Do you think ... would you understand if the taxpayers found it extremely galling that after a bank had been bailed out it has now a further €1.2 billion write-off of corporation tax that might help to make up some of the damage that many people felt was done by the collapse?

Mr. Richie Boucher:

Well the taxpayers have got significantly more back from Bank of Ireland than they invested.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Okay. Last question so, Mr. ... or, Chairperson, is this. Mr. Boucher, in ... sorry, in 2007 you wrote a letter to Dublin City Council in relation to the Jury's Berkeley Court site ... it was being attempted to be developed by Mr. Dunne, and you said, I quote, "Dear Sir, I refer to the above and write to confirm my strong support for this landmark proposal which I believe will significantly benefit the city of Dublin and its citizens through helping enhance the concept of a living city and providing buildings of significant architectural merit befitting Ireland of the 21st century." And you signed it, "Richie Boucher, chief executive, Retail Financial Services Ireland". Is it usual for banks to involve themselves in the planning process on behalf of developers?

Mr. Richie Boucher:

No, that letter was a mistake. It was one of the many stupid things I've done.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Were other representations made by Bank of Ireland for ... in relation to developers?

Mr. Richie Boucher:

No. Not that I ... not that I can recall.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Why was it made in this case?

Mr. Richie Boucher:

I don't have the same immunity as-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

I'm sorry, Mr. Boucher?

Mr. Richie Boucher:

I don't have the same immunity as the committee does.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, that's answered. Senator Michael D'Arcy, ten minutes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Thank you Chairman. Mr. Boucher, you're very welcome. NAMA has highlighted the issues in relation to valuations and the veracity of security and titles. Can you comment on why your internal controls never highlighted these issues as a problem during your tenure? And the document, the core documents I'm using-----

Mr. Richie Boucher:

I ... Deputy, I'm sorry I ... would it be possible for you to repeat the question? I couldn't hear you, I'm sorry.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Sure. NAMA have highlighted the issues in relation to valuations and the security and titles involved that were transferred from NAMA ... from yourselves to NAMA. Can you comment on why your internal controls did not highlight those concerns?

Mr. Richie Boucher:

Well, I-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

The documents that I'm using are BOI - B4, pages 27 to 31.

Mr. Richie Boucher:

Well, I think if I go back to my testimony on NAMA, and the verifications by NAMA is the level of discounts that we suffered and incurred on documentary issues in terms of transferring €9.9 billion loans, were very low. So, like, in that context, we suffered about €20 million. I think roughly half of that was in relation to specific transaction. We had a considerable dispute with NAMA as to whether or not we agreed with that. They made the rule and took that. So as a factual matter, as a matter of fact, from Bank of Ireland's perspective, the level of discounts we suffered in transferring loans to NAMA, or that NAMA imposed on us, was extremely low.

Mr. Richie Boucher:

That was the discount on the transfer, it wasn't to do with documentation.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

And the documentation ... why ... the question I'm asking you is, why did your internal controls not raise that issue directly with you?

Mr. Richie Boucher:

But, sorry, Deputy, I've actually, hopefully, answered that question on documentation. It's a different ... so of the 43% discount ... of the 43%, I would say the discount, and I'm just doing the sums in my head, is about 0.0013%, 0.0014%.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. Mr. Boucher, in terms of ... you said the biggest mistake you made was in relation to the funding of the mortgage book in the UK. Is that correct?

Mr. Richie Boucher:

I said if I looked ... I mean we made a number of mistakes, but if I say it was the biggest liquidity mistake and was the biggest issue that we had to focus on, because it required an entire change in our business model, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Yes, and document BOI - Vol. 1, B1, page 23, Funding and Liquidity, this should be up on your screen. This document-----

Mr. Richie Boucher:

I beg your ... it's not quite up yet, Deputy.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay, sorry.

Mr. Richie Boucher:

I prefer it on the screen rather than transcribing it, if that's okay?

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

That's fine.

Mr. Richie Boucher:

But perhaps if you can continue the question and if I need to refer to the screen I will do so-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Funding and Liquidity, 3.1, "The single biggest strategic mistake the Bank made, in common with a large number of banks throughout the world, was to become over-reliant on wholesale funding to grow its loan assets particularly outside its core franchises". That document is contrary to what you're saying was the biggest mistake. Could you ... if you see it there, Funding and Liquidity, 3.1.

Mr. Richie Boucher:

I think it's exactly what we said. I've said I thought that was the biggest mistake and I think that's ... if I read out the testimony I gave, I think, to Deputy McGrath, I said I thought it was the biggest single mistake, this is a document I signed, it had to be approved by the Government before it went to the Commission and it says "The single biggest strategic mistake the Bank made, in common with a large number of banks throughout the world, was to become over-reliant on wholesale funding to grow its loan assets particularly outside its core franchises". And that was my assessment as a member of a team who made the mistake, I ... when ... I came into my role I had to ensure that we, as a bank, recognise we made mistakes. That I recognised and all of my colleagues recognise we had made mistakes. I personally felt that was a very important part of the recovery and recuperation process, so I believe that. That is a belief statement that is not an absolute factual matter that I could ever verify, that was my personal belief.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

On that same page, Mr. Boucher, it says that the amount of the reduction in wholesale funding is €69 billion that the bank were using. Was it a €69 billion mistake?

Mr. Richie Boucher:

Well it didn't cost us €69 billion, but the level was too big. I mean, you can't draw a comparison between a number and a number. What we have done is, we changed our business model, we've grown deposits in our core franchises, we've ... I've described what our new business model is without going into ratios or absolute numbers. €69 billion was too much and we've brought it down by €69 billion.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay, can I just move on page 35 in the same document and it's a line that I use with Mr. Goggin, in all the Bank of Ireland documents a term cropped up continually and that was to protect the franchise. Are you aware of the term that was used?

Mr. Richie Boucher:

It's a well-known business term, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

And on page 35, where there is an assessment of your competitors and the fourth paragraph on that page, we are discussing the 100% mortgages that we discussed earlier and other products, we're discussing "hero" products. Was Bank of Ireland's 100% mortgage a hero product? Fourth paragraph, page 35-----

Mr. Richie Boucher:

Like I said, that document was before I came into my role.

Mr. Richie Boucher:

But the concept of a hero ... actually I don't know whether it was chosen. The concept of a hero product is products you market strongly. My reading of the documentation provided ... other document provided to the committee has pointed out that the vast focus was on a lower LTV mortgage but that the 100% was part of it. In terms of the question of franchise, banks and any company will always try and protect its franchise. I am on the record, in my role as chief executive of the bank, is that we will not follow some business models. They might prove to be correct but we will not follow some pricing and other business models. We have competitors who give away product for free, I don't believe that's a sustainable business model. We might lose market share, we might lose customers over those decisions. Those decisions might be right or might be wrong but I don't believe that a franchise argument should override a sustainability or viability argument.

Mr. Richie Boucher:

Decisions were taken to protect a franchise. I don't think they were taken to override it but now, our new structure is, is that risk, and it was pointed out in the Oliver Wyman document, pointed out in other documents, is we set a risk appetite statement so risk that constructed the group, the business model, is the boundary under which strategy is done.

Mr. Richie Boucher:

It was ... I've jumped and I was a member of the team that made that mistake, so I'm very conscious of it.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

But did protecting the franchise overrule the risk?

Mr. Richie Boucher:

I don't believe it overruled it but I think now we have much greater clarity that the franchise argument must be done within the risk appetite, that the risk appetite doesn't sit beside it, the franchise sits within it.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Mr. Boucher, you've presented before the finance committee previously and the question of moral hazard has been raised with you and in terms of debt forbearance, has your position in Bank of Ireland altered at all in terms of debt forbearance?

Mr. Richie Boucher:

I gave testimony to the committee, the finance committee last week and that's on the public record. I don't really have anything further to say. I'm here to discuss to a period up to 2013, Senator. But my presentation and documentation, the transcript of my presentation last week to the finance committee is available to anyone.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay and that was up to 2013, from 2013 to date-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

No, from 2013 to date is outside the scope-----

Mr. Richie Boucher:

But to help the Senator-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

The question I'm asking-----

Mr. Richie Boucher:

-----that was the position up to 2013. The position ... our current position was in accordance with the testimony I've given.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay, can I ask, Mr. Boucher, in terms of debt forbearance for corporate write-down including in our terms of reference which is to end of 2013-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Within our terms of reference, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Did Bank of Ireland provide corporate write-down debt forbearance for corporate entities within the terms of reference of today's hearing, which is to the end of 2013?

Mr. Richie Boucher:

Well, as I disclosed at the finance committee yesterday, as a matter of public record we've done debt-for-equity swaps.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Have you done debt forbearance?

Mr. Richie Boucher:

Debt-for-equity swaps.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Has there been any write-down with Bank of Ireland for corporate entities?

Mr. Richie Boucher:

If the corporate entity is gone, then the debt is written off. So, a corporate entity, as a limited liability company, if you have-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Senator-----

Mr. Richie Boucher:

If a corporate entity is gone, you write it off. But an accounting write-off is different from a continued desire to recover the money, so if an entity is gone you write it off.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

And can I ask you, Mr. Boucher, how you reconcile the moral hazard that you use in terms of the mortgage-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Final question, Senator.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Final question - that in terms of the mortgage, no debt forbearance versus what you have done for corporate debt forbearance-----

Mr. Richie Boucher:

Which is a debt-for-equity swap but we have participation in the upside.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you very much. If I could just return to just something that Senator D'Arcy dealt with you there, it's in core document B1, page 23. I don't want to go into the commentary with regard to the mistake and just look for you to repeat that, there is a certain "stucktiveness", I could probably use the word, to go into the night the banking guarantee with inquiry members and there is a full picture of that, that's actually required but there ... a fundamental part of this inquiry, Mr. Boucher, is to find out what actually went wrong. On item 3.1, there is admission that a very large or a single strategic mistake was made by the bank. Maybe if you could explain to us how the mistake was actually made, so we can draw some learning going into the future in that regard.

Mr. Richie Boucher:

The thought process and why that strategy was implemented, Chairman? Yes, I think and these are strategies that went back to 2001, 2002, I obviously joined the bank, I implemented strategy, I ... subsequent to 2006 I was part of that strategy but there was a belief that we should diversify outside of Ireland, that ... I believe that you obviously have to fund yourself, we didn't have natural customer deposits, long-standing customer relationships, branch networks etc. and as a belief how we could do that it. So it is a belief that you could get your loans, you could bundle them and you could sell them on - I would not sell them on. You could use them as collateral, so you'd get a group of mortgages etc,. use them as collateral and you'd raise funding from the market for that. That was a model that was being done for ... and is still done. It was a belief, you know, so there was an investigation of the depth of those markets, what were other people doing, you know, what was the advice, the best advice. It was considered at that time an appropriate model to grow your business.

As it transpired, when the markets freeze or when, like I said, you had particular technical issues in certain markets and that, the money is not available. Core customer deposits, franchise deposits, where people provide you with money because it's part of their day-to-day banking activities, etc., is a much better model. So, if I go to the UK, so this was our mistake, I think it was our biggest mistake with the UK, what we have done since is we've incorporated in the UK, we gather our deposits, primarily, in our Northern Ireland business, it's self-funded so that the customer franchise in Northern Ireland funds the personal lending business and corporate lending in Northern Ireland. In Great Britain, so that's England and Wales really for us, we gather deposits through our partnership with the post office in a separately incorporated subsidiary and we grow assets within that. We didn't do that, we didn't have those core customer deposits, it was a massive mistake.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

So all the behaviour that you are talking about now which is currently in place is obviously based on a more prudential approach and a reduction of exposure and risk. Why wasn't that awareness there at the time?

Mr. Richie Boucher:

I think there was a ... it's hard to actually go back, but I think there was an element of a recognition diversification was good, a, "How do we deal ... how do we do that?" I think that's a reasonable thought process. "How are other people doing it?" You know, "What's the market practice?" You know, "What does this look like?" So, that belief that, you know, this was a good thing to do. I mean, I would say that our model now is a model of 100 years ago.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes, okay.

Mr. Richie Boucher:

And I believe that in the period up to ... from the late '90s, even if I go back to my own career, too much of a belief in ratios, in models, computer-driven processes and less of a challenge on, like, "Does this actually make sense?"

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay. And was there any influence with regard to remuneration or bonuses or anything else?

Mr. Richie Boucher:

The growth of the company influenced remuneration, yes, of course.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay. So, that was a cultural influence, or would you reckon it was a cultural influence?

Mr. Richie Boucher:

It's hard to say, like. Personally, personally-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes, yes.

Mr. Richie Boucher:

-----you know, I'm not sure that remuneration is the reason that you do certain things. You do it because you believe in your business, you believe it the right thing to do. Remuneration is a component of incentivisation, but I ... it wasn't my experience that people did things just because they were going to get paid more or less, but nevertheless you can't also say that remuneration wasn't an aspect of why people had ambition to grow their business, but I think it was a component but I don't think it was a driver.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you. Senator?

Mr. Richie Boucher:

Or it may have been one of the drivers, but I don't think it was the single one.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

That's my personal opinion. I can't speak for other people.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you, Mr. Boucher. Senator O'Keeffe?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Thank you, Chair. Mr. Boucher, you acknowledged to Deputy Higgins that the letter that he referred to was a mistake. Did you write any other letters of that kind about any other developers or consortia or anything of that kind?

Mr. Richie Boucher:

No.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

That was a one-off?

Mr. Richie Boucher:

Yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Did any of your colleagues at the bank write any letters of that kind?

Mr. Richie Boucher:

Not that I'm aware of.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Not that you're aware of?

Mr. Richie Boucher:

Yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Okay. In 2014, last year, you were at an IBEC conference and RTE reported you as having said, when you were asked about the bank's property lending during the boom, you said, "Obviously everyone did things to different degrees, but when there is a wild party, even good girls get into trouble." What were you referring to there?

Mr. Richie Boucher:

It was an unfortunate analogy which I was trying to ... I've been-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

I'll give you an opportunity to clarify it this morning, Mr. Boucher.

Mr. Richie Boucher:

I've been advised that, in the past, that I used too much jargon and corporate speak. I may have gone too far in trying to go the other way. I am learning in life to try and get a different balance between what I say ... I tried to do it, it was ... some people took offence, I didn't mean to give offence to it. I was trying to give an analogy. It was an unfortunate use of moving away from my corporate speak.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

But is it not-----

Mr. Richie Boucher:

But if I got ... what I was really trying to say is that we might have thought we were ... we might have thought that our practice, our policies, were better. We knew there was a large lot of lending going on. We went along. Could we have left before midnight? Could we have left at 11 o'clock? Could we have left before the bar really opened? Yes, we could have. You do get caught up in things. That was the ... it was a ... I don't know what the word is, a mis-chosen analogy.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

But was there a truth to the word "wildness" in the analogy?

Mr. Richie Boucher:

There was a lot of ... there was a ... the markets, not just in Ireland, were very exuberant. Like, the subsequent crash has proved that. It's-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Is "exuberant"-----

Mr. Richie Boucher:

I don't think I've given a huge insight.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Is "exuberant" a posh word for wild?

Mr. Richie Boucher:

It's ... yes. So, I just have to be careful. It was mad, you know. It was ... there was ... I mean, the chairman of the Federal Reserve said there's irrational exuberance in the markets.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

You didn't-----

Mr. Richie Boucher:

I mean, we have dangers of exuberance in bond markets at the moment. You know, quantitative easing is creating issues in the bond markets. Whether that will happen today, tomorrow, next year, there is a bubble developing in bond markets.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Mr. Boucher, you've acknowledged errors and mistakes, you've talked about not recognising risk, you've said yourself you accept your share of responsibility. Would you like to apologise either to the shareholders or to the people of Ireland for what you did within the bank and your role in that?

Mr. Richie Boucher:

I have done that. I continue to do that. One of my ways of dealing with that is putting action behind words. The actions over the past six-and-a-half years are a recognition of the mistakes I made and my responsibility and a huge drive I have to restructure the bank, to make it a sustainable, viable institution. I've been particularly personally conscious of the history of the bank. I joined the bank ten years ago, it's a 230-year history. I never wanted to be the person that saw that bank demise. I recognised that we had a huge responsibility to taxpayers and I haven't gone around talking in pious terms about, like, what I see other people, you know, "Maybe the taxpayers maybe get their money back at some indefinite date in the future, you know, when the curlew cries three times at Newgrange." I have said we must put in a definitive plan. It's in our commercial interest to repay.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

No, forgive me, because I didn't see the words "sorry" in your statement and I just wanted to make that clear.

Mr. Richie Boucher:

I've made my personal apology but I actually believe that you must back words with action. I hope I've demonstrated, in the past six-and-a-half years, I've put action behind words.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Just one thing ... Mr. Goggin ... I raised with him the assurance that he had given to your board - that's book 1, Vol. 1, page 13 and 14 - that he said that there was a contingency plan that had been put in place by the Financial Regulator. When I asked him about it during his testimony, he said he had never actually seen one, so I'm just wondering whether you ever saw a contingency plan by the Financial Regulator?

Mr. Richie Boucher:

I've given in testimony earlier, Senator, that I was shocked on a weekend when there was meant to be a contingency plan for a particular ... I'm sorry, there was meant to be a contingency plan for a particular institution. I was shocked at the lack of ... we were asked to attend a meeting, we were asked to come up with a plan and there was no ... not even an identification of the problem, so it was ... my personal view is there wasn't a contingency plan, based on what I saw, but there might have been but it wasn't evident. By the testimony of what I saw, as, like I said, I wasn't ... I'm sorry, I have to go back to analogies, I wasn't on the pitch but I was in the dugout on the night of the 29th.

Mr. Richie Boucher:

I didn't see evidence that there was a thought-through plan. I mean, if a decision was made to cover subordinated debt by a loose comment an executive of one bank may or may not have made when he was in a very stressed scenario, that wouldn't have identified for me a thought-through process.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Were you present at the Anglo Irish Bank meeting with Bank of Ireland that took place on the day of the guarantee?

Mr. Richie Boucher:

No, I actually didn't know about that meeting until about 9 o'clock that night.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Were you present at the Central Bank meeting earlier that day?

Mr. Richie Boucher:

That was a one-to-one between our chairman and the chairman of the Central Bank which ... I'm sorry, not the chairman, the-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Chief executive?

Mr. Richie Boucher:

Mr. Hurley, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

What was your ... why do you believe the Bank of Ireland asked to see the Taoiseach and the Government that night, because we're just still not quite clear what the request was?

Mr. Richie Boucher:

I ... to be honest, I'm not sure whether there was a ... I think there was a, I think there was a belief that, like, the Government wasn't aware of the extent of the issues. There was a belief that the ... like, it wasn't explained to me. It was just said, "We're going". I mean, if I've learned, over my period of time, if you're going to meet a politician, you should have a pretty good idea in your mind what you're asking for, but, in fairness, like, we'd had the experience of Nationwide, what we'd seen at first hand, there were talks that morning about, you know, would we ... I understand, I wasn't at that meeting, would we consider Irish Permanent. Anglo had come in to us that afternoon to say, "We're going to default", that's effectively what they said, and my belief is, and my absolute belief is, that our chief executive and our chairman felt that they had to tell the Government something was going. If I read the testimony now, if I see that Mr. Gleeson has said that AIB had information that I don't think we had that day, I think our chairman decided they should ring up AIB and say, "Listen, we think we need to go to the Government. We think you should come." They agreed to go. But I don't think ... I wasn't conscious, as a member of ... a senior member of a committee-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

This is speculation on your behalf now, Mr. Boucher.

Mr. Richie Boucher:

Yes, I'm giving a belief statement.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, a belief statement, okay.

Mr. Richie Boucher:

And I hope it's not pejorative or anything like that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes, yes.

Mr. Richie Boucher:

If it is, I would apologise.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

No, no, no, continue.

Mr. Richie Boucher:

But I've been asked my general impression.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

But if the Chairman would prefer me to stop?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

No, no, no, continue.

Mr. Richie Boucher:

My genuine ... my genuine impression was that the desire of our chairman and chief executive was to point out, like, were they really aware that a significant bank, perhaps not systemic, I don't know, but a very significant bank was going to default the next day.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Can I ask you about Exhibit B3? This is a document you gave us yourself in your own statement. It seems to me to be a very serious document, in which it ... it shows the immediate actions that your own bank was taking at the time. You were sell ... you were continuing to run down books, various books and portfolios, you were looking at, sort of, how to ... basically how to save yourselves. You also have a big long list of immediate ... of actions ... management actions that might be taken, some of which are quite serious and involve selling off various businesses and so on. But in that document you ... there's a very long reference to the whole idea of a bank which you believe is about to fail, and I'm assuming it's Anglo Irish Bank, on page 13 of Exhibit B3. You say: "We assume that the institution concerned is ... Headquartered and supervised in Ireland ... Not our major indigenous [customer] ... [and is] A publicly quoted company". So is it Anglo Irish that you're referring to?

Mr. Richie Boucher:

What we did was we put up for ... our belief is ... rather than identifying a bank, we said, like ... what's the concept, a straw ... straw person, straw man. We said, "If this was the scenario."

Mr. Richie Boucher:

So we said ... so what we tried to do for ourselves on the board ... we'll do it to a much more sophisticated level and we said, "Let us presume that this was to happen or could happen; what would be necessary for us to do?" I'm not sure did we identify that ... let us presume it's a bank. I think the management, because I was involved in that presentation, decided, "Let's not get into a debate as to who it might be, let us just make a presumption that not ourselves, not AIB, but one of the large Irish banks goes bust and [you know] what would be the actions we need to contemplate."

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

But, Mr. Boucher, obviously this document, the Financial Market Developments And Scenarios - Strategic Implications, written in September 2008, quite clearly shows the Bank of Ireland under a lot of pressure, struggling with its own liquidity, looking around at the various implications of other banks, becoming insolvent, a hard crash, and so on. What was going on in Bank of Ireland in the ... I mean, I don't know, it doesn't say what date this was written, but obviously it's clear from this-----

Mr. Richie Boucher:

I think that-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

-----that it was a very serious-----

Mr. Richie Boucher:

I think that that paper, to help you, Senator, I don't have the exact date, but from memory it would have been the first or second week in September.

Mr. Richie Boucher:

I can't remember exactly, but it would have been around about ... it was certainly after the weekend of the Irish Nationwide.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

But, is it fair to say that it's quite revealing of the seriousness within the bank at very specific levels?

Mr. Richie Boucher:

We were deeply concerned. We were deeply concerned at what was going on. We were obviously concerned at our own position. And to help put it into a context of what would we have to do ... and like we do today, so we run ... I've provided a 175-page document of the scenarios we run today, in that we said, "Okay, if this happens." So rather than to have the debate of who it is, we said let's just focus on the actions which would potentially have to be considered if a large bank went bust. So ... but we felt that banks could be going bust around us so, I beg your pardon, to answer your question: did we think it was a possibility that one of our competitors, an Irish-quoted competitor could go bust? Yes, we did.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Did the Government know about-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

I need to ask you to wrap up-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Final question.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

-----answer a final question.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Did the Government know, obviously when you went in, did the Government ... was the Government made aware of the sorts of things Bank of Ireland was doing itself that are outlined in this document to keep itself going? Was that made clear to Government, to the Department of Finance, to the Central Bank? Or was this a private document that you kept to yourself?

Mr. Richie Boucher:

I'm not sure. I'm not conscious that document and those scenarios were shared with the Government or the regulator.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, that-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

To be clear, sorry, a Chathaoirligh... it's actually not the scenarios that I'm talking about here, it's actually what you were doing yourselves-----

Mr. Richie Boucher:

We wouldn't I, I-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

-----that you'd talk about your own immediate actions on a page-----

Mr. Richie Boucher:

I don't believe we would have articulated to the Government or the regulator what ... the potential actions we were taking or what we were actually taking.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

So the seriousness of those actions were not shared?

Mr. Richie Boucher:

In September?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

In, yes, in September?

Mr. Richie Boucher:

Yes, yes, I mean, and I think as we've given in subsequent documents, in subsequent interactions with the Government, the regulator, we pointed out the business plan that we would be proposing to implement.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

All right, thank you.

Mr. Richie Boucher:

But sorry, Senator, in September ... I'm not conscious ... at that particular date, whether it was the first or second week in September, we went to the Government and said "We're gonna do this". I would be surprised if we did.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Okay. A Chathaoirligh, it might be worth asking Mr. Boucher if that can ever be clarified?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Because it is quite serious, I think, whether or not-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Can I just summarise what's happened?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

-----you might have?

Mr. Richie Boucher:

I will ask a colleague and I will come back.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you very much, Mr. Boucher.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay. I just want to wrap up. I'll be inviting Deputy Murphy and Deputy McGrath in for five minutes of supplementaries to finish, but maybe just to ... there was a lot of discussion this morning, Mr. Boucher, between the board and the subsidiary boards and the transference of information and so forth. Maybe if I could put the question to you, and in two different stages: first of all, did you think the board of Bank of Ireland was as good as it should have been in terms of how it operated and how it pulled together the different information streams, decision-making processes that were taking place at subsidiary levels to the main board?

Mr. Richie Boucher:

I think they were genuine people who thought they were doing their best. I think that they felt that they were discharging their responsibilities, and I was a member of the board.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Sure.

Mr. Richie Boucher:

So, you know, I can't exactly say what everyone else felt, but that was my impression. But, clearly, the level of information, the understanding of risk, the management of information, and not just at board level, let me be straight about this, Chairman, but also within a management team, that we have an understanding of the correlation of risk, the influence of liquidity and capital and that, did we have the understanding then that we have now? No. Do we have a process now to provide that information? Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

And the board subsequently changed during your period as the chief executive officer as well, yes?

Mr. Richie Boucher:

That's correct.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

The composition of it? And a part of that change of the composition of the board saw new members coming in, significant investors such as Wilbur Ross and other people. Was that change of personnel and personality ... was that reflected in a change of culture, management style, and do you have any reflection and thoughts on how that actually impacted on the day-to-day operation of Bank of Ireland?

Mr. Richie Boucher:

Well, I think that, you know, there was a transition, where people moved from ... so I would say that the board members in September 2008 embraced very quickly an understanding of the ... of the issues and mistakes the bank had made, and were strong advocates for change. There is a greater diversification on our board in terms of experience levels and international experience. A lot of them have financial services ... we give a lot more ... management take a greater responsibility for what we call the education process. So our board members spend a lot of time understanding and getting presentations - outside of normal board meetings - on liquidity, capital, risk. And I think it's a major responsibility of management to ensure that the board members have sufficient knowledge to challenge and to have an input. We have a lot of financial services expertise on the board; I think that's appropriate. I sometimes wonder ... if you have too much financial service expertise and you don't have someone who's just kind of saying yes, like, that's all ... seems to make sense in your jargon, but doesn't make real sense, so I think you need that balance on a board.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you. Deputy Murphy, five minutes, thank you.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Thank you, Chairman, and thank you, Mr. Boucher. I just want to come back to what we were discussing earlier about this dedicated property unit that you established in 2004. When you look now at the PwC Project Atlas report, and you look at what happened with NAMA, do you view the setting up of that unit as a mistake for the bank?

Mr. Richie Boucher:

Well, just as I explained in my earlier testimony, that was part of a wider restructuring of corporate. It was a consequence rather than a deliberate, "We must do property". It was, like, we needed to restructure what ... corporate. We needed to also restructure risks that were being taken in retail which we felt should be taken in corporate. As it transpired, and if I listened to the testimony, and what I viewed in AIB, AIB were taking much higher property risks within their retail division than we were, and that subsequently turned out ...but, nevertheless, we had an over-focus on property. We focused on lending in a lot of other areas but we ended up having lent too much money to property.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I ask about the structure of this dedicated unit? Why was private banking included?

Mr. Richie Boucher:

Because private banking was involved in lending for property-related purposes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Exclusively at the time?

Mr. Richie Boucher:

No, no, the private banking had a range of other activities. It was one of the services provided.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And if you could just explain to me what private banking is in terms of what Bank of Ireland offers? Is it a licensed credit institution?

Mr. Richie Boucher:

No.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

It's not?

Mr. Richie Boucher:

No, it's a descriptor.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can you elaborate on that please? I don't understand the term.

Mr. Richie Boucher:

I mean, we call different businesses under different brand names. It's a brand name.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

It's a brand name?

Mr. Richie Boucher:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

But it's not a licensed credit institution?

Mr. Richie Boucher:

No.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Is it a separate entity then from the bank?

Mr. Richie Boucher:

It's a brand name, Deputy. So, like, you know, we have different ... we operate under different offerings to customers, we call it different things. But it is under the Gulf Co. licence.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

So it's just a point of presentation for the bank, if you like, to customers?

Mr. Richie Boucher:

It's a differentiation in presentation to customers.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Is it the same as a car manufacturer having a series of different cars, or is this a separate company? I suppose this is what Deputy Murphy wants-----

Mr. Richie Boucher:

It's not a licensed entity.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Are you asking is it a legal entity?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Yes, sorry.

Mr. Richie Boucher:

No, I don't think so but certainly it's not a licensed entity.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. Would it have the same oversight that the rest of the bank would have in terms of the Central Bank?

Mr. Richie Boucher:

There is a certain aspect of the bank, of that bank's activities which is the provision of fund management services, which is covered under what we call EMIR. And I'm sorry, it's an acronym, I can't remember exactly what is ... but it has something to do with securities. And that has a regulatory interface with the Central Bank of Ireland.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The Central Bank wouldn't overview the private banking section of Bank of Ireland?

Mr. Richie Boucher:

It would overview all of us. What happens today is the Central Bank will have insight into all of our activities. Do they have a specific focus on private banking today? I don't think so.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Has there ever been an investigation by an external agency into private banking in Bank of Ireland?

Mr. Richie Boucher:

Back in ... in what time period are we talking about?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Up until and including 2013.

Mr. Richie Boucher:

Like ... what ... I'm sorry-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

An external agency having an investigation into private banking, to look at their operations, say, as to what the bank provides.

Mr. Richie Boucher:

Where there's been internal audits and that, I am not conscious ... that from time to time we refer specific cases, as we are required to do, if we suspect money laundering or if we suspect there has been a fraud either within the bank or outside the bank. We refer ... we bring our investigation to ... first of all, we ... our practice is if we suspect a fraud or if we suspect money laundering, we are required to advise the authorities, we are required to advise people and from time to time we have provided all of our internal documentation. I am conscious of that.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay, thank you. I just want to move to some of the evidence NAMA gave us when they were before us in relation to how NAMA debtors and the banks were managed once NAMA was announced. And one of the things that NAMA told us was that the extent to which NAMA, the banks, sorry, were collecting income from things like office blocks or shopping centres where the banks themselves ... that was not being collected in the millions. And NAMA estimated that about 20% of income from investment assets was being mandated to the banks. About 80% of the income was being diverted away. NAMA said that it seems no one was following up on it and NAMA then went after that income. Was it the case in Bank of Ireland that you were not following up on this income?

Mr. Richie Boucher:

I think we were and to a greater extent than other people but I'm sure there were cases where we didn't.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And in those cases where you didn't, what ... why wouldn't you?

Mr. Richie Boucher:

I think it was a ... we didn't have the proper procedures. So now what we have is a core requirement that would have been an implicit requirement, now it's a core requirement that we lend for investment property and there's rent, the rent must come into the rental account.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay and-----

Mr. Richie Boucher:

I think if I ... we ... it's ... I'm on record as well going even to the period 2013 for buy-to-let or RIP properties or whatever were called whatever they are or whatever the acronym is now ... so now buy-to-let properties ... rent diversion was a significant issue and was a cause so it's not investment property-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

What do you mean by rent diversion?

Mr. Richie Boucher:

Rent diversion. So this is a retail property ... so a house or a flat, the customer was keeping the rent the tenant was paying and we have appointed rent receivers to make sure we get that rent.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Deputy, the final question.

Mr. Richie Boucher:

So I think there was a, more of a looseness in the buy-to-let area than in the commercial property lending but I'm sure there were aspects of that where it was not followed through.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Advances made to debtors once NAMA was announced that eventually went into NAMA. NAMA found that 17% of advances made by Bank of Ireland were not for commercial purposes and so were not repaid by NAMA, were not eligible under the scheme announced by the Central Bank at the time.

Mr. Richie Boucher:

They have subsequently paid us back some of that money. I don't think that they have agreed with that subsequent and we are in a legal discussion with them.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

I missed the first part of that, Mr. Boucher. Sorry, you think that NAMA has repaid some of that money since ... of the 17%-----

Mr. Richie Boucher:

Yes, and we're in legal discussion on the balance.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
Link to this: Individually | In context | Oireachtas source

And can I just ask when that legal discussion began because we got this evidence only a few weeks ago----

Mr. Richie Boucher:

I'm not sure ... This is a legal issue between ourselves and NAMA. I can't give any further testimony on this.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you very much. Deputy McGrath.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Thank you, Chair. Mr. Boucher, just under the heading of counterfactuals, which you mentioned a while ago, if Anglo had been allowed to fail and in the absence of a bank guarantee, would Bank of Ireland have survived?

Mr. Richie Boucher:

Senator O'Keeffe has pointed out, we looked at the scenario it wasn't necessary ... I believe, my personal view ...you know it's not ...

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

My personal view is that at that time - we have to also remember the time we were in, where the TARP had failed, there were banks collapsing all over the world. I believe if Anglo had had a disorderly process, it could have had very, very serious implications for the other banks and for the economy as a whole. Whether or not Anglo should have been brought into the guarantee ... if I could just expand a little bit ... I mean, I think there has been some commentary of Anglo being taken out. I have to remember that I noted at the time there was actually no mechanism ... you know in other jurisdictions you had "conservatory" which is the US term, in the UK they had ... there was actually no mechanism available to the State to how it took over a bank. I'm not sure nationalising a bank changed the problem .. you're changing the ownership. I note with Anglo, I mean, the period between the guarantee and Anglo being nationalised was three or four months, I don't think it changed things.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes. And if you had of -----

Mr. Richie Boucher:

But I believe that the fall of Anglo, or collapse of Anglo in a disorderly fashion would have had serious implications in the market.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Even if the other four banks were guaranteed?

Mr. Richie Boucher:

Yes, I think that's an interesting question. I think it probably would have been much more contained, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. Just on the issue of the subordinated debt as you know, Mr. Boucher, ultimately, in the guarantee there were €12.2 billion of dated subordinated debt included, of which Bank of Ireland had just under €5.2 billion. You may not have this detail to hand, but do you know how much of that fell due and was repaid during the two year guarantee window?

Mr. Richie Boucher:

There was ... €750 million was redeemed in February 2010.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

That was a ... a particular issue.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Redeemed at par?

Mr. Richie Boucher:

Oh, I presume so, I don't know.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Full payment.

Mr. Richie Boucher:

I'm sorry, I would say ... my presumption is was redeemed at par.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. Okay.

Mr. Richie Boucher:

I doubt it wasn't, Deputy. I can absolutely verify that but I would be pretty sure that it was redeemed in par.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And you said in your opening statement that the bank generated capital of around €5 billion from the private sector through liability management exercises. Could that have been higher, perhaps by several hundred million if the date of subordinated debt was not ------

Mr. Richie Boucher:

It might have been earlier, Deputy. I'm not sure the quantum had actually been changed because it was voluntary. Different processes, you know ... ultimately you ... because ours was always voluntary, the investor had to take a view that bonds were turning over. We found it easier once the guarantee had been removed because the bonds were trading much more quickly and you are moving it from natural holders to hedge funds and that who were taking a bet. If I could just confirm ... to help to your question ... the tier 1, we had €3 billion nominal converted into a gain of €2.2 billion equity ... and lower tier 2, €4 billion, which is €2.8 billion and the verification of that excludes €750 million of our redemptions.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Sure ... yes. Can I ask you how did the bank ever think it was going to make money from tracker mortgages?

Mr. Richie Boucher:

We had a presumption, I think, that we would always be able to borrow at or near ECB rates and-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

How big a mistake was that assumption?

Mr. Richie Boucher:

A very big mistake. You must always price your product based on the cost of your raw material, not of what you presume you might buy it. I don't think a farmer would sell milk on the basis of what he thinks it might cost. You know we made a basic mis-assumption of not aligning the pricing of our product to the cost of the raw material. We presumed we could get the raw material and we guaranteed the customer that we always thought we could get the raw material at different price ... it transpired we couldn't.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And it's not just your bank, of course, but did you ever estimate on behalf of Bank of Ireland what the cost to the bank was in engaging in tracker mortgages to the extent that you did?

Mr. Richie Boucher:

If I look at the disclosures that we made today so even if-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Richie Boucher:

Our disclosure today is that the ... our average cost of funds right across the group from tier 2 capital down to our current accounts is about 1.03% to 1.04%. The yield, average yield on tracker mortgages is around about that. So at a gross margin basis ... but that doesn't take any recovery of costs, any provision for potential bad debts so tracker mortgages are still costing us money today as we speak, notwithstanding the fact that we have brought our cost of funds down. But it's not the gross margin cost.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

But in the history of the bank over the last ten to 15 years, and I'm speaking from the bank's ... I'm asking from the bank's point of view not of course, the customers' point of view ... where does it rank in terms of mistakes that were made - property lending development, the UK liquidity, trackers-----

Mr. Richie Boucher:

It would have been a significant but not that decisive an issue for the bank. We had a very large diversification of our income streams from other things, so we could bear it, but clearly it is costly to us, it's costly to our shareholders, but we have a contract with the customer, so we must observe those contracts.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Of course, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Just one final question then, then I'm going to move immediately to the wrap-up. Just to ask Mr. Boucher, would the exclusion of subordinated debt have allowed Bank of Ireland to hold onto some of the subsidiaries they had to sell as part of the EU restructuring plan?

Mr. Richie Boucher:

No I don't think so ... Chairman ... we were early into a restructuring plan. I think the Commission was taking a very doctrinaire approach at that time. We were required to sell certain businesses and we did negotiate in 2012 to substitute, so these are called punishment measures, moral hazard measures, to go back to your ... moral hazards - you got state aid, people must ... you must suffer. We were required to sell certain businesses. I would have preferred not to, but if we had not had clarity in our potential or existing investors' minds as to what the shape of the group would look like, and we hadn't done the deal with the Commission, I don't think we could have raised the capital to the extent we could. It's counterfactual but I ... in honest answer to your question, and my opinion is ... that ... it didn't influence ultimately because it was the state aid we got from the preference shares which brought the measures.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay. Thank you.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Chairman, can I ask you to explain, to the people out there listening, to explain the immunity issue? In response to a question I put to Mr. Boucher he says, "I don't have the immunity that members of the committee", but at the beginning you said, "The witness has absolute privilege", I think, so-----

Mr. Richie Boucher:

In this jurisdiction.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

I think it should just be explained to people who are listening to us.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes, Mr. Boucher has absolute privilege before this inquiry and this inquiry is taking place in the Irish State. Mr. Boucher does not have privilege outside the Irish State. That's it in summary.

Mr. Richie Boucher:

And that's been pointed out to me.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

So, what's the value of saying to people that the witness has absolute privilege if he hasn't?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

In the Irish State he has absolute privilege.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

I know, but any witness can then come and say, "Sorry -----"

Mr. Richie Boucher:

Chairman, I answered very openly ... I have given very, witness statements, on broad issues, within my interpretation of this.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Richie Boucher:

When it comes to a very specific customer issue, whether or not the work of the committee turns on that, I have tried to be as helpful as I can, but I have to point out I do not have that privilege outside this jurisdiction, and it has been pointed out to me. So I could be sued. Being straight about it. If the Chairman says, "You must answer that question because it is vital to the work of this committee", I will answer that question.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, alright. I am going to bring matters to a conclusion now Mr. Boucher. The purpose of this inquiry is, as I have said in earlier engagements, is not just about learning the lessons from the past, but also applying some learning into the future. Do you have any final comments you'd like to add in that regard? And then I'll bring matters to a close.

Mr. Richie Boucher:

No, I think ... you know ... in Bank of Ireland we made a lot of mistakes, we've worked very hard to repay the taxpayers. We can never fully repay in moral terms. We've tried to do it in financial terms. We've restructured our bank, we have a viable sustainable bank. Some of the lessons we learnt is not to follow a strategy we don't think appropriate. We are a strong bank. We hugely regret the loss a lot of people took on decisions we make, we hope that people can have now much more confidence and faith in how our bank will keep going forward, our contribution to the economy and the value we create for our shareholders, but we can never, never absolutely undo some of the moral issues that were a consequence of some of the decisions. We tried to do that financially. And ... I try to do my job in that context.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay Mr. Boucher. With that said I thank you for your participation and for your engagement with the inquiry today. I would now like to formally excuse you and in doing so propose that we suspend until 2.30 p.m. Is that agreed? Agreed.

Sitting suspended at 1.05 p.m. and resumed at 2.38 p.m.

Ulster Bank - Mr. Cormac McCarthy

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, so we're now proposing that we go back into public session. Is that agreed? Agreed.

So the committee of the bank inquiry is now back into public session for session 2 of today's hearings with Mr. Cormac McCarthy, former group chief executive and director of Ulster Bank. The Committee of Inquiry into the Banking Crisis is now resuming in public session and can I remind members and those in the public gallery to ensure that their mobile devices are switched off.

Today, we continue our hearings with senior bank executives who had roles during the crisis. This afternoon, we will now hear from Mr. Cormac McCarthy, former group chief executive and director, Ulster Bank. Mr. McCarthy was group chief executive and director, Ulster Bank Group, from 2004 to 2011. Previously, he was head of finance and then chief executive at the First Active plc. Mr. McCarthy is currently a director and chief financial officer of Paddy Power plc, a position he has held since October 2012. Mr. McCarthy, you are very welcome before the committee this afternoon.

Before I hear from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence.

You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry, which overlap with the subject matter of the inquiry. Therefore, I would urge the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, those documents will be displayed on the screens to your left and right and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed. The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis and you have been furnished with booklets of core documents. These are before the committee and will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath.

The following witness was sworn in by the Clerk to the Committee: Mr. Cormac McCarthy, former Group Chief Executive, Ulster Bank.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you again, Mr. McCarthy, for being with us this afternoon, and if I could invite you to make your opening statement please.

Mr. Cormac McCarthy:

Thank you, Chairman. Good afternoon Chairman, members of the inquiry. I welcome the opportunity to appear before the inquiry and I'll be as helpful as I can to assist you in your work. I've submitted a witness statement to the inquiry which addresses the lines of inquiry, as requested.

As you all know, Ulster Bank is a universal bank operating primarily in the Republic of Ireland and Northern Ireland. It is owned by the Royal Bank of Scotland. My own background, as it relates to the inquiry, as the Chairman said, is as follows. In 1998 I joined First Active from Woodchester Investments as head of finance. Two years later, I was appointed chief executive. Following the acquisition of First Active by Ulster Bank in January 2004, I was appointed to the position of chief executive of the enlarged Ulster Bank Group. I left Ulster Bank and Royal Bank of Scotland in May 2011. The objective of Royal Bank of Scotland in combining RBS ... Ulster Bank with First Active was to form a credible third force in Irish bank ... in the Irish banking market, to enhance competitiveness and to challenge the dominance of AIB and Bank of Ireland in particular. You will all recall that the need for a credible third force in Irish banking was strongly promoted by politicians, the media, business groups and consumer advocacy groups.

As chief executive of the Ulster Bank Group, I was responsible for all of the operations of the bank. On assuming the role I was tasked with combining and integrating a management team from Ulster Bank and First Active, whilst maintaining the two brands, working with RBS to move the bank's technology platform to those of RBS, developing and executing a strategy to avail of the growing Irish economy and creating a real universal banking alternative to AIB and Bank of Ireland. I was very much enthused by this opportunity, believing that by being a part of RBS, the Ulster Bank and First Active combination could bring something to the Irish market that was both needed and unique. The scale and sophistication of RBS, allied to the on-the-ground capability and experience of the existing indigenous banks, underpinned the opportunity. At that time, all of the economic indicators in Ireland pointed towards sustained growth. I was assured by RBS following my appointment as CEO that capital and funding support would be made available to support growth, obviously with the appropriate group risk framework. I'd like to spend a couple of minutes explaining the governance structure at Ulster Bank Group, as it does differ from the other banks appearing at this inquiry.

The RBS governance model which was in place before the First Active acquisition remained unchanged. Integral to this was significant RBS oversight of and involvement in the Ulster Bank business, particularly where credit, regulatory and operational risk was concerned. Ulster Bank management in each of these areas had solid and dotted reporting lines into senior RBS management. This also applied to the CFO, the head of HR and the head of internal audit. Members of RBS senior management were either formal members of Ulster Bank boards or committees or had rights of attendance. In addition, the Ulster Bank Group had a board of directors comprising independent, experienced and high-calibre people. This board also had RBS representative members. The chairman of the board had open access to the chairman and chief executive of RBS and engaged with them regularly, independent of Ulster Bank management. Ulster Bank Group had three legal entities in Ireland, each of which had a separate board of directors with independent chairpersons and non-executive directors. The bank had what is called a high-level controls framework, which underpinned the RBS governance model. The governance structure at Ulster Bank Group was identical to the governance of all RBS subsidiaries. It was, and is, entirely appropriate for a bank with a single shareholder. Having both a local board and RBS governance felt like we had the best of both worlds, with the benefit of being part of a significant global bank and the comfort of having local boards populated by respected and well known business and public figures.

The approach to strategy was also dictated by the same high-levels control framework. This included, amongst other things, an annual off-site strategy session with the board where the proposed business strategies and five-year plans were reviewed and challenged. The outcomes were fed into the RBS strategic planning and budgetary process, which was a detailed and rigorous exercise in itself. Performance against plan was closely monitored by RBS on a monthly and quarterly basis. The business plans were constantly evolving, based on detailed reporting and forecasting. And this was subject to detailed engagement between myself, our CFO and the RBS CEO and CFO. I was required to report directly to the RBS board annually on Ulster Bank strategy and performance. In a nutshell, the bank's strategy was to grow all aspects of our retail business and corporate business throughout Ireland, North and South, availing of strong economic conditions and positive indicators. Each of us is looking ... each of us in the room is looking back at the period between early 2000 and 2008 with the benefit of knowing what happened. It is a sobering perspective, particularly given the impact the outcome has had on so many people's lives. It is, however, important to consider what the prevailing perspective actually was back in 2004 to put in proper context the development and adoption of strategies and decisions. All of the economic indicators in 2003 to 2007 regarding the demand for housing in particular over the median ... medium term were positive. This included underlying demographics, particularly in the household formation bracket, numbers per household, economic growth, migration and interest rates. It was estimated in 2003 that a minimum of 40,000 housing units a year would be required through the period to 2010, following which there would be a lower but still significant ongoing requirement. In aiming to become a genuine third force in Irish banking, Ulster Bank lent too much money to too many people on the basis of assumptions which turned out to be seriously flawed. This was not to say that we adopted a cavalier or reckless approach to banking, we didn't. What is clear is that our strategy, while genuine in its motives and ambition and backed by one of the worlds largest banks, was ultimately proven the have been ill-judged and mistaken in the light of what transpired in 2008 and beyond. I deeply regret that this happened while I was chief executive of Ulster Bank. I'd like to spend a couple of minutes guiding you through the banks approach to risk and credit.

Business divisions in Ulster Bank were given general, non-specific growth targets that were to be achieved within acceptable risk policies, appetite parameters and lending caps. Hence, as a full service bank, there was no formal sector-specific lending focus. Sector risk appetite over the period was set out initially at a high level. Appetite didn't set limits but articulated the bank's view of a sector which influenced business development. Over time, sector reviews and appetite statements became more detailed and prescriptive. The only property-related portfolio cap was in respect of speculative lending on commercial property. This was set at 3% of total loans and this cap was adhered to throughout my time in the bank. The Ulster Bank Group had a risk policy and controls committee. Policies were structured around rules and guidelines. Rules had to be followed and if breached, were strictly subject to exception reporting and higher level approval. Guidelines which were exceeded had to be justified. All credit policies were subject to annual review. Under the Ulster Bank credit committee and delegated authority policy, the most significant credit risks were presented to the most senior credit committee for approval. Delegated authorities to other committees were based on a combination of the aggregated amount of facilities and the borrower's credit grade. Credit authorities for the credit committees were approved by the RBS risk committee. Loans above certain thresholds had to be submitted to an RBS credit committee for approval.

In retail banking, Ulster Bank branches had no lending authority and every loan application was referred directly to credit. First Active branch managers had authority to approve mortgage lending up to certain limits, subject to policy rules. A detailed process was put in place to deal with exceptions to lending policy. All policy rule exceptions had to be reviewed and approved by the appropriate credit authority as set out in the policy. Exceptions within retail, were reported monthly to risk policy and controls committee and RBS Group credit risk and also presented to the relevant board. Responsibility for monitoring sector concentration risk rested with the risk policy and controls committee. Reports in this committee were presented to the board. The nature and purpose of concentration analysis evolved throughout the years to 2008.

In 2004 and '05 residential lending, commercial real estate and construction accounted for over 60% of the bank's lending portfolio. We did introduce a sector exposure framework in 2005 to develop a more systematic approach to concentration analysis in line with Basel II and RBS Group policy requirements. In 2006 a policy of producing quarterly operational reports was introduced to provide a risk-focused approach to the management of sector concentrations in the lending book. This was supplemented by periodic reviews.

Stress testing was carried out as part of the Central Bank and regulator's biannual process. This examined baseline versus shock scenarios provided by the Central Bank and regulator. The return for July 2008, following shock scenario testing, showed minimum tier 1 and total capital ratios of 7.9% and 8.8%, compared to base case ratios of 8.6% and 9.9%. These stress-testing processes were supplemented by macroeconomic stress testing, involving input from Ulster Bank Group economics and John FitzGerald of the ESRI. They tested three global shock scenarios and John FitzGerald used the ESRI HERMES model to simulate the impact on Ireland over the period 2006 to 2010. The results of the medium-term shock scenario were used as a basis of the Ulster Bank 2007 ICAAP return to the Financial Regulator.

I would like to address the issue of the introduction of 100% mortgages, because I know that it's a concern of the inquiry. In 2004 the First Active mortgage market share was coming under pressure in the first-time buyer segment, where mortgage brokers in particular were gaining increased traction. Following market research and customer feedback, two things became clear to us. Firstly, whilst dated market maximum loans to value were already at 92%, some of our competitors were increasingly prepared to stretch LTVs to 100% or more to secure first-time buyers' business. Secondly, our customers were increasingly having to rely on expensive short-term debt, through credit cards and personal loans, to fund the excess between the maximum LTV and the house purchase price. We already had a 100% mortgage product in existence for some years for professionals on which our experience had been very good. Given this experience, together with factors to which I already referred and the positive economic and demographic backdrop, we decided to recognise the market reality through publicly introducing 100% mortgages in what we judged to be a controlled and restricted way - no exceptions policy, reduction in maximum term. Before launching it, we put the mortgage through a rigorous risk assessment program in RBS and we notified the regulator of our intention. In the three years between mid-2005 and mid-2008, Ulster Bank and First Active combined advanced €1 billion worth of these mortgages to approximately 4,000 customers, which amounted to 4% of our total mortgage lending in this period. The introduction of 100% mortgages had little impact on our market share of mortgage lending, for which the period between 2004 and 2008 remained at 16%. In reality, the collapse in house prices has been of such a magnitude that almost any mortgage written after 2004 with a loan to value in excess of 50% subsequently went into negative equity. With the benefit of hindsight, the introduction of 100% mortgages was a detrimental initiative which became all too apparent as property values collapsed.

I appreciate that much of the inquiry's work has been taken up with the bank guarantee and in my witness statement I have touched on the difficulties which it created for Ulster Bank. I should also confirm, Chairman, the first I knew about the guarantee was when I heard about it on the news on the morning of 30 September 2008 and I was surprised, since I had been in touch with the Financial Regulator on two occasions in the preceding two weeks because of the obvious stresses in the funding market. Following the putting in place of the guarantee, we immediately made significant efforts to address the difficulties this was causing us. In the end, we were afforded the opportunity to enter the scheme but the terms involved proved impossible for us.

In conclusion, Chairman, I can say to you today, hand on heart, that all of the decisions I made were made in good faith on the basis of the best information to hand at the time. I never anticipated the circumstances that transpired in 2008 and beyond and I was mistaken not to have done so. I greatly regret that decisions I made while chief executive of Ulster Bank have had the impact they have had on so many peoples' lives. Thank you, Chairman, I'm happy to take questions.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Thank you very much, Mr. McCarthy, for your opening statement. And if I can now invite Senator Sean Barrett to open the lead questioning. Senator, you have 25 minutes.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Thank you, Chairman, and welcome, Mr. McCarthy.

Mr. Cormac McCarthy:

Thank you, Senator.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

On the 100% mortgages, there was a dissident at the board, Mr. Livingstone, isn't that correct?

Mr. Cormac McCarthy:

That ... Mr. Livingstone attended the meeting as would RBS members generally and, yes, as the minutes note, he had some reservations.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

He found supporting the proposal difficult. Did you get a response from the regulator?

Mr. Cormac McCarthy:

We had effectively a non-objection, Senator, so the regulator did not object. We engaged in some correspondence and dialogue with the regulator over a period of months, where the regulator raised some questions but essentially there was a non-objection to the product.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

When you say over a number of months, how long was that correspondence?

Mr. Cormac McCarthy:

Approximately six months, to the best of my recollection, Senator.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

So after six months you proceeded on the basis he did agree?

Mr. Cormac McCarthy:

There was further dialogue. I mean, I think it's been a matter of record that the regulator in time imposed higher capital requirements on higher loan-to-value mortgages. So that sort of developed over time but, in terms of our own particular dialogue, it was roughly a six-month period.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

And while ... the bailout for Ulster has come from the Royal Bank of Scotland, is that right?

Mr. Cormac McCarthy:

That is correct, Senator.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

€14.3 billion between 2009 and 2013. Has it been more since?

Mr. Cormac McCarthy:

I think the total amount, if I'm not mistaken, Senator, is about €14.9 billion. Subsequent to that ... that was to the end of 2013 ... I believe Ulster Bank had write-backs of about €1.5 billion in 2014. So, the provisioning has been reduced so the capital may follow in time.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Page 6 of your presentation ... the one you sent in to us. The Irish Financial Services Regulatory Authority also set a commercial real estate cap at 250% of the capital base. In July 2007 the financial regulator agreed to a cap of 500%. Could you give us the background to ... was that your request ... to raise it to 500%?

Mr. Cormac McCarthy:

Certainly, Senator, and the papers that have been presented show a narrative on this. The cap was 250% from the early 2000s and it became clear to us that there were challenges around that limit in a number of institutions, so there was a sense that that was honoured more in the breach than the observance. We engaged in a conversation with the regulator as to whether that limit could be changed. As Basel II was coming along, and portfolio analysis was increasingly getting more detailed, it would have been possible to change the risk profile to such an extent that you would get a greater allowance above the 250%. So there was an ongoing discussion with the regulator over a number of years and after ... in 2007 the regulator agreed to increase the cap to 500%.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

And did ... just Ulster or did the other banks join you in that episode?

Mr. Cormac McCarthy:

I have heard that to be the case, Senator, but during our time in discussions with the regulator, there would be no insight - as one can understand - into what was happening in other institutions.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Were there concerns about the inflationary aspect of such a large increase?

Mr. Cormac McCarthy:

Not to my knowledge, Senator, no. It was believed that it was, particularly with Basel II coming along and the risk weightings that were being applied to greater portfolio analysis ... that the 500% was something that the regulator had been looking at for some time.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Could I refer to B1 for Ulster Bank, Chairman, on page 6?

Mr. Cormac McCarthy:

Sorry, I-----

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

It should come up on your screen.

Mr. Cormac McCarthy:

Thanks, Senator. Sorry, I was trying to find it in my documents ... I have some notes, so.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

It concerns a-----

Mr. Cormac McCarthy:

Sorry, I have nothing yet, Senator. My apologies.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

UBI, page 6 ... it's the board meeting that is held in Carrickmacross, County Monaghan-----

Mr. Cormac McCarthy:

I have it, Senator. Thank you.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

"Professor [Niamh] Brennan queried the level of sanctions outside limits, especially with regard to those which breached the loan to value and the debt to service ratio limits.", and she raised those concerns in June 2004. And when we look at later documents ... for ... on this occasion ... to UBI - B2, page 21 ... that three years later the problem that Professor Brennan raised didn't seem to have been addressed. That the loans to value outside policy had gone from 6.5% to 13.6%. And there is also an increase ... it is not a complete series in the DSR outside policy. There are also concerns by the regulator that the Dublin Mortgage Centre was not a very well run operation, to put it mildly. So there's a number of things there, but why did it take so long to respond to Professor Brennan's concerns?

Mr. Cormac McCarthy:

Well starting in ... if you'll forgive the, it may take me a few minutes to explain this Senator so if you'll forgive me, feel free to interrupt me.

In 2004, we commenced a process of reporting exceptions to mortgage policy to the board, so this was the first time that the board members would have seen it so it was new news to them. A typical mortgage, a standard mortgage underwriting has a standard policy and there is typically exceptions allowed to that, so the core portfolio management limits, and we would have allowed exceptions of 10% for loan to value and 10% to debt service ratios. And what we did is in all the cases even though they were, if there was somebody looking to lend outside those particular limits that we had in place, it had to come into the centre. And in doing that we managed these exceptions so in the loan to values, it would not have been unusual for there to be a 10% variation or within a 10% variation. For example, a good chunk of those, as I understand it from my research, were very small changes in loan to value they weren't significant amounts, and on the debt service ratio, for example, if someone, 50% typically of those outside policies would have been for people with incomes of €75,000 and greater, so the greater your income the greater your debt service capacity so we had very clear policies on these but we had portfolio management exceptions that we allowed but they had to be underwritten centrally and then these were reported to the board.

As an aside it's interesting that even with the new rules that the regulator has in place there are exceptions allowed of anywhere between 10% to 20% as I understand it for loans to value and debt service ratios, so that accommodation has continued into the current environment. So what we were doing was, as was entirely appropriate, we were reporting these to the board. And having done the research and having presented to Professor Brennan and the board in 2004, as the minutes indicate she spent time with Mr. McDonnell outside the meeting and satisfied herself on the matter. And those reports would have gone to the board serially subsequent to that over the coming periods and the board minutes don't show until 2007 that there were concerns.

In 2007 as you rightly point out, the board again brought up the issue of outside policy and we agreed that we had exceeded loan-to-value policy in March 2007 in particular, again going back to my 10% limits, following which action was taken to deal with that and the records show that subsequent to that date, the LTVs outside policy and debt service ratios outside policy all declined further. So what we were doing was doing the right thing in reporting these to the board. We we were managing within portfolio management limits that exist to this day, and reporting them to the board, there was good debate and discussion at the board and to the best of my knowledge, the minutes reflect this, reflect this subsequently, the board was satisfied with the explanations it received from management.

With that said Senator, I accept that we let our standards slip in many ... in some occasions and I do regret that but we were managing within, you know, tried and tested and understood limits.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Because the regulator reported in February 2006, there is "no evidence that ... exceptions to policy ... are being reported to the board".

Mr. Cormac McCarthy:

With respect Senator, that was erroneous. So they were being reported to the board and the records show that.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

I see. Now could I come to the other regulatory issues, which are in the same volume beyond that one, UBI - B2, page 23. Now the first item on page 23 is a letter from the regulator dated 24 July, pointing out that correspondence of 12 March about regulation hadn't been replied to. Was that normal? What's that, about four and a half months without a reply?

Mr. Cormac McCarthy:

Senator it was actually, it was too long and let me explain if you'll forgive me, if I can explain the circumstances. Firstly our reply crossed, so our reply to that letter which has been submitted to the inquiry was sent out two days before that particular letter, so our letters crossed with the regulators. Yes it took too long, if I could explain why it took too long. Typically, what the regulator did in their inspections was they visited your institution, they did their work independent of discussion, there was limited enough discussion with management. Typically, they would take files away they would look at those files they would return those files, then they would finish their inspection, go back to the Central Bank or their own offices and write their report. It was a matter of continuing frustration that there wasn't on-the-ground discussion with management at the completion of their review. So typically, what would happen is, you'd expect there to be a dialogue that would say, "We found this, can you help us with that". That didn't happen and typically you got a letter and then we would have to spend quite a bit of time going back over the individual files that the regulator would have pulled to see exactly what the nature of the query was and if the documentation had been in place. And what the reply to the regulator that we issued on, I believe, 22 July, indicates is that in a number of cases we were able to say to the regulator, well actually this document was there or that had been done. So unfortunately, the process was elongated by the fact that there was very limited dialogue at the conclusion of a review and it resorted to paper. I do regret that it took as long as it did to respond but the reality was that we had to do a lot of work after we received the regulator's report to make sure we got a full response in.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Because the queries raised in their documentation to you from the banking supervision department, March 2008, included their concerns for security of loans, reluctance of large developers to provide an independently-certified net worth statement, group exposures, that UBIL understanding of the wider group is extremely disappointing, wider group liquidity, the bank not at a position to have full understanding of liquidity, the lack of robust credit review and a 15-month gap between inspections, which the regulator wanted to have at least annually, the absence of valuations, no forward-looking cash flow statement, no development cash flow statements, no information for the purpose of potential equity release and the extent which UBIL expected its relationship managers to be aware of the purpose of funds being sought from the bank. That was the banking supervisions department. I mean, it's quite a list. I don't know if it explains how long it took to reply but it would certainly give rise to concerns about the way in which the bank was operating, and in retrospect it's not surprising that financial problems were just around the corner.

Mr. Cormac McCarthy:

I'm sorry Senator, if the question is what my response to that is, as I said at the outset, the reply to that letter has been submitted to the inquiry and unfortunately, the nature of the engagement was such that a lot of those matters that arose could have been dealt with at the time of the review. We replied in full to that letter on 22 July. The response to that ... I mean if it serves I'm happy to go through each individual one, but we responded to each individual point that the regulator made and in some, in some occasions the assessment and the comment were wrong. We accepted some of their findings, I mean I said at the outset that we definitely made mistakes but a great deal of what was in that letter from the regulator was responded to and answered and following that, there was no further communication from the regulator so I don't know how best to deal with this, other than to say there is a very full lengthy response to that letter included in the papers we have submitted, which deal with most of those questions.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Because you can appreciate that this was going on in March to July 2008 and the banking system was pretty soon going to get in all these problems and the regulator did have, did have those concerns. The regulator was also concerned about the low percentage of your funding raised from deposits and in particular that you were bringing resources in from the Royal Bank of Scotland. Was that ... what was your deposits-to-loans ratio at that stage?

Mr. Cormac McCarthy:

I think our loan-to-deposit ratio for the group in Ireland as a whole was of the order of between 150% and 200%. So that would not have been at odds typically with the system at the time, as wholesale funding had increased significantly in the previous five to ten years. But in addition Senator, as the liquidity crisis hit in late 2007, increasingly funding fell into the wholesale environment so that was our ratio at the time and that was not atypical of institutions at the time. And we had limits, RBS had Financial Services Authority in the UK limits imposed on how much they could lend us as well and they were observed at all times.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Is it possible to regulate the sector in Ireland if banks with connections outside the jurisdiction can finance their lending from that source ... has the regulator control over that?

Mr. Cormac McCarthy:

It's a ... I mean, I can't speak for the current environment, I've been out of banking for four years now, Senator. But the regulator, both the Financial Services Authority and the Irish Financial Regulator would've had full visibility of our balance sheet, our funding and would've had a lot of, I suppose, conversations between themselves as regulators. So there would've been a lot of visibility and the regulator would have ... ultimately had sanction on any of those things, such as, for example, the 250% limit that you referred to earlier. So, it's complex, no doubt, and I cannot comment on what the current environment is like, but certainly at the time, despite the complexity, it was manageable. I mean, it would have appeared to me at the time that the regulator was comfortable with the fact that, you know, an institution such as Ulster Bank had significant external parentage and support. It led a lot of comfort to the capital strength and liquidity of the local institution.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

But was it an ingredient of a property bubble, that was happening at the time?

Mr. Cormac McCarthy:

I don't believe so, Senator.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Thank you. On 29 September, were you aware of the momentous events that were taking place in Dublin on that day?

Mr. Cormac McCarthy:

I wasn't, Senator. As I said in my opening statement today, I'd had a number of conversations with the regulator in the previous two weeks, since Lehman's collapsed, because stresses were apparent, just to reassure the regulator that we were sound as we could be and asking the regulator for any insight into what may be happening. But I was unaware on the 29th of what was happening.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

And did you form a view afterwards of the guarantee?

Mr. Cormac McCarthy:

I wasn't there, Senator, so it would be wrong of me to give an opinion. I didn't have all the facts, I wasn't in the room. All I can comment on was the impact it had on Ulster Bank and I've done that in my statement. It would be wrong of me to make any further comment on the guarantee itself.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Should any bank be allowed to fail?

Mr. Cormac McCarthy:

Well, that's moral hazard and I think there's been enough papers written on that over time to give more opinion than mine, Senator. I think all I can say is that there is no doubt that the collapse of Lehman's and allowing Lehman's to fail had very significant consequences. As to what the right answer to that one is, it's a good question. I think that ... I think a lot has been done by regulators and governments since the crisis to shore up the system and to make sure that banks are either right-sized or insulated with capital and liquidity to make sure it doesn't happen. But it's ... I mean, it would not be ... it's a very, very difficult question for me to answer, Senator.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Was there sufficient value from auditors to bankers in Ireland during that period?

Mr. Cormac McCarthy:

Well ... all of our audit opinions were clean audit opinions and they were ... you know, our accounting policies in Ulster Bank, which is the only ones I can speak for, were the accounting policies of the larger group, Royal Bank of Scotland, and our audit opinions and our accounts have been submitted to the inquiry. There has been some debate as to the appropriateness of provisioning policy through IAS 39 but it was what it was, so in the circumstances and with the policies that were in place at the time, you know, all I can say is our audit opinions were clean. And circumstances, you know, changed after the event.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

And was that true of the internal audits also?

Mr. Cormac McCarthy:

Again, internal audit in Ulster Bank was a pretty strong function and did a lot of work that was governed by RBS group internal audit. We had a very strong audit committee that was independently chaired. Again, the papers have been submitted to the inquiry. It acted independently and behaved independently, including separate reporting to Royal Bank of Scotland, so we had a very strong functioning internal audit function as well.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

The internal audit report of December 2006 found lax controls under the disbursement of mortgages, inadequate and ineffective control of documentation required to obtain legal title over mortgage properties and no clearly defined process or controls for the handling of non-performing debt. Was there a response to that?

Mr. Cormac McCarthy:

Yes there was. That report was brought to the board and the audit committee. Just to explain, we had converted our systems earlier that year from Ulster Bank's old systems to Royal Bank of Scotland systems and it's a matter of record there were challenges after that in the mortgage area. So there was a significant amount of oversight and insight into that particular challenge and a lot of work was done, so that by the following year ... there's an internal audit report of December 2007 that indicates that all of the issues that were brought up in the 2006 report had been dealt with. So yes, there were issues. Yes, I spent, personally, a huge amount of management time appropriately, making sure that these were addressed and within 12 months or shorter, these matters had been fully addressed as the audit paper of that time shows and the subsequent meeting of the audit committee covered. I think that was a early 2008 audit committee of the group.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Could you describe for us, then, and those at home, the outcomes of the round table discussions held with the Central Bank in relation to the financial stability reports from 2004 onwards?

Mr. Cormac McCarthy:

Sorry, Senator, would you mind referring me to the appropriate document?

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Now, it's on page 15 of ... it is ... so maybe I should make the question general, in the absence of putting my hand on the document, Mr. McCarthy.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

We can come up with the supplementary later on.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Yes. Right. Thank you, Chairman.

Mr. Cormac McCarthy:

I'm happy to take a general question, Chairman, if-----

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Yes. The financial stability meetings from 2004 on ... if you could tell us your participation and what generally went on and what were the conclusions. Thank you very much.

Mr. Cormac McCarthy:

They weren't, in particular, financial stability meetings, Senator. I mean, our engagement with the regulator was typically periodic and you know, it was more situational or thematic. So there would not have been a regular dialogue that I can recall around that particular matter with the regulator. There would've been regular meetings, I would've met the Governor, I would've met the chief executive of the regulator, at least on an annual basis and we would've had broad general discussions about banking matters generally, but, unless you can draw my attention to this specific paper, I'm not sure I recall what you're talking about.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Okay, thank you. You referred to, in your presentation, when First Active was acquired by the group, that some 700 jobs were lost. You also referred to the Ulster integration project which was to transfer functions into the Royal Bank of Scotland. Was there much job losses on that occasion also?

Mr. Cormac McCarthy:

I'm not sure about the 700 job losses, Senator. I don't recall that. We ... definitely after the crisis, we put in place a plan to resize the business for the new reality and there were significant job losses unfortunately as a result of that. But during the integration of First Active and Ulster Bank, over that period of time, the employment numbers in the Ulster Bank actually grew.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Was there much transfer of functions from local branch managers to the centre?

Mr. Cormac McCarthy:

There wasn't ... there wasn't anything particularly new. I mean, there was a theme in banking generally, of automation. Credit authorities generally, were vested in centre-independent credit. That would've been the case in Ulster Bank and that stayed the same. Other than a general drive towards automation and centralisation of processing which was thematic in the industry, there was nothing particular done. In fact, in my time in First Active and in my time in Ulster Bank, I always believed in the importance of the local branch and the local service and the community side of that. So, thematically, we were keen to make sure that local service was delivered locally and as best done locally, but there would've been, as a matter of course with greater systems automation, there would've been increasing centralisation, yes.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Because some people might say that when that was the system that banks were solvent and that the managerial reorganisation, integrations and transfers of functions, lost the connection between the manager and what risks were worthwhile in the local community and which ones were not.

Mr. Cormac McCarthy:

It's ... I've heard that comment before. All I can say is, in the case of our own institution, nothing changed. When I took over as chief executive of the group in January 2004, the credit authorities remained the same as they had been beforehand, so there was no ... there was, as you've referred to in the exceptions reporting, there was appropriate hierarchies of people who were looking for, you know, to override a policy. But there was no change in the local authority or local, in fact we believed fundamentally that the connection between our branch manager or our business centre manager was a very important one. In my time in the bank, we actually opened more branches and we opened more business centres across the country to that effect.

Photo of Sean BarrettSean Barrett (Independent)
Link to this: Individually | In context | Oireachtas source

Thank you very much. And thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

If I can just deal with two matters here before we bring in Senator O'Keeffe, Mr. McCarthy. One is just to clarify something you were saying about the round table meetings that was facilitated by the regulator from 2004 onwards. Were you saying that Ulster Bank were not part of their process, or you were not part of that process?

Mr. Cormac McCarthy:

I ... my memory may serve me, but I don't recall any particular ... if you're referring to a meeting that took place with the chiefs of all the banks, that we were not included in any meeting like that that I can recall, no. Our engagement with the regulator was very much institutional and one-to-one, Chairman, if that's the question you're asking.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay. And I've just one other matter if I could deal with this as well, it's just, it's in regard to the property related lending strategies of the bank, and bring your attention to core document UBI - B2, page 13. And as you can this, this is-----

Mr. Cormac McCarthy:

Yes, Chairman, I see that, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

It's an Ulster Bank presentation.

Mr. Cormac McCarthy:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

And it's, it ... a presentation of what I can gather, is a strategy document, Our Goals and Customer Strategies. These are where Ulster Bank sees itself going into the future. They ... it would appear, as outlined in this - I think this was presented to the board on 27 April 2007, and the question I'll be putting to you it was to become ... the target for Ulster Bank was to become the No. 1 new mortgage lending by tripling current account volumes, and secondly to double your share of corporate lending in the Republic of Ireland from 15% to 30%. I may be asking your views on the ambition of that in a moment. But in deciding the strategy, did you have any concerns that this could potentially lead to a degradation in credit quality in the drive to gain market share?

Mr. Cormac McCarthy:

It's a good question, Chairman. Just to explain the background to this: in 2006 we had come through a significant integration programme with Royal Bank of Scotland, and as had been the case when I took over as chief executive of Ulster Bank, our ambition was to take on AIB and Bank of Ireland, so being No. 1 in the island of Ireland was the stated ambition. What this programme tried to do was rally the flag and get, you know, the organisation united round a unified ambition to be the No. 1 bank. And what these numbers were purporting was to say that if you were the No. 1 financial institution in the country this is what the numbers would look like. So none of the shares that are up there, or indeed the numbers if looked at, the market leading position in the market at the time would've been different. So, we were not seeking in any way to be bigger than the existing leader in the marketplace. And so what these set out was what that ambition in five years, if we were to achieve the ambition of becoming No. 1, that's what it would look like. Governing all of this is risk. So as a table stake in our business, as I explained the structure at the outset of how things worked is none of this would have done without the appropriate reference and paying the appropriate attention to the risk parameters and the risk structures in the institution.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Is there an implied statement, or not, in the strategy document that this is grow the bank as fast as you can?

Mr. Cormac McCarthy:

No, Chairman. I mean, you know, it would ... everything we would have done would have been done-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Cormac McCarthy:

-----within a very strict and rigorous framework that was joined into the parent. So even if, even if I had wanted to go and grow to your - to use your language, the way you described it - I would not have been permitted to do it because I would have had to be able to fund the institution appropriately; I would have had to make sure that my lending was done appropriately; that my customer acquisition was done appropriately. So, all this tried to do was say if we were No. 1 these ... this is what the numbers would look like.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Now, in your own testimony earlier you said up to 2004 onwards, and mortgages issued after that were going to be, most likely, in negative equity. Now I'm assuming what you're talking about is first time buyers coming in, not people who are taking equity from previous properties, in the main?

Mr. Cormac McCarthy:

Correct. Well, the first-time buyer market, Chairman, was typically 25% to 30% of the market, and the majority of the market was refinancing, people upgrading, but-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

And was this targeted towards the first-time buyers market?

Mr. Cormac McCarthy:

This would have been the overall market, so this would have been the total market.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay. Now we do know that Ulster Bank were giving 100% mortgages loan-to-value ratios of 100%. You had the tracker mortgage, as well, which was a part of your product mix, and your mortgage schedule, the traditional mortgage schedule would have been in and around 20 years. What was your mortgage schedule around this time? What would it have gone out to?

Mr. Cormac McCarthy:

Well, typically it never varied much because the majority ... I mean in typically in loan to value, the majority written would have been around the 70%. So, typically you could get a mortgage at that time with anything of terms up to 40 years.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Up to 40 years? Okay.

Mr. Cormac McCarthy:

That was, that was generally available in the marketplace, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

But the traditional prudential practice for banks that had been in existence for decades, if not centuries, was in around 20 years. Would I be right in saying that?

Mr. Cormac McCarthy:

On average it would have been around that amount, but-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay.

Mr. Cormac McCarthy:

And typically the portfolio would have had that, so in a balanced portfolio you would have had an average life. In fact, the average life would have been a lot less than that, because typically in mortgages you get early repayments of capital. So actually, the life is a lot less than that. But the typical term, on average, would have been of the order of 20% to 25%.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

And we had lending ratios back in the day as well, where it would have been maybe two and a half to three times the principal earner's and one time the secondary earner of the household. Did that rate increase or did it multiply by any factor in Ulster Bank during that period?

Mr. Cormac McCarthy:

It changed, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

To what amount?

Mr. Cormac McCarthy:

So typically in the 1980s and 90s it was two times gross income or, two times the principal earner and one times the secondary earner. What that didn't take account of particularly was the improvement in personal take-home pays as tax rates fell. So the industry as a whole switched to a debt service ratio, which was a net disposal income.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Yes.

Mr. Cormac McCarthy:

So people stopped doing the two times gross income because it couldn't take account of the take-home pay, and switched to a net disposable income, and that typically fell in around the 40% to 45% level. And if you look at the typical mortgage portfolio that was written in Ireland say between the mid-90s and say, 2008-09, that typically would have been around the 45% level. So 45% of net disposal income was the typical, typical stress test or hurdle for repayment.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

But at the time the affordability rate of entry into the market for first-time buyers required Government intervention through the affordable housing programmes, and in parts of the country we were seeing subsidised entry at in and around €250,000 in urban areas, probably more in Dublin. So, at this time we had a mixture of 100% LTVs, tracker rates, mortgage schedules going from 20 years out to 40 years, as you said this morning, and lending ratios increasing severalfold, and we had to have State intervention to get people into the market because of earnings levels at the national industrial rate. Did anybody in Ulster Bank say that there's a problem here?

Mr. Cormac McCarthy:

Chairman, at the time all of the indicators were positive. So, you know, in hindsight, as I've said, we've made mistakes, I acknowledge that. We definitely got it wrong, but at the time all of the economic indicators were positive. House formation was increasing, there was considered to be a deficit in house formation in Ireland. There was net migration, economic growth was strong, employment was full. The general sense of, you know, house production for the foreseeable future was strong, and we did stress test those as has been indicated. But, you know, we clearly got it wrong, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

But there was nobody in Ulster Bank at the time ... we know ... you said you got it wrong, but at the time was there anybody in Ulster Bank saying that this could be wrong? And if there wasn't, why was that concern not being expressed? That's not with the benefit of hindsight, but just anybody at the time saying that there could be a problem here?

Mr. Cormac McCarthy:

There wasn't Chairman. I wish I could say that, you know, there was. I wish I could go back and change things, but at the time the general consensus view that prevailed, and the view within our own institution was that there'd been a paradigm shift and that there was, you know, very strong growth, you know, for the foreseeable future, both politically ... it wasn't just within, you know, within Ulster Bank. We had our, we had RBS Group economics, who are an independent view, as well. We had third party economics, we had stress testing from the Central Bank, we had stress testing from the ESRI. Unfortunately, Chairman, no.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Well, we know from earlier testimony here that some of the stress testing wasn't looking at the property sector at all. We know that from earlier testimony given here. But looking specifically at Ulster Bank, what was absent in your risk assessment that this wasn't showing up?

Mr. Cormac McCarthy:

I don't think we gave enough account of the ... we took enough account of the potential for extreme events to happen. We accepted the conventional wisdom that a soft landing was the logical outcome. The view was that Ireland, having come into the euro environment, had a very stable currency now that it hadn't had before. There was an infrastructural and economic deficit in Ireland that was being rebuilt, and low interest rates prevailed. So, that, for want of a better phrase, groupthink, or consensual view, prevailed throughout the period, and any of the stress testing that was done did not take enough account of potential for, let's call it catastrophic events, to occur. That was the mistake was that we didn't challenge ourselves enough as to what the potential outcomes would be if there was a significant, major shock to the system.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

But I'll bring in Senator O'Keeffe after this, so just the traditional banking model that has sustained banks for over a century in this country and for several centuries, the prudential rules had changed completely. Did it require an external factor outside the Republic of Ireland for Ulster Bank to actually run into difficulty with these products now coming on line?

Mr. Cormac McCarthy:

I'm not sure I ... with respect, Chairman, I'm not sure I understand the question-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

If a person bought a house in the 1980s, albeit with a different interest rate at the time, they would have had a 20 year schedule, the ratio of their income would have been more measurable to the mortgage they were taking onboard, they would have had to come up with 90% ... or they'd be on an LTV of 90%, they'd have to come for a 10% deposit, there ... there wouldn't have been a tracker rate, that would be subject to all the variables coming down the line, so regardless of any external stimulus that might have been happening outside the Republic of Ireland, given these significant changes away from traditional banking practices, was there or not a danger already in place in the Irish banking sector because of the product and how the product had changed over two decades from the 1980s into the 2000s?

Mr. Cormac McCarthy:

Inherently, yes, but the circumstances were we had very low and stable interest rates so that was something we'd not experienced before and we even stressed those interest rates for 2% to 3% so stress tests were performed. In addition we had significantly reduced personal tax rates so take home pay was higher than it had been before. So the economic circumstances had changed dramatically, Chairman, but you are right, you know, we did not take enough account of potential stress, so we let our standards slip.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you. Senator O'Keeffe.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Thank you, Chair. Mr. McCarthy, when we go back to the Financial Regulator, forgive me, in 2003, in this ... I'm sorry I don't know what the reference is, this is this additional document, 2003, the letter that the Financial Regulator wrote to the chair, Mr. Burgess, and basically outlining quite a number of deficiencies at the bank. "Ulster Bank unable to provide details as to the precise level of exceptions outside policy directly from their systems" and so on, "loans in breach", "insufficient evidence of income on file", and so on. You're familiar with this document?

Mr. Cormac McCarthy:

I ... I got this document last night, Senator, thank you.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

I know. Yes. Yes, and you're familiar with it. So then again in 2004 we have, again to Mr. Burgess, in January, so that's seven or eight months or so afterwards, again, difficulties arising with ... with the Ulster Bank. So this is quite a long time ago, 2003-2004, and then, of course, we come up to 19 June 2006 - I think my colleague has mentioned this - and again a whole series of events, so I ... I'm really very puzzled that this would have been going ... I do appreciate these things take a long time, there's lots of paperwork and so on, but it does not appear from the reading of those documents that any substantial progress was made by the bank, the similar problems arising all the time. And people have been very critical in the public domain about the Financial Regulator, in fairness, they have. And here is the Financial Regulator saying to you, "You haven't done this, you haven't done that, and you haven't done the other", but they're saying it over a period of three years.

Mr. Cormac McCarthy:

Yes, Senator, I can see how that can be interpreted from these documents, so if I might provide some context, again, in the time I had available since last night. I actually did recall this when the letter came in. The regulator wrote to every institution, so the letter you see went to 11 institutions, as did the following letter, both the letter of 31 July and 15 January were general institutional letters. So they went to everybody in the marketplace, not just to Ulster Bank.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Yes, but you're just speaking for Ulster Bank.

Mr. Cormac McCarthy:

Yes, I am. But all I'm saying is that the ... just to give some context, this wasn't just about ... this wasn't just about Ulster Bank.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Yes, I know. I know. We've had that testimony before-----

Mr. Cormac McCarthy:

I think the second point is, again, the ... and we did ... we did discuss this with the regulator at the time, the methodology that the regulator chose to use was to come and do the review, not discuss the matters that they had found on the review with management, in other words, can you explain this, can you show me this, go away, and then write the letter in. That was a matter of some frustration over time, and so we replied to this letter and many ... I don't ... in the time available to me I haven't been able to find a copy of it, but from the board minutes that I've been .... managed to get a hold of in Ulster Bank and First Active subsequently, again, I am satisfied that we answered the regulator's concerns. The regulator asked us to raise things at board, we did that; it asked us to bring policies to board, we did that; it asked us to report exceptions to board, we did that. On the individual file by file cases, we would have gone back to the regulator on each one of those, and, in many cases, as subsequent reviews have shown, we were in a position to be able to answer, and, in some case, correct the regulator's misapprehension about files, because when you look at mortgage files or loan files, they can be quite thick and lengthy. They're not one page on a computer document or an A4 sheet, so there can be quite a degree of paperwork involved, and sometimes you need someone to guide you through it. So we took these letters very seriously. Every year the regulator would do thematic reviews. We always brought them to the board, we always replied, we took action where it was appropriate, and the evidence of that is in the regulator's either lack of follow-up or follow-up subsequently, but these particular letters, again, were thematic industry letters, and the points that were made regarding Ulster Bank were addressed and followed up with the regulator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

But, just to be clear, was Ulster Bank in breach, as per those letters notwithstanding they were sent to other people? I don't care about them, I care about you. Were you in breach according to those letters?

Mr. Cormac McCarthy:

In breach of ... of-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Of what they said?

Mr. Cormac McCarthy:

Specifically, Senator, I don't believe in most cases we were. There would have been instances, yes, where they would have found things, certainly, and we would have corrected them, and, indeed, our board minutes would show discussion and correction, but in the main, my recollection is, we were able to respond on most of the points to the regulator, addressing their concerns. And indeed, if the regulator brought something to our attention that we were in breach of, or doing wrong, we would have corrected it. We took our responsibility seriously in that regard.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

So, as a banking inquiry, we should set these letters aside and not consider them as being relevant to the behaviour of Ulster Bank at that time, is that broadly what you're telling me?

Mr. Cormac McCarthy:

I can't, Senator, all I can give you is the context in which they came, so, looking at the letters ... looking at the letters cold, you're correct. All I can say to you is that we responded to every one of these letters, we answered all of these questions. I don't have the responses to hand. What responses I've been able to find to some of the regulatory letters that were presented to me I have given back, and it shows, as do our board minutes, that we ... we took the matter seriously and we responded. Contextually, the point I make about process is it is very challenging if you're in a situation where someone does a review, takes a load of files, and doesn't ask you a question at the time, goes away, writes a letter, and then it comes into you, and it's clear that they have missed something, or not got something right, that's the challenge.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Okay, well then you will ... I think my colleague, Senator Barrett, did refer to the Dublin Mortgage Centre and the six significant issues that were mentioned there. That, correct me if I'm wrong, was an internal document created by Ulster Bank itself, not by the regulator, and it was ... discusses very serious elements that are going wrong, so I'm ... am I right in that?

Mr. Cormac McCarthy:

That's correct, Senator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Yes, so ... So that's your own guys telling you things are wrong.

Mr. Cormac McCarthy:

Correct.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

So now you're saying to me that the Financial Regulator's letters really aren't wrong but your own guys were wrong, or not, or were they wrong too, or right?

Mr. Cormac McCarthy:

I ... I'm sorry, my apologies, Senator, I'm not saying either. I'm simply saying that we took these letters from the regulator seriously. There is context for each of the letters, which doesn't appear. We replied to all of the issues. The fact that the regulator, in these particular letters, did not follow up with us subsequently indicates to me that they were satisfied with our responses. As regards the Dublin Mortgage Centre we had issues post a conversion of a system which we self assessed and raised. I believe I asked for internal audit to do that review myself, but I may be incorrect in that. And as those issues arose, we subsequently corrected them and fixed them. As issues came to our attention, Senator, we took them seriously and we fixed them.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

But they ... in fairness, they were very serious issues. You know, non-performing debt, "clearly defined processes or controls for the handling of non-performing debt is not currently in place", "mortgages are processed to completion without sufficient consideration being given to whether all terms and conditions and documentation requirements have been satisfied". You were, after all, a bank. It ... these things are quite ... they seem to me to be quite serious breaches of your own, normal kind of business. Or maybe I'm wrong.

Mr. Cormac McCarthy:

That's ... no, Senator, that's ... as regards the internal audit report, if that's what you're reading from, that's correct, and we absolutely had issues after that. We self ... we self-raised them, the regulator was aware of them, we took significant steps with Royal Bank of Scotland to fix them, and by the end of 2007 they were fixed, in fact they were fixed largely early. So, yes, we had issues, I regret that it happened, but we self-assessed them, we told everybody who needed to be told about them, and we fixed them.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

You talked earlier on about the 100% mortgages and we heard testimony that Mr. Goggin said he had a visit from the Financial Regulator. This was in his own testimony, page 19, "I had a visit from the Financial Regulator who himself was expressing concern about the development of 100% mortgages in the marketplace", and Mr. Goggin remarked that it was odd because the Financial Regulator came to visit him and that wasn't normally the case. That's why he remembered it very particularly. And I think you've said to us ... to my colleague, that you didn't think that the Financial Regulator had any concerns, so maybe ... you might just clarify for me.

Mr. Cormac McCarthy:

The Financial Regulator did not object to us launching the product. We had a dialogue with the Financial Regulator about aspects of the product. They asked us some questions and we replied. I think the ... the thing that Mr. Goggin was referring to was the Financial Regulator did talk to all the financial institutions about introducing higher capital charge for increased loan-to-value products. So, what happened subsequent to the introduction of first ... 100% mortgages and higher LTV mortgages, was the regulator put a higher capital requirement on those loans. And that, I think, I may be mistaken ... I think that's what Mr. Goggin referred to because the regulator-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Well he says, "I had a visit from the Financial Regulator who himself was expressing concern about the development of 100% mortgages in the marketplace".

Mr. Cormac McCarthy:

I can't speak for Mr. Goggin, Senator, I'm sorry.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

No, I'm not asking you to. I'm saying that he's observing that the Financial Regulator was concerned. You're saying that that didn't happen for you.

Mr. Cormac McCarthy:

I'm saying the regulator did not object to our launch of the product.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Do you believe, Mr. McCarthy, as the chief executive officer, that you were satisfied with the level of financial information you received? I'm talking here about the board. Did the board have the capacity, did it have sufficient information to carry out its duty of oversight effectively, do you believe?

Mr. Cormac McCarthy:

I believe so, Senator, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Okay. You've nothing to add to that, no?

Mr. Cormac McCarthy:

We had, you know, there's no doubt we had issues when we converted the systems from Royal Bank of Scotland on to Ulster Bank in 2006 around just classic computer conversion stuff, where we had some information gaps but they were fixed in time and there was never a gap that was systemic or in any way would have put the situation in trouble.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Just to clarify, in relation to Professor Brennan having that conversation outside the room, that's Vol. 1, B1, page 6, where she had raised her concerns again and my colleague has raised this with you - it was agreed that Mr. McDonnell would meet with her outside the meeting to address her concerns. Was that something that routinely happened? You know, why would she be asked to leave the room if she had a view that was contrary to the other views?

Mr. Cormac McCarthy:

I think the minutes may not serve that well. Typically, what would have happened is in ... if something was lengthy or complicated, it was often better to take it ... for a board member to come in and have a separate long conversation about a matter and we encouraged that, so if a board member had something they wanted to learn more about or understand more about it, it was not unusual and that would have been the chair, so William Burgess, who was the chair at the time, would have decided that. It would be better if the board member had a conversation with the team member of management, excuse me, outside the room and then bring back to the board any subsequent concerns.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

But not minuted that meeting ... those meetings wouldn't have been------

Mr. Cormac McCarthy:

I don't have sight of the following minutes but if there had been an issue, it would have been recorded in the minutes that the non-executive member of the board had a subsequent issue and it would have been raised and minuted accordingly, as, you know, our minutes were quite detailed.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Is that good practice at a board level of a publicly quoted company to have ... sort of ... outside meeting ... I'm asking, I don't know the answer?

Mr. Cormac McCarthy:

It's not unusual, you know, in trying to run a meeting to a certain time period, if a matter becomes, you know, either detailed or complex, it's not unusual for there to be an agreement either to have, you know, in some cases either a sub-committee meeting or for a board member who has a particular interest to go and inform themselves about something outside the meeting. That would be quite normal and then it would be normal if that board member had further concerns to come back to the board and say to the chairman "I met with X, I was either satisfied or not satisfied". The absence of any minute to the effect would seem to indicate that there would be satisfaction and that has been the case with this particular point having been raised by Professor Brennan.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you. On Vol. 1, B2, pages 9 and 10, there was the group risk credit policy and strategy committee minutes of the meeting held on 28 July 2005 and this was a meeting, Mr. McCarthy, to discuss, I think, the whole first ... the whole ... the 100% mortgage introduction and, at the end, there is a decision and it says "JM summed up by confirming that all parties were in agreement to support the product", the product being the 100% mortgage-----

Mr. Cormac McCarthy:

Yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

-----"BL stated that the decision should be recorded as ratified as the product had already been released". Now I understand from that the product had already been released by First Active and this was now Ulster Bank having a look at the same product, is that correct?

Mr. Cormac McCarthy:

That's correct, Senator, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Is it the case the board of Ulster Bank would have been likely, or not the board, the group risk credit policy and strategy committee, would they have been likely to overturn a product that was already on the market with First Active, a company that you owned?

Mr. Cormac McCarthy:

It's unlikely that they would have, Senator, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

So this was a kind of a ... was this closer to a rubber-stamping than a ....

Mr. Cormac McCarthy:

I don't think so, the process was different. So the underwriting process in Ulster Bank would have been different and, therefore, it would have been appropriate that the Ulster Bank would have gone through the appropriate process for Ulster Bank, so, no it wouldn't have been, but given the fact that the product had already gone through an internal new product approval process, it had gone through the RBS risk process, then it would have been ... it would have been reasonable to expect that there .... that product would have been launched. It was not unusual to launch products across brand but, for good governance, it was important that the Ulster Bank risk committee went through it and if they had concerns or issues, that would have been escalated as well.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

I mean, given that 100% mortgages were literally handing somebody, you know,carte blancheto buy a house, what was going through Ulster Bank's mind at that time that they thought this could possibly be a good idea, given that you had, I imagine, in the bank quite a number of people, possibly including yourself, who had been bankers for a very long time and had always known that there was a kind of practice there about mortgages that, you know, don't give 100% because people need to have saved something and so on? What on earth happened at that point that somebody said "Bingo, this is a good idea"?

Mr. Cormac McCarthy:

Well, as I've explained, Senator, I do regret that we did it, so I accept that we made a mistake. That said, the circumstances at the time were that this product was generally available in the market; it wasn't publicised. And what we were finding with our customers was that well, No. 1, from a competitive position, we were losing share of the first-time buyer market because others were doing 100% mortgages. The second thing was we had seen customers who were to try and get the deposit for a house, were extending themselves on personal loans and credit cards, which is not the right way for people to find deposits for houses, and those two combined with the fact that we already had a 100% product in existence for some time for professionals, so typically you know, people who had significant income, more income flows coming, you know, with their businesses, doctors whatever it may be. So we had experience of the product, so it was a combination of those factors led us to believe that it was the right thing to do. In hindsight, it was the wrong thing to do, but those were the motivators at the time.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

So, basically, you felt under pressure competitively and wanted to keep your market share or increase your market share at that time?

Mr. Cormac McCarthy:

There was ... candidly, Senator, there was a degree of that, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

You were ... you're members ... I don't know if ... assuming you still are of IBEC, the Irish Business & Employers' Confederation?

Mr. Cormac McCarthy:

We were at the time, Senator-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

You were at the time----

Mr. Cormac McCarthy:

I don't know now.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

In 2008 and this is the one I have the note for, you paid €194,000 in annual fees to IBEC, of course along with other banks, but again you're Ulster Bank. What did you get for your €194,000?

Mr. Cormac McCarthy:

Well, I can't attest to the number but if you say that's the number, I take it as read. It would have been ... I mean there would have been .... IBEC would have done a lot of work on the industrial relations front, so we had a significant union presence, unionised staff cadre, so IBEC would have been the employer representative in negotiation around national wage agreements, things like that. So it's very difficult for an individual institution to do those things independently, so that's a simple case of ... IBEC would have been the employer's representative in doing negotiations around national wage agreements, etc., and so in engaging with our union, we believed it was helpful to be part of the employers' confederation so that we could make sure that we had, you know, a seat at the table when national agreements, etc., were being discussed. That's one simple example. There were other training courses that IBEC did, they did a lot of consulting work as well and so there was a raft of services they provided, but the one that occurs to me most is the industrial relations side.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Thank you. In Vol. 1, B2, page 3, it says that, "Additional risk transfers [are] required by [the] end of April", and a memorandum to the board dated August 2007, also in that book on page 16, notes that risk transfers had amounted to €4.5 billion, exclusive of some "notes which are transacted for Large Exposure risk diversification purposes". So, I'm wondering if you can explain to us what is happening here, what was going on?

Mr. Cormac McCarthy:

Senator, this goes back to 250% limit that's been discussed and so as part of the capital planning for RBS Group, RBS would maintain minimum capital levels in its various subsidiaries, so it's not comparable with, say AIB or Bank of Ireland, who had the total capital in the public company and so for capital planning reasons, more of our group capital was held in Ulster Bank Limited, which was a Northern Ireland company, than in Ulster Bank Ireland Limited and the regulator had this 250% limit of own funds which you could lend into property. So, what we did was, with the agreement of the regulator, we did risk transfers to house some of that exposure and any of that exposure in excess of 250% was held on the balance sheet of Ulster Bank Limited through risk transfers, and again this was approved and agreed with the regulator and so what happened subsequently was that when the regulator agreed to the 500% limited, we then unwound those risk transfers and took them on the balance sheet of Ulster Bank Ireland Limited, the Republic of Ireland bank, and put additional capital in to support that, so it was largely a group ... RBS Group capital planning exercise.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Did that mean that Ulster Bank in Ireland, that your regulatory returns were an inaccurate picture of the bank's true exposure to the property market in the Republic of Ireland, you know?

Mr. Cormac McCarthy:

No, Senator, because the risk transfers took that risk onto the Ulster Bank Northern Ireland or Ulster Bank Limited balance sheet and, as I said, the regulator had full visibility and transparency of those transfers.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

And approved that you could do that?

Mr. Cormac McCarthy:

I mean, it was ... it was a non-objection, Senator, which was effectively an approval.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

On the ... you just spoke briefly about the guarantee, the night of the guarantee, and you said that you learned about it, I think, the next day; is that correct?

Mr. Cormac McCarthy:

That's correct, Senator, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

So, obviously in the day leading up to the night, there were obviously all kinds of meeting, Anglo Irish, the Central Bank, all kinds of people were on the phone. Bank of Ireland and AIB obviously decided to go in and see the Government because they felt things were really, really running into the wall. How was it that Ulster Bank was just completely not in that loop?

Mr. Cormac McCarthy:

I can't answer that question, Senator. I can speculate: the fact that we were not an indigenous Irish bank was ... you know, that we had a foreign or international shareholder was a factor in that, but, as I said in my opening statement, I rang the regulator after Lehman's collapsed. I rang the regulator each week before the 30th, just to ... just to reassure the regulator that RBS took its responsibilities seriously and that we were acutely aware of, you know, the stresses that, you know, that may have been there and to also ask the regulator if there was anything that we should know or be aware of, but I got no ... I got no indication back from the regulator to that effect, so essentially, on the night of the ... I learned about the guarantee and all that went with it on the morning of the 30th.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Did anyone ask you to buy Anglo Irish?

Mr. Cormac McCarthy:

No, Senator. There was some conversation subsequent to the guarantee about institutions merging and doing, you know, transactions. I think there's been some evidence to the committee about that and there were some conversations held with us as to whether we, as a group, would be interested in participating in consolidation of the Irish banking sector.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Final question, Senator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

And what about Irish Nationwide?

Mr. Cormac McCarthy:

No, Senator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

No, okay. So, did you ever make any phone calls to the Department of Finance, or did anybody from the Department of Finance ever contact you, in and around this period of time while you were talking to the Financial Regulator? Was there any conversation?

Mr. Cormac McCarthy:

Not prior to the 30th.

Mr. Cormac McCarthy:

Not prior to the night of 29 September, Senator, no.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Okay. When you talked about wanting to be the third force, as a bank, did your company spend much on marketing, or how did you ... was that something that was internal idea or did you externalise it? How did that manifest itself?

Mr. Cormac McCarthy:

It was very much an internal ... you know, I mean, when we would produce results, or, you know, our annual results for RBS, we would have kind of reiterated our ambition, but we did no more than advertise our product and our services, as others would have done, so there was no ... there was no kind of branding externally to that effect. It was a generally held ... there was a lot of talk in the market over many years as to the need for a third force. It became kind of the lingua franca of the time, so we didn't go out and post that on posters.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Senator, I need to move you towards a final question.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Yes. On Vol. 1, B5, page 4, you talk about incentive schemes and you say they "included Commercial [and] Residential real estate loan volumes" and I'm just trying to establish whether or not the incentive schemes were linked to volume.

Mr. Cormac McCarthy:

Incentive schemes would have had multiple facets, as I think the papers we submitted would say, so typically we would have incentive schemes that were what were called a balanced score card, so there would have been ... there would have been targets for income, there would have been targets for deposit raising, there would have been targets for staff satisfaction, for customer satisfaction and, typically, one of those, you know, would have been loan growth, so ... but it wasn't of itself. There would have been multiple. We used quite a number of RBS variable rate and incentive scheme products that they had existing in the UK bank and RBS, so they would have been very, you know, balanced score cards and people would have had targets for multiple things at the start of the year, not just one thing, Senator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

No, I appreciate it's not one thing, but it does specify, "included Commercial/Residential real estate loan volumes" and I'm just trying to-----

Mr. Cormac McCarthy:

Yes. Yes, Senator.

Mr. Cormac McCarthy:

That's correct, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

Okay, okay. Just coming to the end, on page 4 of your statement, you say: "I was assured by Royal Bank of Scotland that capital and funding support would be made available to support growth. In this regard, capital and liquidity management were not considered to be a critical, local Ulster Bank priority." Do you think that this may have had, or did it have, an effect on the behaviour and attitude of Ulster Bank executives in the local market, in other words in the Republic of Ireland?

Mr. Cormac McCarthy:

I don't believe so, Senator, because the risk parameters that we were subject to would have defined our capability and our appetite, so the advantage of that was simply the fact that we didn't have to have a full service, you know, treasury. We had a local, smaller treasury. As it transpired over time, as the FSA put in more limits on the amount of inter-company lending RBS could put in place, we actually had to beef up our own treasury so, as time passed, notwithstanding the commitment at the outset, and as the papers will show, we had our own group asset and liability committee, so we were very heavily exercised in our own funding as time passed, but we couldn't have done anything that was outside the risk framework that was put in place for us.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Final question, Senator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

So you don't think that the combined facilities available to Ulster Bank of risk transfer and funding support mimicked the sort of function of cheap credit following the EMU that you yourself raised in your opening statement?

Mr. Cormac McCarthy:

I don't believe so, Senator. There's no doubt that liquidity was readily available in the system.

Mr. Cormac McCarthy:

It wasn't just for Ulster Bank, it was readily available generally and I think that's been witnessed. It was comforting to know that you were part of a bigger group and that you had access to funding, if and when you needed it at points in time, but again within the constraints of an overall risk framework that you had to manage too.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

But comforting, rather than that it gave rise to risk?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

This is your last question now, Senator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

To make people more reckless? Yes, I'm just clarifying.

Mr. Cormac McCarthy:

Yes, absolutely, Senator, the two are separate. Treasury and capital management were entirely separate to credit risk.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you. Senator Marc MacSharry.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Thanks, and thanks, Mr. McCarthy, for coming in and being here. You said there were three legal entities here in Ireland and each with a board of directors; isn't that correct?

Mr. Cormac McCarthy:

That's correct, Senator, yes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. There are 27 registered companies for Ulster Bank between Dublin and Belfast. Why would that be necessary?

Mr. Cormac McCarthy:

It's not unusual in large groups and in banking groups to have multiple subsidiaries, so, without wishing to over-complicate it, so, for example, in Ulster Bank we would have had Lombard & Ulster, which would have been the leasing business, that was actually part ... that was one subsidiary. There would have been other subsidiaries put up for a whole variety of reasons and there would be legacy subsidiaries. In fact, one of the things we did after the Ulster Bank and First Active merger was the group had a programme put in place to reduce the number of subsidiaries because once you set up a subsidiary, it's actually very hard to close it down, or deal with it. You end up with trapped capital and dividend issues, so it's not unusual in large groups, and not even ... not just in banking groups, for there to be multiple companies in a group. A lot of those companies would have been dormant.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Were you responsible for all of these 27?

Mr. Cormac McCarthy:

I wouldn't have been on the board of all of those 27. I would have been on the board of a number of them, but we would have had a variety. So, we had a treasury business in the IFSC, we'd an IFSC company, so that would have been part of the group as well and there would have been board members on that so, you know, ultimately, as a director and chief executive of the holding company, I would have had responsibility as chief executive for the group as a whole.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And would these 27 all have been in the group?

Mr. Cormac McCarthy:

To the best of my ... to the best of my knowledge, Senator, some of them may ... I don't have the chart in front of me, but some of them may have been RBS subsidiaries, so RBS may have had ... would have had IFSC businesses, international businesses, that would have been outside the Ulster Bank Group and may have been in the RBS chain. I wouldn't have any involvement in those. But any of them that were subsidiaries of Ulster Bank, in logic, as the top company chief executive, I would have had responsibility for them, but a good chunk of them, Senator, would have been dormant companies.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And whether they were registered in Belfast or Dublin, would that have-----

Mr. Cormac McCarthy:

Obviously, in terms of regulation and legal entities. I mean the companies law is different in Northern Ireland and in the Republic of Ireland, so there are different obligations for companies registered in Northern Ireland and registered in the Republic of Ireland, so, therefore, one would have had to pay attention to those obligations and, indeed, the regulatory obligations that went with the different jurisdictions.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

They would be different, would they, the regulatory-----

Mr. Cormac McCarthy:

Yes, they would. The Financial Services Authority, Senator, was the governing regulator for Ulster Bank Limited, which was a Northern Irish company. The Irish Financial Services Regulatory Authority was the governing regulator for First Active plc and Ulster Bank Ireland Limited, which were the Republic of Ireland banks.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Was entities on either side of the Border ever used to distribute concentration, to keep a lower level of, say, construction or-----

Mr. Cormac McCarthy:

As I said in response to the Senator's question, there was ... the regulator in the Republic of Ireland had a 250% own funds limit, so we didn't want to breach that and, therefore, what we did was rather than inject capital into the Ulster Bank Republic of Ireland business, which was expensive for the RBS group, we used the capital base in Northern Ireland to transfer the risk in there and again, as I said, that was all done with the knowledge and agreement, for want of a better phrase, or non-objection of the regulator. So, the regulator was aware of what we were doing.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

So is it fair to say then that the regulator endorsed, or not, that you would split the business, if you like, between one regulatory system and another in order to stay compliant?

Mr. Cormac McCarthy:

That's one way of looking at it. Let me put it a slightly different way: if the regulator had insisted that we do something else then we would have injected the capital into Ulster Bank Ireland Limited to deal with that. So if the regulator had come to us and said, "We don't want you to do this," and could support that argument ... "We want you to actually hold the capital in Ulster Bank Ireland Limited," then the capital would have been provided, as it was in 2007 when the regulator increased the limit and we supported the transfer with capital.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

While I know you left in 2011, up to that date was there any difficulty, because of the number of entities, in retrieving assets?

Mr. Cormac McCarthy:

Not ... to the best of my knowledge, Senator, no.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Not at that stage?

Mr. Cormac McCarthy:

No, I don't believe that was ... most ... again, a lot of the companies that you refer to would have been dormant companies or what are known as special purpose vehicles, and most of the, kind of ... most of the lending and the banking would have been done in either of those three legal entities you mentioned. So to the best of my knowledge, certainly by the time I left, there was not an issue with multiplicity of companies causing security or collection issues. And I'm not aware that there was any subsequently, although I may be wrong. I very much doubt it.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. In terms of targets within the company, you had mentioned - and Senator O'Keeffe had touched on it there - where there was, you know, a series of ... your colleagues from other banks had been in and there seems to have been a theme throughout that there were never any targets, that people just went to work and they did their job and loan book and credit card book and so on grew. So in your time as CEO, did ... how did you drive the sales business if there were no direct targets on tellers or foot soldiers, for want of a better expression, in branches?

Mr. Cormac McCarthy:

Well it's not fair ... it's not true to say that there weren't targets.

Mr. Cormac McCarthy:

There were multiple targets. There wasn't ... if anyone thinks there was, you know, one loan target and that's it - go and get it - that wasn't the truth. To my point about the incentive schemes, we had balance scorecards. So, typically, a branch would have a target for current accounts, for deposits, for non-interest income, for credit cards.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

For the full sale-----

Mr. Cormac McCarthy:

For the full suite of products.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

The full suite of products.

Mr. Cormac McCarthy:

Correct.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And then would staff then have cross-selling targets? So, I'm an employee in the branch in town A, and my boss is saying, "Now, your job today is to go out and sell two credit cards and four current accounts and two mortgages"; does that-----

Mr. Cormac McCarthy:

Cross-selling, Senator, was the norm in the industry, and there would be have been-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

And would there be remuneration linked to that?

Mr. Cormac McCarthy:

Well, typically what there was was either ... there was either a branch incentive scheme or individual incentive schemes. And to that point those schemes would have dealt with any particular targets. But, again, everything would have been done within a risk framework that had to be observed.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Would the manager have a bonus structure that was linked to meeting these targets?

Mr. Cormac McCarthy:

Typically, managers would have bonus capability, again ... excuse me ... depending on the achievement of multiple things in the balance scorecard, which would include deposit raising, it would include, to your point, cross-selling, it would include new current accounts, it would include customer satisfaction, which we measured on a regular basis. So there was a series of these things that the branch manager would have had a bonus or incentive scheme based on.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay. In your opinion how much was Ulster Bank Ireland Limited's strategy driven by the activities of competitors rather than assessing fully the quality and impact of the strategic decisions made? So, in your opinion, was the bank's business strategy over-reliant on property and construction loans?

Mr. Cormac McCarthy:

In hindsight, Senator, yes.

Mr. Cormac McCarthy:

We ... you know, we were over-exposed, as were many others, to the property sector.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Around the time of the guarantee, and indeed preceding that, Mr. Goggin, from another bank, gave testimony that he had had a meeting with the Governor of the Central Bank, who had asked his opinion of a guarantee that was being canvassed by other banks. Do you have any knowledge, either within your own personal domain within Ulster Bank or, indeed, the industry generally, that this was the case in June or early summer 2008?

Mr. Cormac McCarthy:

No, Senator, not at all.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Did you ever speak to Brian Lenihan?

Mr. Cormac McCarthy:

I did, Senator, yes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

In the context of the guarantee or any of these matters?

Mr. Cormac McCarthy:

Yes. The Minister was, as it happened, on the day of the guarantee, he had a ... we were launching a ... it was a customer event in Ulster Bank in George's Quay, and Minister Lenihan was due to come to launch that, and he turned up, which was somewhat surprising, given the events of the evening before. And I did have a conversation with him before that event started about the guarantee and the impact on Ulster Bank, and, you know, he listened, as he did, and, you know, he heard what I had to say. So that was the ... that was the first time I'd actually met him, and-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Did he say anything?

Mr. Cormac McCarthy:

He listened to what I had to say, and-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

What did you have to say?

Mr. Cormac McCarthy:

I explained to him what the impact was on Ulster Bank, that, you know, we were systemic in ... we believed ourselves to be systemic in that we had branches and business relationships across the country, and that already we had seen the impact of this, even though it was early in the day, of deposits leaving us to go to the competition. So the message I was giving was that this was having a significant impact on us and, by implication, it would have an impact on our customers.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

So at what point after that then were you offered participation in the guarantee?

Mr. Cormac McCarthy:

We spoke to the Minister and his staff in the Department of Finance a number of times over the coming month. You may recall on 13 October, as it happened, Royal Bank of Scotland, along with other banks in the United Kingdom, were bailed out by the UK Government, so our immediate stress was resolved by that. But we still were experiencing, you know, challenges around deposit ... about deposit losses, so we worked with the Department of Finance over a period of months to try to see if we could avail of the benefit of the guarantee. And, sometime in October we got to a point where the requirements that the guarantee would have had for the group, not just Ulster Bank, RBS as a whole, would have meant it was impossible for us to join the guarantee. So we declined the opportunity.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Without the intervention of the Bank of England, would Ulster Bank have required the support of the guarantee here, or not?

Mr. Cormac McCarthy:

I think, ultimately, Ulster Bank's fate in that regard was tied up with RBS's fate, and circumstances prevailed with the UK Government to offer assistance in liquidity terms to Ulster Bank, so the question didn't arise, Senator.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Were you aware ... this is my last question and thank you for your forbearance, Chair ...were you aware of the position of Anglo or Irish Nationwide in advance of 29 September?

Mr. Cormac McCarthy:

I wasn't, Senator. But, you know, I once ... there had been liquidity stresses in the system, but when Lehman's collapsed it clearly was exacerbating. Hence my calls to the regulator to try and assess if there was ... you know, if there were matters afoot or if there was something I needed to know, etc., and to reassure the regulator that Ulster Bank was conscious of its obligations. But I was unaware of those two institutions' situations.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source

Okay, thanks.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you very much. With that said, I now propose that we break until 4.25 p.m. The witness is reminded that once he begins giving evidence, he should not confer with any person other than his legal team in relation to his evidence on matters that have been discussed before this committee. With that in mind, I now suspend the meeting until 4.25 p.m. and remind the witness that he is still under oath until we resume. Is that agreed? Agreed.

Sitting suspended at 4.10 p.m. and resumed at 4.30 p.m.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

I'm now proposing that we go back into public session to continue with our engagement with Mr. Cormac McCarthy from Ulster Bank, this afternoon. Is that agreed? Agreed. And, in doing so, if I can invite Senator Michael McD'Arcy please. Michael ... Senator D'Arcy. We're more informal in the afternoon, I'm afraid. Senator D'Arcy, you have ten minutes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

First time I've ever been called "McD'Arcy". Thank you, Chairman, Mr. McCarthy. Thank you for coming in. In terms of the Government guarantee ... and you're out of banking now for a number of years and you've the benefit of hindsight and the benefit of where we've come from to where we are today, Mr. McCarthy. Do you think the bank guarantee was a good idea?

Mr. Cormac McCarthy:

Again, Senator, I've ... I wasn't there. I wasn't party to the conversations-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

No, but you ... you were a national banker and you would have-----

Mr. Cormac McCarthy:

I didn't have ... I can ... I have explained the impact it had on the institution that I ran. I suppose, the best I can say is that in the circumstances, I can understand why a decision like that would have been made, but I say that without the benefit of all knowledge of what happened that evening. So, therefore, you know, the value of my opinion must be questionable, but, you know, it had a significant impact on Ulster Bank, and that was my focus and my concentration, but my lack of insight into the circumstances, as I've explained, leading up to that point and what happened on that evening, leave me compromised in my ability to give an answer to that that would be meaningful, I think.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay and, I suppose, the same question in relation to NAMA, the establishment of NAMA?

Mr. Cormac McCarthy:

Again, Ulster Bank was not involved in the set up of NAMA. It didn't participate in the stress test. It didn't participate in NAMA. It had a significant impact on Ulster Bank, given that it was the mark in the market. So, in a market that wasn't moving at all, it was the only valuation methodology available, so it had an impact. Again, in the circumstances, I have some understanding of why one would do what was done but, again, I was not party to the discussions or the debate. We did have some conversations with NAMA about ... in the early days, about participation or, given that NAMA was the only vehicle that was acquiring assets at the time, as to whether we could participate, but it was ultimately for the guaranteed banks and not for us.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

In terms of the numbers from the national Exchequer from the British Government for RBS, £46 billion was provided for RBS. Ulster Bank, the figure I had was €14.3 billion, you said €14.9 billion, but it was in that territory.

Ulster Bank's ratio of RBS was, you know, the figures I have '07, 3%, '08, 2%, '09, 3%, '10, 3%. It seems like a very large quantity of the funds that went into RBS found their way into Ulster Bank and yet Ulster Bank was a very small sector of RBS. Could you explain that please?

Mr. Cormac McCarthy:

Yes, it's a fair question Senator. The first thing to say is that the funds that were injected into RBS had no ... Ulster Bank was not part of that decision, so when the British Government injected its capital into RBS in the first half of 2008, Ulster Bank was not a factor in that decision. So the Ulster Bank losses that occurred subsequently were supported by the ongoing business of Royal Bank of Scotland. There is no doubt that it was a significant cheque. There is no doubt it was a significant amount, but it is not, so I don't understate that at all. But it is difficult to make comparators with the Irish banks, for example, simply because Ulster Bank had no international business, it had no share capital in terms of third-party shareholders. It did not participate in NAMA, so it's...it's only time will tell what the ultimate cheque from RBS will have been. As I said in my statement ... as I said earlier on, in terms of provisions, which is what drove the capital, Ulster Bank wrote back €1.5 billion of provisions in the year end-2014. And I expect more will be written back, so the ultimate cost to Royal Bank of Scotland of the Ulster Bank support will only be known in time. But it is not an insignificant sum, Senator.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

One third of the overall moneys from the national Exchequer of the UK that went into RBS found their way into Ulster Bank.

Mr. Cormac McCarthy:

Well, the money that went into RBS in 2008, went in to support the challenges RBS had in its global banking business. Ulster Bank in 2008, its results and its performance in 2009 were not part of that decision, so in making the decision to invest in RBS at the time, the Ulster Bank situation was not germane at the time. Subsequently RBS injected money as it traded through the following years into... into Ulster Bank.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay, and can I read a quotation to you please, "For all those who say investment banking is this evil thing, as a terrible activity which lost all the money, the most money that RBS lost, the least wise decisions, were property lending in the UK and Ireland, of which Ireland was worst of all." That came from Mr. Stephen Hester, RBS boss. Do you think that is fair?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

When was that said?

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

February 2012.

Mr. Cormac McCarthy:

I don't ... I have no.... I don't recall or have seen that statement. I mean I reported to Stephen Hester for a while before I left the bank. I make no ... at the end of the day, Royal Bank of Scotland lost a lot of money through Ulster Bank and the losses in Ulster Bank were significant. But we were subjected to a situation where we had no.... we had no fall-back on the Irish Government. We had no access or insight into NAMA. We had to make provisions on a worst-case basis, only time will tell what the outcome was. But I have said already that I acknowledge that we made bad decisions and we made mistakes but I would, I would suggest that notwithstanding the significance of the numbers, comparability is very difficult still and it will take time before the ultimate cost. But ultimately, Ulster Bank had no international businesses to sell, it had no independent share capital to fall back on as other banks did. So only time will tell, I believe Senator.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I ask, Mr. McCarthy, the 100% loan to value of mortgages, they were available from First Active prior to Ulster Bank making them available?

Mr. Cormac McCarthy:

That is correct Senator, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Was there an international dimension or did you take the provision of 100% mortgages from another jurisdiction? When did the idea come up initially? I'm not talking about the First Active, was that on your watch in First Active or was it before that?

Mr. Cormac McCarthy:

There had been a practice generally in the market of 100% mortgages for professionals, it wasn't uncommon. It was a small part of the market, but typically people who had... you know, very high incomes and had...you know, clear visibility of income. So it wasn't... it wasn't a unique product, but it wasn't available to first-time buyers. So what we did was, we made it available to first-time buyers, that was the change. And that happened on my watch, Senator yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

And did you take it from an international ... or from some other jurisdiction and say this could work here?

Mr. Cormac McCarthy:

No it was available in the United Kingdom so we had insight as most mortgage providers in Ireland had, into the UK market so the product was available in the United Kingdom as well but that wasn't the driver. I mean it was, it was our own experience and market circumstances that lead us to offer the product.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay. The terms, the loans that were offered and the terms offered to borrowers which were outside the normal commercial terms that were available from your institution made during your period as CEO. Can you identify why this happened or how it was allowed happen? The exceptions rather than the rule.

Mr. Cormac McCarthy:

Exceptions had always been part of the norm and as I said earlier on, there were portfolio management limits. The typical mortgage was arranged around a standard model but every mortgage was individually negotiated so there would have been latitude allowed but that was only at the centre, so typically the tolerances were 10% loan-to-value and 10% debt service ratio. And by and large those were adhered to. I have acknowledged that in some circumstances we did let standards slip but by and large we were satisfied that the exceptions were within portfolio management limit tolerances and that they were justifiable. The experience of the Ulster Bank mortgage portfolio as it has worked through the cycle has been not particularly different to the rest of the market so there's no particular skew that I'm aware of in the Ulster Bank mortgage portfolio versus the rest of the market. So the exceptions were not the norm but exceptions were a factor of the industry for some time beforehand, they didn't arise subsequent to 2004.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I just bring to your attention just a follow on, document UBI, Vol. 2. And it's a report form the Financial Regulator June '06 and attached to the report is page, go to page 13. And the letter that's attached to this shows ... the letter is page 3 but there is an appendix attached on page 13. And I think it's out of 61 files inspected 46 had some form of an exception deficiency and under files descriptions, no valuation, no evidence of cost of renovation being financed, no evidence of remaining terms of leasehold, no evidence of cost of reconstruction work being financed, no evidence of site ownership for a new build. I mean these are ... I'm not allowed make a judgment Chairman ...

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

You are a professional politician.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

But these are surprising. That out of 61, 46 had deficiencies of this nature. Could you explain that to the committee please?

Mr. Cormac McCarthy:

Unfortunately Senator I haven't been able to find the reply to this letter. However I'm satisfied it was replied to because I've seen-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can we just forget the reply, explain the appendix there with the likes of "Value of loan repayments included in DSR calculation not clear", "No evidence to support recalculation of DSR", income, "No details of income, P60, payslips." I mean these would suggest that there is an enormous deficiency in the documentation required for a loan.

Mr. Cormac McCarthy:

All I can say Senator is I don't believe that to be the case. As I described earlier the process the regulator had for these reviews was to do their review and do their work and then submit the letter. Typically as I said earlier we would rather they had discussed these with us at the point of the investigation because I believe most of these as has been seen by subsequent reviews, are capable of being answered. So to the best of my knowledge all of these were answered to the regulator's satisfaction because there is no record that I have of follow up, Ulster Bank can't locate the answer but unfortunately I don't have the benefit of the answer to this which would address all of these on the basis of the regulator. As I said earlier on, the modus operandiwas to come in, take the files and do the work and then leave and write the report. So we would have been able, because mortgage files are quite detailed they can be quite significant.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Just to finish. You have had sight of this document?

Mr. Cormac McCarthy:

I have had sight of this document yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I just, No. 37 - "Use of terms 'nixers' in branch assessment and the use of income arising from 'nixers' in accessing a mortgage application."

Mr. Cormac McCarthy:

Again, Senator, I don't have the benefit of the answer other than to say that if ... to the best of my knowledge and belief, all of these matters were addressed and answered. If that were not ... and that is recorded in the board minutes ... but if that were not the case then the regulator would have had the right of recourse to come back to us and express its dissatisfaction and escalate it. That did not happen, but, unfortunately, I don't have the answer to this particular letter. But I think the circumstances of how the work was done and how the letters were written to us are relevant in understanding this.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you. Deputy Pearse Doherty. Deputy you have ten minutes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Go raibh maith agat, a Chathaoirligh, agus fáilte roimh an t-Uasal McCarthy chuig an coiste fiosrúcháin. Can I begin by just asking you ... just in your opening statement on page 6 you say the Financial Regulator also set real estate caps at 250% of the capital base. You go on to say "In July 2007 the Financial Regulator agreed to a cap of 500%." Can I ask you, Mr. McCarthy, did the regulator ever confirm to Ulster Bank that it approved ... it had approved or consented to the increase in Ulster Bank's sector limit of 500%, as opposed to simply not objecting to it?

Mr. Cormac McCarthy:

We would... there ... I will find... if I can find the appropriate documentation, Senator, I'll provide it but we would not have done something like that without regulatory approval. The regulator would have had to approve that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

So the regulator approved-----

Mr. Cormac McCarthy:

Correct.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

From your ... that would have been in the form of a letter, a communiqué, would it?

Mr. Cormac McCarthy:

I would think so, Deputy, but we would never have done something like that. There was an ongoing dialogue with the regulator on this topic, so we would not have been able to do that without regulatory consent.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Would you be able to furnish ... could you furnish the committee ... is it possible-----

Mr. Cormac McCarthy:

If that can be done, I'd be happy to do so.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Okay. I appreciate that.

In March 2008 ... on 15 March on the RTE "Marian Finucane Show", a developer by the name of Mr. Dunne spoke on the radio show. And the contents of that interview made its way into a Sunday Tribunearticle by Justine McCarthy and I want to just refer to what was referenced there. It talked about Mr. Dunne was at the time in Thailand with his wife and young son in late July 2005, with just seven days to secure financing before signing the purchase contract for Ballsbridge. This is the quote: "I phoned up a very good friend of mine, Richie Boucher. He's now deputy head of Bank of Ireland," Dunne remembered. "And, after about Wednesday, Richie said, 'Seán,' he said, 'if I was trying to borrow the money you're trying to borrow, I wouldn't stay in Thailand. I'd come back to Dublin.' So I thought that was good advice, even though I wanted to stay in Thailand with my wife and son." Dunne goes on to say that he flew back immediately, landing in Dublin on Thursday night and this is the quote: "I went straight from the plane to a meeting. I spoke to Bank of Ireland. I spoke to Irish Nationwide and Paul McDonnell in Ulster Bank," he said ... and then, "That Friday night, at nine o'clock, Ulster Bank walked through the door of my office and ... they produced the letter for the full purchase price. The contract was signed the following Wednesday." Is this typical of how Ulster Bank provided loans in excess of a quarter of a billion euro?

Mr. Cormac McCarthy:

Deputy, unfortunately, I can't comment on that particular situation, for both confidentiality and legal reasons. So I have to say I cannot respond to that. Forgive me but-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

No, that's fair enough and I won't press you on that particular issue. But forgetting ... parking Mr. Dunne's comments on RTE radio to one side, have you known, in your time as head of the bank, a situation where an approval of a loan of in excess of €100 million would be turned over in a number of days.

Mr. Cormac McCarthy:

As I ... as we've described in our ... in my submission, and the documentation I submitted to the inquiry, we had a very rigorous credit process, so any loan of such would have had to go to the Royal Bank of Scotland credit committee. We had no capability within Ulster Bank to do that. If that ... so, therefore, there was a process involved, that something like that would have had to go to a local credit committee, and then an RBS credit committee would have had to be convened, and that RBS credit committee would then have to sit, listen to the credit and then give an opinion or delay it. So there was a modus operandi.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

And would that all happen before a letter of approval, in principle, would be given to a borrower?

Mr. Cormac McCarthy:

Absolutely, absolutely.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

And in your time ... so am I taking from your answer in relation to the procedures they had to go through that you are unaware, during your time as head of the bank, of a loan in excess of €100 million being turned around in a matter of days.

Mr. Cormac McCarthy:

I mean, sometimes I wouldn't have been involved in loans of that case. So if, for example, the credit committees were lined up appropriately or due to meet, it's possible that the process could work that way, but the process had to work.

My expectation, given as a former chair of RBS credit committees with the difficulty there was in convening those kind of committees, that it would've taken more than a couple of days to get that organised.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

And, again from your experience, as head of the bank, would it be ... are you familiar with situations where bank officials would go after hours to developers' offices or homes to provide them with letters of offers?

Mr. Cormac McCarthy:

I'm not particularly familiar with that, Deputy. I can't say that it didn't happen, but I'm not particularly familiar with that as-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Do you have any knowledge of it ever happening?

Mr. Cormac McCarthy:

To the best of recollection, Deputy, I can't say that I recall it happening. No, it stands out of the ... out of the norm. Normally what would happen is there would be a postal or there would be a meeting or you would go to people's offices. But outside of hours in homes is ... strikes me as being unusual and not normal practice.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Okay. Can I ask you, in relation to the ... and I'm referring to book of evidence, UBI - B2, page 28, and this is in relation to the inspection of commercial property lending exposures which was carried out by the Financial Regulator between 4 and 14 December 2007 and its General Findings - Medium Priority. The quote is:

The inspector's noted from the minutes of the RBS Group Credit Committee held on [the] 14 May 2007 that in relation to a €90 m[illion] facility being discussed for [blanked out customer's name], "The relationship team said they did not know exactly what the €70 m[illion] equity release would be used for", but that they were ... aware that [the blanked out customer's name], had tendered for two significant projects.

Was ... what was the bank's policy in relation to obtaining information on the purpose of a potential equity release?

Mr. Cormac McCarthy:

Well, we would've had to have full details. So, in that particular case, because again I have cited the reply to that letter which has been submitted to the inquiry, the facility would've been granted subject to there being a referral of the ultimate drawdown. So it wasn't a case that there was a wallet or envelope available, irrespective of what the credit was. So when the ultimate drawdown would've come to the bank, there would've had to been an appropriate authority and review that that particular amount was relevant and appropriate and would've had to have been approved. So what this was a facility ... a general facility approval, that again, would've had to go through the process subsequently base