Oireachtas Joint and Select Committees

Thursday, 7 May 2015

Committee of Inquiry into the Banking Crisis

Nexus Phase

Ulster Bank - Mr. Michael Torpey and Mr. Robert Gallagher

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I call the committee into public session. Is that agreed? Agreed. As we have a quorum, the committee of inquiry into the banking crisis is now in public session. Can I ask members and those in the public gallery to ensure that their mobile devices are switched off?

We begin today's session 1 public hearing discussion with Mr. Michael Torpey, former group finance director at Ulster Bank Group, and Mr. Robert Gallagher, former chief executive, corporate markets division at Ulster Bank. In doing so, I would like to welcome everyone to the 24th public hearing of the Joint Committee of Inquiry into the Banking Crisis, and today we continue our hearings with senior bank executives who had roles during and after the crisis.

This morning we will hear from witnesses from Ulster Bank, Mr. Michael Torpey, former group finance director, Ulster Bank Group and Mr. Robert Gallagher, former chief executive, corporate markets division of Ulster Bank. Mr. Michael Torpey was group finance director, Ulster Bank Group, from 2004 to 2007, having previously been financial director at First Active. Since leaving Ulster Bank, Mr. Torpey has been a group treasurer at Irish Life and Permanent, head of banking at NTMA and, since 2013, has been chief executive, corporate and treasury division at Bank of Ireland.

Mr. Robert Gallagher was chief executive, corporate markets division, Ulster Bank, from 2015 to 2011. Between 1991 and 2005, Mr. Gallagher had numerous positions in AIB and before that he worked with Citigroup in Australia. Since 2014, Mr. Gallagher has been director credit at KKR, a US investment firm.

Mr. Torpey and Mr. Gallagher, you are both welcome before the committee this morning and before I commence proceedings, I wish to advise the witnesses 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 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 they should not publish any of the documents so displayed.

So, in that regard the witnesses have been directed to attend the meeting of the Joint Committee of Inquiry into the Banking Crisis. 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 before we begin the proceedings, so if I can ask the clerk to administer the oath to both Mr. Torpey and Mr. Gallagher, please.

The following witnesses were sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, so if I can maybe commence by inviting Mr. Torpey to speak and then followed by Mr. Gallagher. Mr. Torpey.

Mr. Michael Torpey:

Thank you, Mr. Chairman. I welcome the opportunity to assist the inquiry and I will be pleased to address any questions the committee may wish to ask pertaining to your remit. My background is that I have spent my career to date working in financial services in Ireland with a particular focus on capital markets and treasury activities. Immediately prior to my role as finance director at Ulster Bank Group, I spent three years as director with responsibility for finance and treasury at First Active plc, the former First National Building Society, which had converted to plc and floated on the Stock Exchange in 1998. I was appointed finance director of the Ulster Bank Group in January 2004, following the acquisition of First Active plc by the Ulster Bank Group on behalf of Royal Bank of Scotland. I remained in this position until December 2007. And this move to Ulster Bank represented a move from the position of finance director of a publicly quoted company to a reporting line internally in the RBS group, to the group finance director in what was a very much larger multinational organisation.

My specific responsibilities in my capacity as finance director of Ulster Bank included the integration of the First Active and Ulster Bank Group financial accounting systems onto the RBS Group accounting platform; decision support to all of the business areas of the Ulster Bank Group in matters of finance; review of group accounting policies and practices; and assessing and ensuring compliance with regulatory requirements. I was chairman of the Ulster Bank Group tax policy and controls committee, the group assets and liabilities committee, the group reconciliations committee and the finance supervisory committee.

My brief included responsibility for statutory and regulatory reporting as well as financial controls and reconciliations for so long as the financial accounting systems resided in Ulster Bank Group. A major element of my role while in the Ulster Bank Group was delivery of a hugely complex integration of the financial accounting systems of both First Active and Ulster Bank onto the RBS group financial accounting systems.

With differing regulatory, legal, taxation and even currency regimes, this was an extraordinarily complex project, which had to be delivered while maintaining continuity of accounting reporting and, indeed, controls in Ulster Bank Group throughout the period.

Following completion of the migration project, production of statutory and regulatory accounts, along with the principal accounting services for the Ulster Bank Group, moved to the RBS Group accounting function in Scotland. As a wholly owned subsidiary of RBS, the role of finance director, as indicated, was much more specialised than might have been encountered in a stand-alone company or, indeed, than I had experienced at First Active plc. It was, effectively, a divisional management position within the RBS finance function with additional responsibility, including in relation to statutory accounts and regulatory reporting. Following completion of the integration project and the move of the principal accounting services to Scotland, the role was further narrowed, becoming a role heavily focused on the hugely important business support and financial controls, as well as reporting to, and very close engagement with, RBS Group finance. In practical terms, the role can be represented as a specialised accounting role at that stage.

I reported to the CEO of Ulster Bank Group and, in parallel, to the RBS Group finance director. And this latter relationship reflected that, in large part, my responsibilities were carried out under RBS Group strategy, policies, and often under direct influence and control. I had little involvement in operational matters in the business which did not directly involve delivery by the finance function. The Ulster Bank finance function had no involvement, for example, in credit policy and strategy and was not represented on the group risk credit policy and strategy committee, which was responsible for maintaining asset quality, determining policy, and ensuring adequate controls within the parameters of the RBS policy framework.

Central to this operating structure is the functional nature of the RBS Group organisational structure. RBS Group operates as an integrated group requiring that control, policy and process and so forth are driven and controlled from the centre. A particularly significant instance of this was that, from the outset, RBS Group treasury assumed responsibility for, among other things, treasury and balance sheet management functions and undertook to meet the capital and funding needs of Ulster Bank Group directly. I had proposed the retention of baseline treasury capability in Ulster Bank Group from the outset but this was not in keeping with RBS policy and was not accepted. From Ulster Bank's perspective then, capital funding requirements and balance sheet metrics were viewed in the context of the overall RBS Group situation rather than from a stand-alone perspective. Ulster Bank was a small part of the RBS Group and in Ulster Bank we had limited influence on, or control responsibility for, the RBS Group balance sheet management. This approach by RBS Group certainly had cost and scale benefits and had the effect for the group of enabling divisions to focus on business delivery while the RBS Group centre delivered the structural supports, such as the funding capital and balance sheet management. These structural requirements would, of course be ... form an integral part of management in a stand-alone entity.

I mention these matters, Chairman, to clarify my role and reporting relationships, as they operated within the RBS policy framework, and to provide the committee with some insight into my role within a wholly owned subsidiary. That said, I clearly recognise and accept that, as a member of the boards of Ulster Bank Group and as a member of the RBS finance board - that being a committee of the finance directors of RBS divisions and senior finance personnel from RBS Group centre, which was chaired by the RBS Group finance director - I have responsibility for my part in developments within Ulster Bank Group between 2004 and 2007 and any impacts that these developments had on the banking sector generally. I very much regret that, like so many others, I did not foresee, during my time in Ulster Bank Group, the extent of the difficulties arising within the RBS Group, the extent or duration of the turbulence in wholesale funding markets, the collapse of the property market in Ireland and, indeed, the resulting difficulties for Ulster Bank Group and the impacts on people and the population as a whole. I dearly wish that we could have known that even ... then even a small part of what we now know so that we might have been able to pursue a different course. I'm happy, Chairman, to address any questions the committee wish to ask within the context of the inquiry.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Torpey. Mr. Gallagher.

Mr. Robert Gallagher:

Thank you, Mr. Chairman. I welcome the opportunity to appear before this inquiry and I shall be as helpful as I can in assisting you in your work. My opening remarks this morning are supplementary to the written statement, which I submitted to the inquiry on 9 April.

My professional background is in international banking. Prior to joining Ulster Bank I was head of corporate banking international for AIB, with responsibility for businesses in London, Frankfurt and Paris. I joined as chief executive, corporate markets, at Ulster Bank Group in late 2005 and worked at the bank until I resigned in September 2011.

I joined the bank well into its growth phase, and in the six years I spent working there, I oversaw a two year period of growth followed by four years of intensive portfolio management and remediation of the corporate markets divisions of the bank.

The reputation and strength of RBS Group was a key factor in influencing my decision to join Ulster Bank. RBS was then a very successful bank. It was held in high regard globally, and I believe the significant presence they had in Europe, the US and Asia could be leveraged to the benefit of Irish companies seeking to expand in those markets. Looking back, I was excited about the opportunity to develop and grow a corporate business here to compete with AIB and Bank of Ireland.

As chief executive of the corporate markets, my responsibilities included corporate banking, business and commercial banking, property finance, capital markets in the Republic of Ireland and in Northern Ireland. Corporate markets had approximately 1,700 people working in Dublin, Belfast and 32 business centres around the island.

On my arrival into the business, Ulster Bank already had a well developed and long-standing property division. The commercial property loan book was then approximately 60% of the corporate loan book. On joining, a key objective of mine was to diversify the portfolio. I sought to do this by bringing the RBS global capacity and products to the corporate and business customers in Ireland. In order to facilitate this objective, I oversaw a significant expansion of the business centre network, the enhancement of the corporate systems capability and initiated substantial training and investment in our people, particularly on financial and cash flow analysis.

The bank's strategy was to become a third force in the Irish universal banking market, to challenge the dominance of the big two. As a wholly owned subsidiary bank, treasury, capital funding and balance sheet management were provided to us by RBS. Our focus in corporate markets was on growth and diversification of income streams.

The bank's strategy and business agenda were underpinned by a control and reporting framework, which was aligned with the wider RBS Group. We were plugged directly into the RBS credit approval framework. The risk, credit, finance operations, internal audit, HR and treasury functions all reported into RBS on a matrix basis. The concept of first and second line of defence was deeply imbedded in the RBS approach to the control environment. The risk management division of Ulster Bank, which was independent of the corporate markets, was structured, resourced and managed in a manner consistent with other RBS divisional risk management functions. We were obliged to operate within the parameters of a comprehensive and detailed policy rules and guidelines, which prescribed how risks were to be managed. These policies covered lending limits and approval structures, LTV limits, stress testing and evaluation processes.

In my view, the governance structures and policies at Ulster Bank were adequate. Did everything work according to plan? No, I can't say everything did. However, in the vast majority of situations, the rigour and consistency of the bank's approach worked well. The critical mistake was to base our ambitious growth strategy on economic assumptions which we firmly believed to be well founded, but which proved in time to be seriously flawed. When I joined the bank in 2005, the internal economic analysis and pretty much all of the external economic analysis forecasted continued GDP growth into the medium term. Ireland had experienced a property boom which had lasted then over ten years, driven in main by the fundamental factors such as low interest rate regime, increasing population, strong growth in employment and rising household incomes. Corporate activity was particularly strong from the late 1990s onwards through a combination of buoyant indigenous enterprise and foreign direct investment.

Come 2007 when the signals of the slow down became apparent, most economic analysis, including our own, predicted the notorious soft landing. The consequence of the reliance on flawed assumptions allied to the failure to critically analysis and challenge the pace and extent of the property construction lending has been clear to everyone. As a former director of Ulster Bank, I deeply regret this. I spent the period from 2008 onwards remediating the business. During this period and as a member of the executive of Ulster Bank, we sought and received RBS approval for an action plan to protect the Ulster Bank franchise in Ireland. In corporate markets, this plan included the allocation of over 300 people to a new division to manage the deteriorating portfolio; the reduction of the intergroup lending limit, which had grown substantially following the introduction of the bank guarantee scheme in the Republic of Ireland, of which Ulster Bank was not part; and the reduction of the cost base of the organisation and the re-shape and re-size of the business to reflect the new economic reality.

Through this very difficult period we continue to have the support and faith of the new RBS management team which has brought in to manage business. Thank you for listening to my opening remarks and I am happy to address the questions from the members of the inquiry.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Mr. Gallagher, and thank you earlier, Mr. Torpey. Deputy John Paul Phelan, you have 25 minutes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chair, and good morning, gentlemen. A few questions for you following on from your statements. First of all actually I want to ask you both, Mr. McCarthy when he was here yesterday indicated to the committee that he had had some contact with Ulster Bank in preparing his opening statement. I'd just like to ask you maybe both to clarify the extent of any help from Ulster Bank in terms of preparing your presentation to the committee both this morning and the previous written statement.

Mr. Michael Torpey:

I'll take that first if that's okay. I left Ulster Bank at the end of 2007 so when I received the direction to attend the committee, I sought from Ulster Bank some briefing so as to assist me in my recall and accurate evidence to the committee and I received briefing documents in relation to the areas of inquiry which the committee has signalled to me.

Mr. Robert Gallagher:

I equally got extensive factual briefing from Ulster Bank on the matters which were relevant to the inquiry.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I want to turn then to, in fact either of you can answer this particular question, it relates to events surrounding the guarantee. On the night of the 29th, we know now that there was extensive conversations involving officials at the Department of Finance on 29 September 2008, Minister for Finance, Taoiseach and representatives of AIB and Bank of Ireland. Were either or both of you aware at the time that these conversations were happening and did Ulster Bank, in or about that time, make any representations as to the nature of those discussions? And I also furthermore ask you both your opinion as to the nature of the guarantee which emerged? Do you have any particular views as to the items that were covered by the guarantee and the full extent of it and what is your current opinion on the blanket guarantee that emerged subsequently?

Mr. Michael Torpey:

Perhaps I'll address that first, Chairman. I think in terms of events on the night of the guarantee Deputy, I've no knowledge whatever. I left Ulster Bank at the end of 2007 and in fact I was not working in the financial services industry and for very much of 2008 not even in the country. So that I have no knowledge, frankly, as to the events leading up to, surrounding or immediately following the night of the guarantee so regrettably, I can't offer any assistance on that front. Equally I am entirely uninformed as to the detail of the circumstances that gave rise to the guarantee and as such, any opinion that I would have would be at risk of being worse than unhelpful but misleading simply because of the lack of information I have. Thank you Chairman.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Fair enough.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Gallagher?

Mr. Robert Gallagher:

So, I had no knowledge of the guarantee or the conversations of the guarantee prior to the public announcement of the guarantee on the 29th or 30th. I did, along with Mr. McCarthy, meet the Minister for Finance on the 30th in the morning, where he was attending a business launch which we were having in George's Quay in Dublin and at that meeting, we indicated our concern about the impact of the guarantee to Ulster Bank and the outflow of deposits. And post that date and for broadly speaking a month afterwards, we saw a material outflow of deposits.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You did not make any, or did you make any representation as to the nature of the guarantee? Following the announcement, the legislation took a few days to pass, was there -----

Mr. Robert Gallagher:

No, we did not.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I ask then, Mr. Gallagher I suppose is the most relevant person to ask, in relation to the guarantee itself, Mr. McCarthy yesterday in evidence spoke about the predatory behaviour of certain institutions in or around the time of the guarantee and I want to quote him directly.

He said:

...pretty quickly after the guarantee was announced there was predatory behaviour on the part of certain institutions. People in certain institutions contacting customers to the effect that, you know, "Bring your money in here, there is a State guarantee, it is much safer."

That's a direct quote. Can you inform the committee which institutions were engaged in that particular activity or do you have any further information to add to what Mr. McCarthy said in that regard yesterday?

Mr. Robert Gallagher:

No, Deputy. So, as a fact, we had a material outflow of moneys, which went to other institutions and that fact is reflected in the increase in the intergroup limit in Ulster Bank. The moneys provided by RBS, I think in the month of October, went up by approximately €4 billion. So we had an outflow of approximately that amount of money that went to other institutions who were guaranteed. There is no question in my mind that other institutions, or front-line staff of other institutions, were proactive with our customer base in their desire to build their deposit base. And, anecdotal evidence would suggest that, in doing so, they reinforced their ... their communication around the strength of the guarantee and our lack of a guarantee.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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All of the other institutions or-----

Mr. Robert Gallagher:

I don't know, Deputy.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. He also said on the same point yesterday ,about consolidation in the banking sector ... and I want to quote him directly again, he said "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." Just want to know, Mr. Gallagher, can you provide any additional information as to the nature of those conversations and, really, who was asking Ulster Bank to participate in consolidation of the banking sector and what consideration was given by Ulster Bank to those conversations?

Mr. Robert Gallagher:

So, Deputy, I wasn't party to any of the conversations which I can ... I can assume happened at chief executive and chairman level. So, other than what has been covered in the public media about coming together ... or whether third forces ... I don't have actually a perspective or knowledge of that.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Mr. Torpey, are you aware of any loans or terms offered to borrowers which would be considered outside the normal commercial terms available at your institution in Ulster Bank Ireland made during the period of your tenure and if you could maybe clarify for the committee any of the ... or some of the reasons why those terms were granted?

Mr. Michael Torpey:

I'm not aware of any terms outside the normal commercial terms and conditions, other than the standard and publicly known staff mortgage schemes for instance, that will have been available to banking staff generally. I am not aware of any special arrangements in relation to anybody that stepped outside normal commercial terms.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask you specifically, and I know we can't ... we had a discussion about this yesterday in relation to the Dublin 4 hotels site and we are not going to get into the personal information or details of those who were involved. But, yesterday Mr. Boucher, under questioning from Deputy Higgins, said that a letter which he wrote in support of that particular project - a planning letter - in Ballsbridge was one of the most stupid things he had ever done and that's a direct quote. And yet it was Ulster Bank who had famously mostly funded the particular project in question. I'd just like to ask you how you would characterise the decision of Ulster Bank at the time to fund that particular project. It was during your time, I think.

Mr. Michael Torpey:

It would have been during my time, Deputy. The decision in relation to the ... any particular credit, and I am not going to talk about anyone in particular, was a matter which occurred as between the competent functions in the Ulster Bank Group. So when a credit application came to the appropriate part of the business, that credit application was considered and developed in whatever way they do it, and went to the appropriate credit decisioning authority to make a decision. And where credits were of a certain size that fell within discretion within Ulster Bank; where they were of a larger size they went to credit committees at RBS Group. I think I mentioned in my opening statement the integrated nature of the group and such that there was a very high level of control by RBS Group in such matters.

As the finance director in Ulster Bank, I had no part to play in these matters. I would have no knowledge of the customers, of the particular credit applications or the credit decisions and, you know, to the extent that it's a follow-on from your earlier question, I would have no reason to believe that any such decisions in relation to any customers of the bank were taken on anything other than commercial ... a commercial basis.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Mr. Gallagher, you were present at the time when you were chief executive of the corporate division. Did you have any involvement in that particular decision to fund that particular project?

Mr. Robert Gallagher:

Well, first thing I'd say, Deputy, is the ... I think in the public ... in the public domain, that sale and purchase of that asset, I think, occurred in June, July '05. I wasn't in the organisation but I echo Mr. Torpey's comments with regard to specific customer information, I couldn't comment, even if I had been.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I'm going to change to the matter of 100% mortgages, and we've had a lot of evidence from previous witnesses as to the introduction of that particular product. And I want to put you particularly a quote from Mr. Brian Goggin, former chief executive of Bank of Ireland, who gave testimony to the inquiry last week on the product, and he said, and I quote:

The pioneers of 100% mortgages was Ulster Bank through First Active. And we actually ... when the concept of providing 100% mortgages was first raised at a group risk policy committee, my recollection is it was declined and by the time we came to providing 100% mortgages, we were very much a reluctant follower.

I want to ask you both: do you believe that Ulster Bank effectively then drove other banks in the Republic of Ireland into the 100% mortgage market and ultimately into making decisions which, up to that point, they wouldn't have made?

Mr. Michael Torpey:

I think, Deputy, the question of 100% mortgages is something that was grounded in the circumstances of the time. I have no doubt ... in fact I'm entirely satisfied that 100% mortgages were available on a let's call it case-by-case basis from a number of institutions prior to the more public availability of a product labelled in those terms. I think, again I would be ... I'm entirely satisfied that we were in an extremely competitive market situation at the time and indeed First Active, being the subsidiary within Ulster Bank which was the first within Ulster Bank to introduce the 100% mortgages, was in fact losing market share materially in the context of the competition in the marketplace. They were the conditions that gave rise to the introduction of a product with limited availability and fairly tight controls. Having said all of that, you know, as the way the market has evolved over time, events that subsequently happened, I think with the benefit of hindsight, it would've better if that product had not been introduced.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you have any views, Mr. Gallagher?

Mr. Robert Gallagher:

The mortgage part of the business wasn't part of the business that reported to me, but my own view, Deputy, is that a 100% product is not a product that really, as we look at the world now, should exist, so it was of its time. As a board member of the bank, it was a constrained-in-size and well monitored product. That's all I really have to say, yes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I ask, Mr. Torpey, how ... like, what is your own feeling? We've heard evidence from a number of witnesses that Ulster Bank were the instigators of marketing the 100% mortgage product for the first time, and perhaps it was available to certain categories of individuals in other institutions. But others from other institutions have come in here and firmly pointed the finger at Ulster Bank as being the instigators of this particular product. And yesterday, Mr. McCarthy gave evidence to the committee that 100% mortgages formed about 1% of their mortgage loan book, I think, in Ulster Bank, prior to the direct marketing of this product, and then it went up to about 4%, I think, was the figure that he used yesterday. Do you have any feelings about being characterised as the instigators of this product and, you know, what is your own, I suppose, opinion now, if you could elaborate on that a bit more, as to the effect that the 100% mortgage and the direct marketing of that as a product into the Irish market ultimately had on mortgage lending across the board in all the banks?

Mr. Michael Torpey:

I think, Deputy, the 100% mortgages is one of a number of elements of an extraordinarily competitive market that existed in the period to which you're referring. There was extensive marketing of incentives of one sort or another to encourage or support people in the purchase of houses and the financing of them through mortgage borrowing. I think the intensity of the competition across the piece did contribute to the overheating of the market through that period. To the specific question of the 100% mortgage, it was one element in that wide range of competitive factors that were put into play. I think the ... with the benefit of hindsight, it had a more pronounced effect in optical terms in terms of the perceptions that it will have created in the marketplace than it had in terms of an actual impact. As you rightly say, the proportion of Ulster Bank's portfolio that ended up in 100% mortgages built up over a number of years was still in low single digits. So it didn't, in terms of the quantity of financing it put into the market, move the dial in any dramatic fashion, but I would accept, Deputy, that it may have had a greater announcement effect as I have said, and, with that perspective, I would acknowledge that it was not a good move to make with the benefit of that hindsight.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Was there any ... Mr Gallagher, you expressed the view that ... you were a member of the board at the time, and you expressed some regret about the 100% mortgage ... was there any discussion at board level or any opposition, any alternative views offered when the prospect of offering 100% mortgages was first discussed and a decision was made. Did anybody raise any concerns as to the suitability of the product for the Irish market?

Mr. Robert Gallagher:

Deputy, this is not to avoid the answer. Again, the decision on 100% mortgages was prior to my joining, to do it was prior to my joining the organisation.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Was there any subsequent discussion?

Mr. Robert Gallagher:

There was a regular discussion, Deputy, around, as the minutes indicate, around our mortgage business. There was a regular discussion around, as the papers reflect, around the exceptions within it, and there was regular challenge by the board and the non-executives about the mortgage business regularly.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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That's grand, yes. I want to move to core document, gentlemen, UBI - B2, at page 16. It's a memorandum to the board for a meeting in August of 2007, authored by Mr. Torpey. It's particularly a reference to sectoral limits, and there's a quote in it that I ... under the heading "Background", and was referenced yesterday in discussions with Mr McCarthy: "In recent weeks, the Irish Financial Regulator (IFR) has increased Ulster Bank [Ireland's] property sectoral limit from 250% to 500% of its regulatory capital base and may, following a diversification review scheduled for July 2007, be prepared to increase the limit further."

I would like to ask you, I suppose, firstly, Mr Torpey, in your opinion, did the fact that Ulster Bank Ireland could easily transfer the risk on its property portfolio in excess of 250% of its limit to its parent, enable the bank to lend more aggressively into the property sector in Ireland than would otherwise have been the case? And actually, I have a group of further subsequent questions, but if you could answer that one first, maybe?

Mr. Michael Torpey:

The purpose, or the background, Deputy, to the use of risk transfers was, in relation to the capital management of Ulster Bank Group, Ulster Bank Group was run as a group, capital was maintained in different subsidiaries, depending on where it had arisen in the past, and the choice open to the group in capital management terms will have been to move the capital to where the business was being written or do the risk transfers to where the capital was residing.

So the effect of the 250% cap and the risk transfer structure was to cause certain actions to take place in order to efficiently manage capital. The reality is that had the risk transfers not been possible, the capital would have simply been moved to the ... the other subsidiaries, such ... because the capital was available in the ... in the Ulster Bank Group to meet the appetite. So, the short answer to your question, Deputy, is the risk transfer ... the sectoral limits requirements did not act as a constraint on the level of property lending by Ulster Bank Group because the capital was available in the group.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So, effectively, because of the nature of your parent organisation, Ulster Bank was ... second part of my question, Ulster Bank was in a position to lend more aggressively into the property sector in Ireland than maybe some of its competitors because of the capital position of its ... of its parent?

Mr. Michael Torpey:

The Ulster Bank Group, without, indeed, as it happens, without recourse to RBS Group ... Ulster Bank Group had sufficient capital to meet the level of lending that it overtook in the group, so that capital was not a binding constraint on the pace of growth in lending generally or in any specific sector in Ulster Bank through that period.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Specifically on the matter of sectoral limits, yesterday Mr. McCarthy, in his earlier evidence, said ... stated, and I quote, that: "There was a sense that the sectoral limit was honoured more in the breach than in the observance". Subsequently when I asked him specifically about the matter, he said that Ulster Bank had never breached the 250% limit as it previously existed, and we've had evidence from Mr. Gleeson, in particular, former chairman of AIB, where he referred ... referenced the sectoral limits, and he said directly: "We would have been very well off not to have exceeded the sectoral limit. It's a great shame that we didn't". And he's viewed the sectoral limit as a guideline more than an actual firm limit. So I want to ask you, in relation to Mr. McCarthy's evidence yesterday, firstly, he said it was observed more in the breach than in the observance, and, secondly, he said that Ulster Bank had never breached it,. Did Ulster Bank breach the sectoral limit, did it come anywhere near breaching the sectoral limit? If it didn't, why was there ... why was the limit increased to 500%, and why was that sought by Ulster Bank? And, furthermore, what was your own attitude, and the attitude of the bank to the limits in question? Did you see them, as Mr. Gleeson saw them, as guidelines, or did you see them, as Mr. McCarthy referenced them yesterday, as firm restrictions on lending into particular sectors?

Mr. Michael Torpey:

The limit we regarded as a rule, Deputy, and within the RBS Group there was a very strong culture of compliance with regulatory rules, so RBS Group, and Ulster Bank Group, as a subsidiary of RBS, would not have been tolerant of a breach of the limits. We did not breach the limits at any stage. When we were approaching the limit within a subsidiary within the Ulster Bank Group, specifically the subsidiaries UBIL, Ulster Bank Ireland Limited or First Active, we engaged in risk transfers with the full knowledge of the regulator so as to locate the risk where there was sufficient capital to accommodate that lending, and as such we observed, entirely, the rules in a full and open way with full and open transparency to the regulator. So I'm entirely satisfied with the compliance of Ulster Bank to that, and indeed to regulatory rules, generally. To your question in relation to others, we would have wondered, given the pace of growth in lending in some quarters, how it was others managed to comply with the rules, and, indeed, recent evidence as you pointed out suggests that some people who didn't necessarily comply with those rules, as we understood them.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Did you, and this is a final follow-up, Chairman ... did you see the evidence, first of all, that Mr. Gleeson gave? And, specifically within Ulster Bank Ireland now, did you view those sectoral limits as being an actual limit or did you view them as he stated to the committee that he viewed them more in the context of being a guideline?

Mr. Michael Torpey:

Deputy, I did not see the evidence of Mr. Gleeson. However, I can say that within Ulster Bank we saw this as a rule, not a guideline.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Thank you very much.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. I just want to deal with just one other matter before we move on to Deputy Higgins, and that's in regard to just the property ... general property-related lending strategies and the risk appetite in Ulster Bank, and this question is specifically to Mr. Gallagher.

Mr. Gallagher, I want to talk to you about the staffing and appropriate lending skill sets as they would have pertained in Ulster Bank at the time, particularly in around the mid-2000s. Was there any concerns or difficulties with regard to the skill sets of staff members, particularly in regard to when market conditions would deteriorate and loan impairments started to increase? And did you consider that Ulster Bank had sufficiently-trained staff with the appropriate skill sets to deal with the arrear collections and the managing of problem loans? It's like moving, in sporting parlance from offence to defence, did you actually have the skill sets at that time?

Mr. Robert Gallagher:

Chairman, the time you refer to is which particular time, sorry?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The mid-2000s onwards.

Mr. Robert Gallagher:

Yes, okay. So, Chairman, the first thing is I'd say is in 2006, we made a very material investment in enhancing the capability of our people and launched what was called an academy, which was a very comprehensive programme, which pretty much all staff had the option to go on or opportunity to go on, which was anchored in increasing their skills around cash flow analysis, their skills around understanding of balance sheets, cash flows, P and Ls, to reinforce across the business the need to focus on repayment capacity being sourced from cash flow and to continuously encourage our people to realise that security is a second way out not a first way out. That was a very material programme for which we spent a material amount of money.

To the question that then moves how adequately resourced or talented were people to manage the deterioration in the period late '07 onwards, it has to be recognised, I think, that banking generally and banking in Ireland went through a very, very prolonged period of no or very little bad debts and in a period where that occurs, the skill sets and knowledge around managing tough situations diminishes. So, there was a lot of specific training and there was a lot of need to enhance skills and people learned on the job and they learned by training and they learned, by some degree, by the occasional bringing-in of people from RBS who had worked in deteriorating case situations.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Was it a case that you were prepared and or was it a case of a lot of crisis catch-up?

Mr. Robert Gallagher:

Chairman, it was ... well ... we were never prepared for the scale of what happened ... so it was a combination of trying to be prepared and catching up.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy Higgins, 25 minutes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, thanks. Mr. Torpey, if I could address my first question to yourself, please, and I'd like to refer to core document, Vol. 2, page 5, and it relates to the inspection by the regulator of Ulster Bank in February of 2006 and in the subsequent report that you received from the regulator under the heading "Reporting of Credit Risk", the following is said:

The inspectors are concerned that there [are not ... there] does not appear to be any evidence of credit risk reporting to [the bank of ...] the board of [Ulster Bank Ireland] on a periodic basis. Credit Risk reporting would include, inter alia, an overview of the quality of the loan book, the level of provisions and a summary of the level of exceptions which have been approved.

And in relation to those exceptions, Mr. Torpey, the regulator says:

The inspectors noted a high level of exceptions to policy on the [residential mortgage lending] portfolio - 27% of approvals in 2005 were exceptions. In addition, while a list of Debt Service Ratio ... and Loan To Value ... exceptions was provided to the inspectors, there was no evidence that these exceptions to policy (together with a rationale for permitting them) are being reported to the board.

Mr. Torpey, was there a free-for-all in the lending in Ulster Bank at this stage, perhaps arising - I suggest you confirm or deny - from pressure to extend the business of the bank in relation to the type of targets that had been set for the bank, in terms of growth, profits etc.?

Mr. Michael Torpey:

Deputy, your question is rooted in the report from ... or the letter and schedule from the Financial Regulator to Ulster Bank in 2006. It would be a matter of, I suppose, concern that the nature of the engagement by the Financial Regulator with the institution was one where the regulator will, as in this case, have conducted an inspection, will have chosen not to engage with queries as to detail on the ground in the inspection and will have written their observations. An effect of that, Deputy, is that the regulator will not necessarily have been fully appraised of the position, will not have got the simple answers to questions, until such time as he wrote and got the response.

To the specific content of your inquiry, was there reporting of lending, was there reporting of exceptions and was there challenge to exceptions by the board of Ulster Bank Ireland Limited, yes, there was and there was on a continuing basis through my period working with Ulster Bank. So I am entirely satisfied that we were operating in a highly controlled environment, that there was appropriate challenge, there were policies in place, in particular in relation to the residential lending, which is the point of your reference here; that where there were exceptions and, policies being as they are, there was a tolerance for a level of exceptions just as there is now under the regulatory guidelines, or regulatory rules on mortgage lending, that there was a challenge to those exceptions, that exceptions were addressed by management to establish that the lending was of a character and quality that fell within the risk appetite of the group. So, I am fully satisfied that the controls were in place.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Torpey, this raises an extraordinary situation, if I may say so, which I want to tease out with you, because the regulator was in your offices, or conducting an inspection, between 9 and 17 February 2006 and then makes the two assessments that I quoted to you and you point-blank contradict the points the regulator made. How does that square? How did ... in your view, did the regulator get it completely wrong and, if you believe that, how so?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Torpey?

Mr. Michael Torpey:

Deputy, the bank will have responded to the regulator, clarifying the queries that the regulator raised. The regulator, on his inspection, will, I'm absolutely satisfied in good faith, have made certain observations and will not have found, during that relatively short period of inspection, the evidence of these matters. Personally, I would've preferred if there had been a closer engagement by the regulator with senior management, when many of these queries could have been answered immediately, because it is a matter of fact that there was a reporting of these matters and of exceptions to the board on a continuing basis.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But, Mr. Torpey, being more specific, under the report, "Structure of Credit Files", and I quote, "The inspectors-----"

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Which page, Deputy?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Page 5, same page.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Same page, okay.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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"The inspectors reviewed 61 files during the inspection, 46 different issues were noted during the review and details of these are outlined". But some of the main issues are:

The inspectors noted that a number of files had insufficient documentation, were difficult to follow and it was not always evident that all required documentations had been received and filed ... There was no confirmation of the amount of rental income ... used in the calculation of DSR in a number of cases

And there's other related matters ... the use of the term "nixers" in a branch assessment and the use of income arising from nixers in assessing a mortgage application.

Now, Mr. Torpey, this observation here by the regulator ties in with evidence that was given to the inquiry by the chairman and chief executive of NAMA, who found that there was insufficient documentation, insufficient checking of creditworthiness of individuals and projects etc., which created huge problems for many of the banks later. But you say there was no problem in Ulster Bank?

Mr. Michael Torpey:

Deputy, I would be far from claiming that Ulster Bank was perfect in every respect. There is no doubt that files, which are bulky and complex affairs, and indeed back ten years ago tended to be even far more manually compiled than they are nowadays, it will have been challenging for the inspection, in the space of a few days in the building, to trace through all of the documentation on a file. You know, I note from your quote that they found that the files had insufficient documentation or there was no evidence. So I think ... I know that the bank will have addressed these queries very specifically and resolved these queries in an extensive fashion. To your comparison with NAMA, frankly it's impossible to comment upon that. NAMA did not have any engagement with Ulster Bank, so NAMA's experience has ... bears no relation to the position in Ulster Bank and NAMA furthermore was in commercial property.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I will allow that, what you call it, that Ulster Bank didn't go into NAMA and so forth, and I was conscious when Deputy Higgins was making that question, but what Mr. Daly, I think, was indicating at that time was a broad culture across the banking sector to examine and stress test the creditworthiness of loans that were being issued and the subsequent liabilities that were then being incurred by the institution, so in that regard I think it was in a broad context Mr. Higgins ... or Deputy Higgins was making that response.

Mr. Michael Torpey:

In that respect-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In terms of the general culture or the suggested general culture within financial institutions were checking the creditworthiness of borrowers and the subsequent liabilities then that were actually being incurred and created by the banks and the losses that were incurred by institutions because of the possible or not possible examination of people's creditworthiness.

Mr. Michael Torpey:

While, Chairman and Deputy, I, you know, would respect the comments made, obviously, by Mr. Daly, I was operating within a bank, a subsidiary of RBS Group, which applied their controls, standards and processes, which were the controls of a very large international bank, on all of the activities conducted within Ulster Bank. I believe that the standards applied were of the best international standards. It's not to say that there weren't lapses or errors or weaknesses, as in any process driven by human effort, but as to whether there was a systemic laxity in the controls and processes operated by Ulster Bank, I have no reason to believe that there was any such laxity.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Torpey, how did the Ulster Bank Ireland ... we couldn't get precise figures yesterday from Mr. McCarthy because of the ... your relationship with Bank of Scotland, etc., but how did you finish up losing €13 billion or €14 billion if everything was so perfect, as you seem to suggest to me, in Ulster Bank with regard to lending? And just in relation to that, do you say or not that you ... the type of ... Mr. McCarthy told us yesterday, in essence, that Ulster Bank came in here as a much vaunted third force, which had been spoken about. Very ambitious targets of growth for profit, lending, etc. Would you agree or disagree that that would have put a lot of pressure on your lenders within the bank to grow the business much quicker than was perhaps prudent or not?

Mr. Michael Torpey:

I think, Deputy, if you don't mind, just to mention at the outset that we were part of Royal Bank of Scotland, not Bank of Scotland, which was an entirely different operation-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes.

Mr. Michael Torpey:

-----with operations in the country, just to clarify that, if I may. Your question really is: if we did have, as I understand it, a well-controlled process, how did we ... how did we come to lose money? And I think the core of it lies in the fact that the RBS Group was a group which, as you rightly suggest, was targeted on growing its business in Ireland. In particular having invested very heavily in both the purchase of the banks in Ireland and the systems costs that were applied, they sought to grow to be a competitor with, an equal with, or indeed to match the incumbent full service banks, being AIB and Bank of Ireland. The strategy, therefore, was one of growth. The growth was predicated on an environment where there was a near universal view that the growth prospects for the Irish market continued to be strong and that Ireland was on a good path, shall we say. Any ambitions to grow the business were subject to the constraints of the risk appetite of the group, subject to the controls, procedures and policies of the RBS Group, as transmitted to Ulster Bank. So while we had an objective to grow the business, a clear desire and ambition to grow the business, the RBS Group was not tolerant of relaxing standards and controls in pursuit of that growth.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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The Central Bank Governor, nevertheless, I quoted yesterday to McCarthy, said that, you know, growth of 20% or greater should send out warning signals of the balance sheet, that you could quickly come into dangerous territory. Did that occur to you? Mr. Black, if you may be familiar with Mr. Black, William Black, gave evidence along the same lines here. He's a veteran regulator from the United States. Were you aware of a danger that ... overextending?

Mr. Michael Torpey:

I have no doubt that if the business is growing rapidly one has to be extra-careful and I would fully accept that contention. I would distinguish, Deputy, between the position of a small challenger seeking to grow market share within a market and overall growth in a marketplace. Ulster Bank was coming from a position of being very much smaller than the dominant banks in the Irish marketplace. It is entirely acceptable from a business perspective, in my view, that a small challenger can seek to grow significantly more rapidly than the general marketplace and significantly more rapidly than a competitor's, in the interest of bringing competition to the marketplace and growing its position relative to the incumbents.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. Could I explore now with both of you, maybe starting with yourself, Mr. Gallagher, please, the salary, bonus and pension plans offered to senior executives of Ulster Bank Ireland and whether they were appropriate and so forth? So, Mr. Gallagher, maybe you'd confirm that in the Vol. I, core document, you were employee 17?

Mr. Robert Gallagher:

What page, Deputy?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Page 11. Well, it's pages 10, 11.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The cover on it, volume?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Vol. I, UBI - B5.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. Robert Gallagher:

And sorry, Deputy, page 11, is it, or-----?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Pages 10 and 11, yes. But 11, as far as you're concerned.

Mr. Robert Gallagher:

Yes, Deputy, I believe that's correct.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. Mr. Gallagher, could you tell us just in a word, because the information isn't given here, what your basic salary, not bonuses, would have been in 2005 and 2006?

Mr. Robert Gallagher:

My basic salary, Deputy, in 2005, to the best of my recollection was €370,000 approximately. And it increased thereafter in the period of my tenure in the organisation by ... to approximately €470,000.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. And then, Mr. Gallagher, in 2005, or for the year 2005 you were recorded having received a bonus of €99,000. In 2006 it went up to €427,000; 2007, €440,000; 2008, €580,000. What did you do ... would you agree that these are massive sums of money by ordinary people's standards or not? And what did you do for ... to achieve such significant amounts?

Mr. Robert Gallagher:

Well, just for clarification, first of all, Deputy, in the year 2005 that you referred to, I was working three months in the organisation. But to the pure core question, the remuneration which I received was determined by the RBS Group.

It was determined independent of me ... and like all executives within the RBS Group, it was determined across a matrix of objectives about topics like people leadership, topics like running the business, topics like customer engagement, topics like performance. So it was a ...a balanced scorecard assessment. But ultimately it was discretionary ... discretionary in the bonus element by the RBS Group ... of which I was a recipient. To your question about the ... the levels, I think your observation is fair. I think the levels look excessive.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And Mr. Gallagher, it appears, does it or not ...that the performance is measured largely against growth in revenue ... and, therefore, that these bonuses relate to the growth of the bank ... and which was achieved through very, very rapid lending which in all banks as we know ... finished up in tears? Is that fair to say?

Mr. Robert Gallagher:

Deputy, as I said to you the basis on which the remuneration and recognition occurred within the RBS Group was across a number of matrices ... being customer engagement, staff leadership, performance. So I don't agree with your assertion that it is entirely on growth.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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It was a question ... it was a question, Mr. Gallagher.

Mr. Robert Gallagher:

Apologies ... apologies, Deputy. I would equally highlight that in the remediation period the RBS Group continued to recognise performance ... at much, much lesser levels ... but continued to recognise performance which clearly were not about growth.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But ... were risk adjustments built into the bonus schemes or not? For example, your largest bonus was €580,000 in 2008, the very year that many banks, including RBS, tanked. Would there not have been a clawback from the bonus in relation to that very detrimental happening for the bank?

Mr. Robert Gallagher:

Deputy, I think if you look at the progression of how banks and the banking industry have improved the addressing of those matters in terms of deferral of recognition, or indeed, clawback ... that became a much, much more significant item in the banking industry post-2008 and features of that became the norm in my remuneration in the periods 2010 and 2011 in the RBS Group. So I have seen how that has impacted the way the evolution of those types of rewards occur. Were they sufficient in ... across the industry generally? Were they sufficient in the years up to 2008? I think they ... I would echo what the general sentiment is and say, "No they weren't."

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I have to move on ... really ... but Mr. Torpey would you generally have the same opinion or not as Mr. Gallagher in relation to these issues?

Mr. Michael Torpey:

Yes, Deputy. I would think ... you know ... pay levels in the banking business at the time, were undoubtedly very high. I believe that the incentives were driven on a balanced scorecard basis reflecting the variety of objectives which constituted the make-up of the overall banking situation. And I think in terms of the lessons learned ... I think the approach to remuneration in banking internationally, particularly the EBA approach to guidelines for remuneration in banking, have taken on board lessons learned, not just in Ireland, indeed, internationally from the weaknesses of remuneration structures that may have existed, or did indeed, exist in the past.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, Mr. Gallagher could I move on rapidly to ... you ... the strategy that was called ''Journey to One'' ... update ... and it's in the core documents Vol. 1 page 13. And this was presented in April of 2007.

Mr. Robert Gallagher:

Apologies, Deputy ... could I just check the ... one -----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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It's Vol. 1, UBI - B2, page 13.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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''Journey to One'' strategic business initiative update, Mr. Gallagher.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes ... we are on the same page. This sets goals and customer strategies ... or purports to set them for the period 2007 to 2012. And it is envisaged that operating profit will go from €600 million to €1.3 billion ... new mortgage lending from €5 billion to €15 billion ... corporate market Republic of Ireland share from 15% to 30%. What was management thinking here, Mr. Gallagher? These would, by many, be considered to be extraordinarily ambitious targets. What was your rationale and how did you think you were going to achieve them?

Mr. Robert Gallagher:

So, Deputy ...a couple of comments, if I may. The first is ''Journey to One'' was predominantly a staff engagement programme. So we utilised a process emanating from the States called ... a teaching programme where people engaged about leadership and how they shared and worked together. And a part of it was this page and the outputs from this page, but a lot of the programme was around staff engagement ... around post ... some very, very tough integration matters we had ... how would we encourage and motivate and lift people's spirits? That was the context. I will answer your specific question but that was the context to it.

The other thing I will say, Deputy ... in ... on this topic is there is no question that Ulster Bank, until the ownership of RBS, had a real desire to compete with AIB and Bank of Ireland in a much more substantial way. And it was one of the reasons I joined the organisation. And if you think about what Ulster Bank is on the Republic of Ireland ... in ... for instance, in Donegal, Ulster Bank's market share might be 20%, whereas in Cork and Kerry it might be 2%. So the belief that Ulster Bank could increase its market share, particularly in the southern part of the country, was real and meaningful and was evidenced by the investment which Ulster Bank was making around the country.

So, if you look at the business centres and branches which were opened by Ulster Bank in that period in places like Carrigaline, in Killarney, in Tralee, in Limerick ... there was a material expansion of the physical premises on the island of Ireland by Ulster Bank. If you compound that with the material investment in technology ... just to provide services to retail customers and business customers ... and you add to that the material expansion of the ATM network of Ulster Bank ... some of which was reflected in these pages. There was a very substantial increase in the capability of Ulster Bank to provide services to customers around the island which never existed before in its 175 years on the island and in the Republic of Ireland.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Some of -----

Mr. Robert Gallagher:

There is no question when looked at however, Deputy, that the financial ... from to on this page ... look now unrealistic ... and look ... exhibit a very strong growth. But they were about communicating to our people an ambition to take on AIB and Bank of Ireland.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Just a last question so, Mr. Gallagher, because of time. Ulster Bank maintained a panel of perhaps around 100 approved mortgage valuers and obviously in terms of assessing risk it is in banking, I believe, vitally important that an independent valuation be requested and property may be taken as security. How was the business distributed among these valuers? And were there any groups within that, that got disproportionate share of the business or were specially favoured or how did it work?

Mr. Robert Gallagher:

So, Deputy ... the mortgage business I had no management responsibility for. So I don't know the answer to that question.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Torpey, could you give any-----

Mr. Michael Torpey:

To be honest, Deputy, much though I would like to help, having had no role in the risk process ... the risk evaluation process ... frankly, I don't know the answer to your question.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Before I move on, and to just round up one issue that Mr. Torpey and Mr. Gallagher were responding to from questions from Deputy Higgins around remuneration and bonus packages.

What was your bonus package in 2008, Mr. Gallagher? Did you refer to that in evidence, or was it discussed at ... and what was your bonus package?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I can ... just quickly, Chairman-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I can put up the evidence ... it's a document there, but rather than going back to it, I just ... something I just want to tease out on that. It was something like-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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If it saves time, Chairman-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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If you have it there, please yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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In 2008, Mr. Gallagher is down as €580,500, a bonus ... 2007, €440,000.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That's at 274 ... Okay. You said that rules subsequently changed after 2008, Mr. Gallagher, that remuneration packages now get examined with regard to performance. Under the new rules, would that ... 2007 the €172,000 have been paid to you?

Mr. Robert Gallagher:

So ... the governance within RBS, and indeed other banks, has more deferral of reward and more clawback. I don't know the answer to that question, Chairman, it's ... the bonus in 2008 relates to the year 2007.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Mr. Robert Gallagher:

So, my belief is no.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That you wouldn't have received that bonus under the new rules?

Mr. Robert Gallagher:

Yes, but I don't know, I haven't been -----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, and I -----

Mr. Robert Gallagher:

It wouldn't be my decision, it would be the decision of the variable pay committee.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And, on reflection of that, do you believe that that payment or remuneration was then merited?

Mr. Robert Gallagher:

Sorry, Chairman, I didn't hear your question.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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On that basis, and reflecting on that, do you have a view as to whether that payment, from your activities in 2007, paid in 2008, was actually merited?

Mr. Robert Gallagher:

Well ... Chairman, my role in the bank, as I articulated was ... in my opening statement, was to enhance the capability of the organisation to service Irish business customers, it was to enhance the capability of the team within the business and it was to diversify income. It's for others to assess whether ... it's for others to assess whether that was ... it's for others who determine this to assess whether that was reasonable or reasonably achieved or not. I have said to Deputy Higgins that remuneration in the banking sector is excessive.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, and do you have a view on the new remuneration rules? Do you think they're an improvement or not on the previous rules?

Mr. Robert Gallagher:

I think they're an improvement, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Eoghan Murphy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you to both the witnesses. Mr. Torpey, is it possible that loans or terms were offered to borrowers during your tenure that were outside the normal terms available at Ulster Bank?

Mr. Michael Torpey:

Deputy I ... as far as I'm aware, there were no offers of loans to customers outside of normal terms and conditions. I did mention earlier that there would've been a staff scheme, which will have been a staff mortgages scheme, which is the only situation that I am aware of that will have had in any form of preferential terms offered to any individuals or group of individuals.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Can we turn then to the group internal audit, and that's at the Dublin Mortgage Centre from December 2006 and the reference is UBI, Vol. 2, page 74. So, on the top of page 74, if you have it in front of you, "Control Issue No. 2 ... Mortgages are processed to completion without sufficient consideration being given to whether all terms and conditions, and documentation requirements, have been satisfied." Classification is "Significant". And if we go down to the third paragraph then underneath that, "The current process does not require (or result in) full copies of a Mortgage Offer Letter ... being held on file, either in paper form or electronically. For switcher mortgages (remortgages) the current process does not require the centre to have sight of the signed [offer letter] at all." Can you comment on that? That's coming from the internal ... group internal audit in the Dublin Mortgage Centre.

Mr. Michael Torpey:

Deputy, the Dublin Mortgage Centre was established as a result of integration of mortgage systems in ... in 2006, the middle of 2006 I think is when it was established. It's not strictly in my remit but I'll answer as best I can from my general knowledge of the situation. Following the establishment of that mortgage centre, weaknesses emerged ... there was an internal audit requested, I believe by the chief executive, although I'm open to correction on that, and it did turn up very significant issues which led to an immediate escalation of the concerns and did lead to an immediate bringing in of resource from RBS Group who, as I've stressed earlier, take these things very seriously, to remediate the issues as quickly as possible, because ... I would, you know, that ... an audit report like ... such as this does not make good reading. I don't offer it as an excuse, that it had just been newly set up. I think the only good thing that can be said about an audit report like this was that it was undertaken quickly after the establishment of the Dublin Mortgage Centre to establish the weaknesses and ... so that they could be escalated, addressed and put to rights.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Am I correct in understanding that what this says is that people were giving out mortgages ... and it's possible that these did not meet the proper terms of the bank, and it's possible that you did not know they did not meet the proper terms of the bank?

Mr. Michael Torpey:

The implication of ... of what ... of what is in here, is that some of the conditions attaching to the ... to the ... issuing of a mortgage may or may not have been met prior to draw down. I think, Deputy, that's somewhat different to ... any implication that they would be offered ... that there would've been mortgages going out on preferential terms. I think, as I read it here, Deputy, and again I'm talking from a general knowledge rather than a detailed knowledge of the Dublin Mortgage Centre, it seems to me that we're looking here at ... at ... at a serious deficiency in process where the various items that had to be delivered prior to draw down weren't necessarily ... or at least there wasn't evidence that they had been delivered prior to drawdown. That is a weakness, not an acceptable weakness, and management will have taken that very seriously and I have sufficient recollection to know that, as I have said, that ... that a senior resource from the RBS Group was brought in to quickly and thoroughly remediate these weaknesses.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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You see that as a weakness in process?

Mr. Michael Torpey:

That is very much my reading of that, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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If I could turn then to UBI - B1, Vol. 1, page 22. And this is about the corporate hospitality and gifts to staff at the bank from clients. You didn't maintain a register of any corporate hospitality or entertainment, or any gifts received by staff in excess of €250, and it wasn't policy to do so either. Why not?

Mr. Michael Torpey:

The practice at the time, Deputy, was to rely on a code of conduct which required people to act in ... in a certain way. In that context, but I believe the situation has changed since - I am no longer with Ulster Bank - but the practice at the time would have been to rely on codes of conduct where people understood ... and were held accountable for their behaviour, in accordance with the code of conduct, including matters of hospitality.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Could there have been a relationship between this lack of a policy and lack of a register and what group internal audit found in the Dublin Mortgage Centre?

Mr. Michael Torpey:

Again, Deputy, I think ... I think it's ... I would ... I believe, from my reading of the documents and from my recollection of events, I believe we're looking, in the Dublin Mortgage Centre, entirely at a process failure, process weakness and, as such, I don't see any connection between these two items.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you. If we could turn then to B2, Vol. 1, page 28. This is a letter from the Financial Regulator from March 2008. On page 28 ... at the bottom of page 28 they highlight that, "inspectors noted from the minutes of the RBS Group Credit Committee held on 14 May 2007 that in relation to a €90m facility being discussed for [and it's redacted] "The relationship team said that they did not know exactly what the €70m equity release would be used for", but they were aware that [and it's redacted] had tendered for two significant projects." Is that an example of staff at a bank lending out €70 million to a customer and not knowing what it's for?

Mr. Michael Torpey:

Deputy, I don't believe so. I believe what we see here is that a credit committee challenged, appropriately, to gain an understanding and will have referred that ... referred that back for sanctioning and any credit. Again, I won't have been part of the credit process but I think I'm making a reasonable inference from the information in that document.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Three minutes now, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, this is my final question on this area. The group risk credit policy and strategy committee ... you didn't serve on that committee?

Mr. Michael Torpey:

I did not serve on that committee, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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As finance director, should you not have served on that committee?

Mr. Michael Torpey:

I think this goes, Deputy, to the core of the organisational structure, which I sought to bring out in my opening statement, where RBS Group operated very much on functional lines in its organisation.

It was an integrated group under the UK prudential sourcebook rules, the UK regulatory rules, such that the control was from the centre of RBS, and that caused people like me to be in a functional line, very much in the accounting line, with a credit process driven through the credit process lines in RBS Group. So I think, in the context of the international group that RBS was and of which Ulster Bank was a subsidiary, it was not unusual that I would not have been part of that process.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you. I've to move on now just to another question while I still have time. And the book is UBI - B2, page 21. So you have some tables in front of you. By mid-2006, the level of new mortgage lending in Ulster Bank outside of policy reached 40%, and policy changed later that year and the level dropped to 20%. So can you just clarify for me, lending outside of policy, is that what you would refer to as exceptional lending?

Mr. Michael Torpey:

Yes, Deputy, the exception as to policy is lending outside policy, as you read it there.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And would 40% be considered high?

Mr. Michael Torpey:

It certainly would, Deputy, and would prompt a very close inspection as to what was driving these matters. The approach to policy in residential mortgages was ... and, as would be good practice today, indeed, that you had policies which then had a tolerance around them because prescriptive policies of their nature lead to a need for a certain level of exception. And, to be entirely frank, Deputy, once you're moving beyond low-teens, mid-teens exceptions, you have to raise a question as to the appropriateness of policy. The exceptions to policy were the subject of challenge by the board of UBIL throughout. And to the specific item of debt service ratio policy exceptions within ... within UBIL ... and you will note on the page to which you've referred me, the difference between the First Active and the UBIL experience; that arose largely because the exceptions were very highly concentrated on people with higher incomes such that the appropriate debt service requirement will not have been captured by policy and, indeed, the revision to policy will have captured that. So if we find that ... and I believe it to be the case when I was there, that the majority of debt service policy breaches were for high income earners, that is a mitigant which is acceptable and would have been reflected in the policy revision subsequently. And I believe also that a very high proportion of those exceptions will have been minor exceptions - as in, very marginally above the policy limits. It doesn't take from the fact - and it's very, very important, Deputy, I would agree - that where you do have exceptions arising, that they are challenged by the board and satisfactory explanations along the lines I've given or such other as they may be are arrived at to ensure that credit risk appetite is being adhered to.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you. That was December-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Final question.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----or that was the end of 2006 the policy changed, but in September 2007, the chairman is still expressing disquiet over the continued high exception rate for lending approved outside of the debt service ratio limit.

Mr. Michael Torpey:

The chairman very rightly ... and I think ... I think it, in some ways, describes some of the strengths that Ulster Bank Group will have had, notwithstanding events that subsequently happened, that while we had a credit policy driven by and controlled by RBS Group, we had an independent board who saw fit to challenge these things and will have required that they receive detailed explanations as to the level of exceptions continuing. So I believe and I'm satisfied that the board did get satisfactory explanations to give them the assurance that while specific policy lines may have been breached, the credit appetite or, in other words, the credit risks being assumed on this lending were within acceptable boundaries but I would absolutely agree that it's appropriate that such exceptions be challenged on a continuing basis.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Just before we go to the break, if I can just go into an area with either Mr. Torpey or Mr. Gallagher. You might express me which one of you is probably more relative to it. In the engagement with mortgage brokers, which was something that Ulster Bank done, alone with other banks, during the period, was there a part of the growth strategy that was outlined by Deputy Higgins, a thought given to developing partnerships or in developing relationships with independent mortgage brokers as a means of increasing your growth into the mortgage market?

Mr. Michael Torpey:

Deputy, I'm not well-informed in the space you're asking in. Certainly, the mortgage-broking side of the mortgage market grew in importance through the period and, indeed, the First Active brand didn't deal through mortgage brokers, and you will have seen in the documents that-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Ulster Bank did.

Mr. Michael Torpey:

Ulster Bank did engage with mortgage brokers and, as far as I'm aware - and I've to caution in those terms - the nature of the engagement with mortgage brokers was by way of commission payments to mortgage brokers for business originated. I'm not aware of any engagement or proposal to engage in a more substantive or different business model but I'm open to correction on that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And was there a risk management process in place for mortgage processed by brokers that would be coming into Ulster Bank?

Mr. Michael Torpey:

The mortgage applications coming through mortgage brokers were subject to the same policy requirements as mortgages originated through the branch network so the debt service limits, the ... multiples of income and the supporting documentation that will have been required or-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So you ... so you would have run a second sight on broker proposals that would have come in so ... and they would have more or less ... if I'm hearing you correctly there, Mr. Torpey, it would have been like the application was being made from scratch in terms of examining the supporting information. It wouldn't be taken that the broker's package was not to be looked at, that everything was sound inside in the box.

Mr. Michael Torpey:

As I understand it, and I've no reason to doubt my understanding, Deputy, the level of verification of applications coming through the broker network will have been similar to that coming through the branch network.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just a final question on that and then we'll go for a break. Can you account for the percentage of your distressed mortgage book that relates to mortgage broker business?

Mr. Michael Torpey:

I don't have that information to hand.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Have you looked at that as an issue?

Mr. Michael Torpey:

I am certainly ... in terms of my review of the information that I had in connection with the inquiry, I haven't looked at that. I can ... I can, if you wish, Deputy, request of Ulster Bank that they look at that and make the information available.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That would be assistful if you could, Mr. Torpey. We'd appreciate that.

Mr. Michael Torpey:

I'll make that request to Ulster Bank.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, I'm proposing that we now take a break and that we will break until 11 ... or, sorry, 12.25 p.m., if that's agreeable to members. In the meantime, I would like to just let the witnesses know and to remind them that, once they begin giving evidence, they should not confer with any person other than their legal team in relation to their evidence on matters that are being discussed before the committee. With that in mind, I now suspend the meeting until 12.25 p.m. and remind the witnesses that they're still under oath when we resume. Is that agreed? Agreed.

Sitting suspended at 12.07 p.m. and resumed at 12.32 p.m.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Before we go back into public session, just to remind members if they have been using their mobile devices and other pieces of equipment during the short suspension, to make sure to put them back onto safe mode. Mr. Torpey, Mr. Gallagher, you're okay, yes? So I now propose that we go back into public session. Is that agreed? Our next questioner is Senator Sean Barrett. Senator, you have ten minutes.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Chairman, and welcome back to our visitors this morning. Could I refer to core document UBI-B2C, Vol. 2, pages 19 to 30, and, in particular, page 27 stress testing. The worst case scenario... You tell me when you're ready. Do you need the referencing again?

Mr. Robert Gallagher:

Yes, reference please.

Photo of Sean BarrettSean Barrett (Independent)
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Certainly. UBI-B2C, Vol. 2, pages 19 to 30, and, in particular, page 27. Chairman, there was a worst case scenario in stress testing. Residential property prices were forecast to fall by 30% between 2008 to 2009, and commercial property prices were forecast to fall by 40%. That would result in a total impairment charge of €540 million. The actual impairment charge for UBIL was €1.7 billion. Can you explain why the actual impairment charge was so much higher than that forecast in the stress tests? Were there any more severe stress test scenarios considered by the bank or discussed at the board? Were the in-house economists involved and were the stress tests different for residential, commercial development, speculative land banks? The question is directed to both gentlemen, in whatever order.

Mr. Robert Gallagher:

I am just reading the information for a moment, if I may, Senator?

Mr. Michael Torpey:

Perhaps I can start with an initial comment. I am a little bit light on this one because it was subsequent to my departure from Ulster Bank but, in general terms, the parameters of the stress tests that would have applied during my time with the bank were perimeters that were determined or dictated by the Financial Regulator, and as such the stress tests will have been conducted on the basis of those parameters that were indicated. I think it is fair to say that stress tests failed to capture the outcomes that were to transpire over time, perhaps if for no other reason, that the scale of events was entirely unprecedented and off the scale of any past experience or expectation that might have been captured in an analysis conducted at that time, of even severe but implausible future events. So that is a general comment on the approach to stress tests. The financials that drove the stress test outcomes subsequent to my departure, it is not something I am up to speed on.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What the Senator is asking you is that there is a 300% miscalculation here when the whole thing is flattened out. This was the result of behaviour. Can you explain to us the behaviour that actually resulted in the 300% miscalculation?

Mr. Michael Torpey:

I think, Deputy, I would characterise the difference as being driven by the difference in assumptions underlying the models. The assumed outcomes from the levels of changes in property prices were driven through whatever financial modelling tool was used in that exercise. I think what appears to explain to some extent the difference between what was seen in the stress tests that were conducted and the actual outcomes, is the severity of events and the pervasive nature of those events as they transpired over time. While stress tests will have looked at percentage changes in values that are here, and while the actual fallen values was materially greater than this, that will have had its own set of impacts. But I suggest also that the stress tests proved insufficient to capture the wider range of impacts, starting with the international crisis that happened at the same time, extending into the wider fiscal impacts of the downturn in activity in the economy. Such that it is fair to say that the stress tests, however diligently done, however honestly they were appraising the potential for a downturn in the economy, it is fair to say that the actual outcomes proved to be dramatically more severe than those stress tests.

Photo of Sean BarrettSean Barrett (Independent)
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I will address Mr. Gallagher, if I may? On the core documents, B2, pages 24 to 29, a letter from the Financial Regulator to UBIL, dated 12 March. He was ... the Financial Regulator was concerned regarding the effectiveness of UBIL's credit review process as it related to commercial property lending. Do our visitors think that UBIL had a sufficiently robust and effective credit approval and review process for its commercial property portfolio?

Mr. Robert Gallagher:

Senator, the review process within Ulster Bank was covered by the credit policy framework documents and required all cases to be reviewed annually, and to the extent that some cases did not get achieved annually, then that was escalated to management and to boards. So every case was reviewed annually, and it was reviewed by relationship team writing a comprehensive paper, by that paper being supported or not by a separate document on risk, the combined papers going to Ulster Bank credit committee where challenge and update would have existed. That continuing if the cases were in deal size of approximately in excess of €35 million, it would have gone to an RBS committee which this letter reflects, again where challenge would have existed. So there was a defined, communicated and comprehensive review process within Ulster Bank.

Photo of Sean BarrettSean Barrett (Independent)
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I just want to, Mr Torpey, arising from his presentation today, Chairman. On page 6, you say that the treasury was transferred to Royal Bank of Scotland. On page 7, accounting functions, accounts production, regulatory reporting and accounts payable were transferred. Yesterday Mr. McCarthy said on his page 7 that Ulster Bank branches had no lending authority and everything was referred to Credit, with a capital "C".

It is obviously in the section. Was the Ulster Bank just being hollowed out by the Royal Bank of Scotland?

Mr. Michael Torpey:

The Royal Bank of Scotland was the single shareholder ... the sole shareholder in the Ulster Bank Group and the position of the Royal Bank of Scotland was that they operated as an integrated group, a technical expression in terms of the prudential sourcebook in the UK. The integrated group rules required that RBS Group exercise a very close degree of control. The control ... the management of control processes, policies and so forth were required under the UK prudential rules to be driven from the centre.

Photo of Sean BarrettSean Barrett (Independent)
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Now you referred earlier, I think it's in response to Deputy Phelan, about the compliance culture of the Royal Bank of Scotland. I have many constituents, the nature of my constituency in the United Kingdom, and I think I'd have to say that compliance and the Royal Bank of Scotland don't actually go well in the same sentence. Record fines for anti-competitive practices on 20/1/ 2011. In fact, one of the executives was deprived of his knighthood by Her Majesty, so, I mean, it was not a compliant corporate culture. I think I will just have to ... unless there are people from the United Kingdom looking into today, I know they have other things to do, but Royal Bank of Scotland did not have a compliant culture. I'd have to put that proposition to you.

Mr. Michael Torpey:

While one most acknowledge the failings in Royal Bank of Scotland and beyond that, it wouldn't be fair to comment on them. I believe, and my experience was, that the approach of RBS Group was one of very strong rigour in terms of compliance with the policies, procedures, prudential requirements and so forth. I instanced, Deputy, the view taken by Ulster Bank Group and by RBS Group that the rules around sector exposures were seen as rules which we were not prepared to breach. And that is symptomatic of the approach that I experienced in my engagement with, and management by, RBS Group that rules were there to be conformed with consistently and rigorously.

Photo of Sean BarrettSean Barrett (Independent)
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And the Treasury Select Committee of the House of Commons found on 10 February 2009 that a senior executive had no technical bank training and no formal qualifications. Was that a problem?

Mr. Michael Torpey:

Again, I can speak only of my experience working within Ulster Bank Group and my engagement with the RBS Group. And all of the people that I had the occasion to engage with in the RBS Group were, in my experience, people who were well experienced in their area. We were dealing with a bank which was one of the largest banks globally, and I can only speak for the experience of Ulster Bank in dealing with RBS where I found that I was dealing with a business which was, and I repeat myself, very strongly control oriented.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you very much. Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just to pick up on one point from Senator Barrett's question there with regard to the stress testing of impairment charges. At any time, did the board consult with your in-house economists in the assumptions used in the stress test?

Mr. Michael Torpey:

The board will have used the in-house economists to inform ... to inform particularly the shorter term macroeconomic forecasts and will have relied, to a significant extent, on the external inputs in relation to medium-term forecasts with particular reference to the ESRI indeed.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Senator MacSharry, ten minutes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Thank you very much, and thanks gentlemen for being here today. Yesterday when we had Cormac McCarthy and I asked why was there the need for 27 registered companies between Ulster Bank here in the Republic and, I think, eight more in ... that were registered in Belfast but were called things like Ulster Bank, Dublin Treasury and so on. Why is it necessary to have 27 entities? Because he, in his testimony, mentioned that there were three legal entities in the Ulster Bank Group and they each had a board of directors but yet, it seems, within that, there were 27 registered companies. Can you explain for the committee, and people watching at home, why would that be necessary?

Mr. Michael Torpey:

The organisational structure, Deputy, of Ulster Bank Group, was that Ulster Bank Limited was the parent within that group. It was a bank in its own right and then ... in the United Kingdom. And the two principal subsidiaries then were First Active and Ulster Bank Ireland Limited, each of them banks as well. So the three principal legal entities were those three, which were licensed banks. As will be quite normal in a complex corporate entity, there were a significant number of, what I'll call, minor subsidiaries, owned by any or all of the three aforementioned which will be in place for specific purposes. So there, you know, you will have subsidiaries, for instance, related to property ... property ownership on behalf of the group, if there is a particular reason to do that or subsidiaries to accommodate various complex structures that may have been put in place. They are all, and I think the important point to note, is that they are all wholly owned subsidiaries. Each have their own boards in their own right, but they're single purpose companies, which are consolidated into the headline companies, the UBIL or First Active or UBL, for reporting purposes. So the existence of those companies, while it is to facilitate individual activities or transactions within the group, all of those activities are captured in full at the consolidated company levels.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Were these single entity companies, as you've described them, used to convenient ... for the convenience of distributing loan concentration to various entities as opposed to exposing one entity to beyond the rules?

Mr. Michael Torpey:

No, Deputy, they were not. The consolidation of exposures was done at the banking levels. The banks ... the three banks I have named, First Active, Ulster Bank Ireland Limited and Ulster Bank Limited, were the lending companies which did the lending. All of the lending was done through those and recognised appropriately.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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The bank's loan-to-deposit ratio increased significantly in the 2000s peaking at around 209% in 2007. Would you have any comment to make on the appropriateness of that loan-to-deposit ratio?

Mr. Michael Torpey:

I believe ... I believe that Mr. McCarthy clarified numbers in relation to loan-to-deposit ratio yesterday, that the true loan-to-deposit ratio was lower than that, but, leaving that aside, Deputy, I think the key to understanding the financing of the Ulster Bank balance sheet is the position that RBS Group adopted, where it would provide the funding and capital, the treasury needs of Ulster Bank as it went forward. In treasury terms, loan-to-deposit ratio is a useful metric but has very great weaknesses, as has been seen in many instances, nationally and internationally. The key ...the key issue in managing the balance sheet is stability of funding and for so long as RBS Group was ... gave the assurance and delivered upon that assurance, that it would meet the funding and capital needs of Ulster Bank Group, the stability of funding was assured and, indeed, you know, long after I left, when it was tested in the crisis, it's reassuring to see that RBS Group, indeed, did stand over those assurances.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Did ... with reporting, and you described it yourself that you reported to the CEO and, in parallel, you reported to the director of the treasury side of the business in RBS, in parallel, so ... and Mr. McCarthy yesterday gave us quite a complicated outline of how reporting was carried out as well and it certainly involved RBS from what his evidence had said. Were RBS making all of the balls?

Mr. Michael Torpey:

RBS exercised a very significant degree of control over Ulster Bank. There can be no doubt about that. The reporting line ... I did, as you say, report to the CEO locally and to the finance director of the RBS Group, and that's very consistent with the pattern that you will typically see in a multinational organisation. The conduct of the finance function, which was my brief, was driven very strongly through the RBS Group where we had to apply the standards, the controls, the processes, even the reporting timelines, that fit within the RBS Group requirements, so it is absolutely true to say there was a very strong degree of RBS Group control.

The advantage that you have, I suppose, in the licensed bank situation that Ulster Bank was ... within Ireland, is in addition to that control exercised by RBS Group, you had an independent board of Ulster Bank and Ulster Bank Ireland Limited here, which had duty of oversight to ensure that the bank complied with statutory reporting and governance and was fit for the local conditions, so it conveyed the advantage of the strength of the control environment of a multinational group together with the oversight of a local independent board to act as a check and balance on the behaviours ... within the Irish context.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Were you in a position, as the person responsible for funding Ulster Bank in your role, could you fund it independently of RBS or did it have to go through RBS? Did you access the wholesale markets for funding without consulting or-----

Mr. Michael Torpey:

When RBS acquired First Active and set about integrating them, the position RBS adopted was that treasury services would be supplied in full ... through the RBS Group. In practice, what that meant was deposit-taking was the business, the normal banking business of Ulster Bank in Ireland, there was limited money markets activity in terms of local type activity, and any other treasury activity, and any surplus funding or funding shortage would be addressed by RBS Group treasury, so the control of that was exercised entirely ... as time went on, Deputy, and as the markets evolved, RBS elected to permit Ulster Bank to raise specific fundings ... on Ulster Bank's account and that's to do with relatively complex intra-group lending limits applied by the UK regulator. So you will see specific instances through the documents where Ulster Bank did go into the markets under the direction and guidance of RBS Group treasury. The method by which that direction and guidance was applied was that the assets liabilities committee in Ulster Bank had the attendance as a member by personnel from RBS Group treasury and such decisions to go into the market, even on specific transactions such as the issuance of a floating rate note, such decisions had to be signed off or approved at the RBS Group assets and liabilities committee before they could proceed.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Did the impact of the introduction of the euro have, and while I know this goes back perhaps before your time in Ulster Bank, but in terms of your experience, did it have a positive or negative impact on the funding of financial institutions that you were in?

Mr. Michael Torpey:

That's a very pertinent question to the overall issue, Deputy. The entry into the euro changed the availability of liquidity to financial institutions generally ... in this country. We were now part of the euro, and it meant that our home currency was now a currency which was one of the larger currencies globally. Liquidity in that currency was greatly enhanced and all financial institutions operating in the Irish market found themselves with the far greater facility in terms of accessing funding on the global markets through the years that followed.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Yes ... in line, and I don't mind ... it's not that I'm excluding you, Mr. Gallagher, you are free to come in at any stage and this is my final question, so with the onset of the euro and the access to facilities that you speak of, did, as a result of the very competitive environment which existed with all banks and you were trying to be the third banking force and so on, did this have ... an unintended consequence of driving the quality of underwriting down or not?

Mr. Michael Torpey:

In relation to Ulster Bank, I would say it did not drive the quality of underwriting down, because the credit stream within Ulster Bank and extending into RBS Group, was entirely independent of the business and entirely independent of the funding of the balance sheet. I think the availability of liquidity, the relatively easy availability of liquidity, did undoubtedly influence the banking system and while any individual bank, and particularly a challenger bank, can seek to grow its market share, there is a reasonable question to be asked as to what is the impact if all banks have that access to liquidity and it drives up the scale of borrowing by all banks across the system.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Did it loosen the acceptable standards, as opposed to drive down the quality? Did it loosen the considerations of underwriting?

Mr. Michael Torpey:

From the perspective of Ulster Bank, and that's the only place in which I worked through this, the two were unconnected. Underwriting standards were independent. I can't honestly comment on whether it was a driver of any changes across banks, across the system as a whole.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just to bring in Mr. Gallagher there, before I bring in Senator O'Keeffe, on some of the questions that was put to yourself, Mr. Torpey, a number of the difficulties, it would appear or you can correct if it didn't appear, such as the banks' loans-deposit ratios, the difficulties associating this stress testing and so forth, may have been associated or not with Ulster Bank's growth strategy. Given your own international experience, Mr. Gallagher, of banking, what is your view of Ulster Bank's growth strategy as compared with strategies that would have been seen or been involved with elsewhere during your international career? Ultimately Ulster Bank was going to compete with two big huge, with two big players in the Irish market, your ambition was to get on to a level kind of pegging position with them. And was it overly ambitious, in view of the size of the market and the dominance of the two banks ... was that a very ambitious and ultimately flawed approach or not by Ulster Bank to get into that space?

Mr. Robert Gallagher:

Chairman, just to pick up on your questions and to link to Mr. Torpey's comments, there is no question that both the business and commercial bank and the residential part of the bank in Ulster Bank, sought to win domestic deposits. And if you think about the challenge for a challenger bank, versus the incumbent two banks, is that the challenger bank tends to have less deposit base than the two incumbent banks and the attraction of winning lots of small depositors is you have a stickiness about your deposit base, which helps your loan-to-deposit ratio. So there was an active strategy both in the retail bank and the commercial business bank to win the completeness of a customer proposition and that is, deposits, clearing accounts and lending and that was the strategy as evidenced by the branch openings around the country. So our growth strategy was about winning more customers in the completeness of our relationship with those customers, not about winning more and more property-lending business.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But are you saying in that regard, so, that Ulster Bank were not narrowly based on growth in one specific sector and that sector being property?

Mr. Robert Gallagher:

No, Chairman, I'm ... well, I'm saying that every bank, Chairman, in this economy reflected the activities of the time in the economy, which were skewed to property. One of the challenges for all banks in this economy, which continues, Chairman, is that a lot of the industries which one would like to deploy capital to, don't require bank capital. So, for example, Chairman, foreign direct investment companies, broadly speaking, don't require bank capital from the domestic banks; broadly speaking, indigenous software companies or technology companies don't require capital; and, broadly speaking, heavy industry in the OECD world has migrated to the developing economies. So if you think in Ireland, in Britain, in any other OECD economy, the asset activity that consumes loan capital tends to be skewed to property. It's a challenge for the banking industry, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, but, going back to earlier testimony, to use your manufacturing concept ... a plastic bucket has a point to market when it arrives there, it has a positioning on it, it would have a price point and so forth. Property is very subjective and notional and far more taken to sentiment and other factors, as would be a plastic bucket. Therefore, it comes with entirely different type of risks. And, so if you are funding a plastic bucket factory, you are asking them how much is the manufacturing base, how much does it cost to get it retailed and on to the shelf of the shop and what's it doing competing with and is at a reasonable price. Property doesn't operate in that way, property has a capacity, as you would know better than I would, to absorb capital and the more it absorbs, the more it would further absorb because it's a notional cost. So, because you weren't in the type of other areas that you were talking about, were you not aware that your growth was in one specific area, that area was property, and that that came with a type of risk that was very specific and contained within that sector?

Mr. Robert Gallagher:

So, Chairman, I hope I indicate in my opening statement that I agree with you that undoubtedly Ulster Bank was too concentrated in property, as were all the banks in this island, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, thank you. Senator O'Keeffe.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Thank you, Chair. Mr. Torpey, in September 2007, 45% of Ulster Bank's group funding was provided by wholesale markets. By September 2008 60% of its funding was maturing within 1 year. I appreciate you may not have been at the bank at that ... in 2008, but you certainly are a banker so I'd be grateful for your view as to whether that kind of funding strategy was appropriate, and how would you evaluate the level of risk attached to that strategy, if there is a risk?

Mr. Michael Torpey:

Senator, the funding strategy of Ulster Bank Group was influenced fundamentally by the fact that there was an assurance on the provision of funding from its parent, RBS Group. In that context the key consideration for me will have been the stability of the funding, the level of assurance that I had that funding would be replaced upon maturity. The objective in running Ulster Bank was to grow the business in Ireland, including the retail deposit base, to the extent that we could, certainly to put us into a proper, full scale, competitive position against the major banks, and the residual funding requirement, which was always going to be quite substantial for a challenger bank in a growth phase ... the critical thing was to ensure that that was stable funding, and the combination of term debt that was approved by RBS, and the provision of funding and the assurance of the continuing provision of such funding by RBS Group, were sufficient to give that assurance of stable funding. The ... it's ... as you point out, as events progressed through 2008 and the international liquidity crisis and the developing domestic situation happened, the shape of that funding moved towards shorter term maturities, but even though I wasn't there I think it's reassuring to see that the RBS Group ultimately stood by those assurances upon which I had relied while I was there.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay, thank you. In relation to the 100% mortgages, yesterday, Mr. McCarthy, on page 79 of his testimony says: "We were losing share of the first time buyer market". This morning, Mr. Torpey, you said: "We were grounded in the circumstances at the time", and Mr. Gallagher, you said it was "Of its time", the decision to grant them. I'm just really trying to get to the nub of this. You were bankers, you were sensible, you'd ... it wasn't a business that you'd been in before, it wasn't a traditional thing, and yet, now, because of, it appears, market share, the need ... because of the competition, you guys just said, do you know what, we have to do this, we need to be in this market. Is that correct? Have I understood correctly? You threw caution to the winds?

Mr. Michael Torpey:

Deputy, we ... we were in a very competitive position. We will have evaluated all of the product alternatives available to us, so ... to achieve our desires, and any product that we wished to launch will have gone through a rigorous process of risk evaluation-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Well I know you say that, Mr. Torpey, and in fact we discussed that yesterday, but, I suppose what's puzzling is that now you are saying yourself it would have been better if we hadn't done it, and Mr. McCarthy said I accept we made a mistake. So if now you shouldn't have done it and now we've made a mistake, how is it that it was alright then to do it when in fairness that particular brand of idea, of selling 100% ... just simply wasn't a thing, maybe up until two years before?

Mr. Michael Torpey:

I think it's-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Was it just pursuit of market share?

Mr. Michael Torpey:

With the benefit of hindsight, Deputy, it was ... it would have been better had we not done it.

Mr. Michael Torpey:

With the benefit of hindsight we ... it was one of a number of factors which contributed to noise, I'll call it, in the market around overheating. The reality is that 100% mortgages, of themselves, did not fundamentally alter the amount of mortgage finance that was put in the marketplace. You know, the amount, over a number of years, of 100% loan-to-value mortgages that were issued was in low single digit percentages-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So in fact we're raising a red herring here, we shouldn't be worried about it, it didn't really make any difference anyway?

Mr. Michael Torpey:

I think ... I think, Deputy, what we've got to recognise is that there were quite a number of factors driving the market.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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We know that, we've heard of-----

Mr. Michael Torpey:

And this was ... this was a factor driving the market and I would acknowledge that the announcement effect of a product called a 100% mortgage will have had an announcement effect probably disproportionate to its value effect, and looking back on things that you, with the benefit of hindsight, would prefer you hadn't done ... I would prefer we had not released that mortgage because it was one of those factors which arguably did contribute to the ... the heated state of the market.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Mr. Gallagher, I know that you've said that you were not involved in the night of the bank guarantee and we accept that. However, Mr. Boucher, from Bank of Ireland, told us yesterday that, you know, he'd met with the Financial Regulator at the beginning of September to discuss INBS, and that it was very serious, and that, from memory, he'd been asked for a quantum of about €4 billion, this is on page ... I'm sorry, anyway ... page 17 of his testimony: "A quantum of about €4 billion, and we fed back to the regulator that we weren't comfortable, that that wasn't an accurate picture of what was needed". So it was clear that in the market people understood that INBS was in a perilous state, perhaps insolvent at that time, that Anglo was in a perilous state also, and yet, at Ulster Bank the impression we're ... we've been given is that it was all calm and quiet, there was nothing happening, apart from your boss ringing up the Financial Regulator to say everything's okay. I'm very puzzled that there was this sense of calm at Ulster Bank, or am I wrong?

Mr. Robert Gallagher:

Well, a sense of calm ... so, Senator, I had no interaction with the regulator in the run up to the bank guarantee, so as a statement of fact, I-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, I'm not just looking for a statement of fact, Mr. Gallagher, what I'm trying to get at is what was going on inside the bank, were people talking and discussing it?

Mr. Robert Gallagher:

Okay, so ... so the question of calmness. Clearly in 2008, throughout 2008, as the papers evidence ... funding challenges were increasing. We, as a firm-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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I'm sorry, Mr. Gallagher, I'm going to interrupt you because of the time constraint, I'm not talking about the year, I'm talking about that month. I'm talking about the fact that it was now clear ... people must have been out there talking, the dogs on the street, to use that expression, knew that INBS, knew that Anglo, were in perilous state. I want to find out whether, in Ulster Bank, you were talking to each other, and to fellow bankers, about how perilous it now was, in Ireland, in your own doorstep, on your back doorstep.

Mr. Robert Gallagher:

Well, to pick up, Senator, on ... so yes, we were aware of the material stresses in the marketplace, from reading the media, and not from any interaction with the regulator on the topic. We did, at the time, have, to the funding question, the support of the RBS Group behind us, both from a capital and liquidity perspective, so ... so the ... the concerns that emanated in the market were ... were underpinned by our support from RBS.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So you felt safer.

Mr. Robert Gallagher:

Well-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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I'm sorry, well, it's a question. Did you feel safer or not, because of the support of RBS?

Mr. Robert Gallagher:

Well, the support of RBS was immaterial, as the size of its balance sheet at the time, the size of the organisation, the size of its funding lines, undoubtedly supported, if needed, a wholly owned subsidiary of it, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. I want then, if I may ... I asked Mr. McCarthy yesterday about the fact that some of his statement looked like some of yours and he explained that he'd been briefed, and you acknowledged this morning that you were briefed also, by Ulster Bank, and given that you both left the bank ... all of you left the bank. I have to say though I am very puzzled by the response that you've made in relation to the Financial Regulator, that ... we have letters from 2004 ... 2003, 2006, 2008, all raising very serious queries about what was going on in the bank, and yet, yesterday, Mr. McCarthy talked about the methodology that the regulator chose to use, to come and review what was going on, and again, Mr. Torpey, this morning you talked about the nature of engagement - they weren't on the ground, they wrote their observations, it ... they weren't fully appraised of the condition or the position, they were bulky and complex affairs, files to trace through. I'm very puzzled, I have to confess, that your testimony about these very serious issues is so very similar to Mr. McCarthy's, that you're both concerned about the process of the Financial Regulator. I would argue that you've effectively thrown the Financial Regulator under the proverbial bus, that it was his methodology, or his offices methodology that you're questioning, rather than telling us exactly what was going on at the ... in your own bank.

Mr. Michael Torpey:

Is that question to me?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Yes, Mr. Torpey, it is.

Mr. Michael Torpey:

I certainly would not wish to throw the Financial Regulator or anybody else under the bus, because I think, you know, trying to blame anybody else is not part of what I would seek to do. I will observe, though, that the regulator had a certain approach to things, which was a very formal approach, and the regulator, in the way the regulator operated at that time, had a system whereby he made his observations, communicated in writing and, therefore, raised issues which might have been more rapidly and more easily defused had there been a different model of engagement directly with the business-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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But, Mr. Torpey, that's not to answer the... you mean you-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Leave space to respond ther. I see the line of questioning ... I'll give Mr. Torpey some time and then bring yourself in again, Senator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Sorry, Mr. Chairman.

Mr. Michael Torpey:

So, what I would say is that the regulator operated the rules of the time as he applied them. There were, I believe, weaknesses in the way he operated. I've expressed my view and it's only a view that it had might have been more effective if there had been more direct engagement rather than waiting for the formal communication of outcomes and I believe a lot of these issues would have been resolved more quickly. That's my belief and I also believe that the change in regulatory approach in recent years has reflected the fact that there were weaknesses in the particular regulatory approach which I am glad to say have been very thoroughly addressed by regulators in the years since.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Your final question, Senator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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This committee has tried both with Mr. McCarthy and with yourself to try to get to the bottom of what were the challenges being raised, the queries being raised and both of you have opted to explain to us that the Financial Regulator was very formal and that it was very on the ground and he wrote everything down. Quite frankly, it's odd that your answers are both so similar to what has to be serious issues that were raised by the Financial Regulator which actually you haven't properly addressed. You've both talked about letters and you've both talked about files, but I still am at a loss to know was the Financial Regulator right at all with anything that he said ... I mean his office .. and how seriously did you take it because you've not explained at all to us that you took it seriously?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'm sorry. What we're looking for here is that there is the regulator's behaviour with regard to what he or she considered to be problems with regard to an operation inside in Ulster Bank and there is a series of them. You'd have seen the witness books and rather than pulling them up and all the rest yesterday afternoon, but I think what the point the Senator wants to get to, we'll deal with the regulator in further engagements in this inquiry. What we would like to know is why was the regulator finding all these difficulties. We'll ... there's the content matter and there's the process which the content is actually dealt with. That's content ... there was content here, quite significant content. Deputy Higgins referred to nixers this morning and other matters. What is your ... forget about ... we'll deal with the regulator in time, Mr. Torpey, but what is Ulster Bank's assessment that these things would have come on to the regulator's radar?

Mr. Michael Torpey:

I think, Chairman, firstly, in Ulster Bank we would recognise that there were weaknesses. I would, frankly, welcome the fact that we had a regulator overseeing what we were doing so as to bring these weaknesses to light, particularly in instances where we mightn't have identified those before then. To your point, I think the manner of engagement could have, in my view, have been different and maybe improved, but once these issues were highlighted, I can absolutely assure the inquiry that Ulster Bank will have taken them with the utmost seriousness. Any and every issue identified by the regulator to Ulster Bank will have been the subject of very close examination and scrutiny to ensure that we either ... that we in the first instance established the nature of the issue, established the facts to see whether the necessarily brief look the regulator had, had captured the picture in its entirety and, thereafter, to make sure that we addressed the issue, corrected the issue as such that the issue was not to recur. You know, we will have responded to the regulator's inquiries and the regulator to the extent that the responses were satisfactory, we'll have left the matter rest as you would expect. And if there were issues that were not satisfactorily addressed, the regulator will have come back on those issues and I am not aware of continuing issues from the regulatory point of view that were not addressed by Ulster Bank.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Senator Michael D'Arcy. Senator, ten minutes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Thank you. Mr.Torpey. You know, we've books of evidence here, but can I just ask you a very simple question? Is there any responsibility ... is there any accountability in the banking sector then and now? Does the buck stop anywhere?

Mr. Michael Torpey:

Deputy, the banking sector is fully accountable for its actions. People within the banking sector are fully accountable for their responsibilities and I've no reservation in saying that.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And in what way are they accountable? Do they lose their job, do they get sacked, are they fired? In what way are they accountable?

Mr. Michael Torpey:

The ... all individuals working in any of the banks are accountable to discharge the objectives, the tasks that they are given in a proper and effective way and to the extent that they discharge ... they're subject to appraisal on the basis of how they've performed. If they perform properly, they will continue. If they don't perform, they're subject to the appropriate sanction in terms of the employment arrangements, same as in any other employment, Senator.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And the appropriate sanction is what?

Mr. Michael Torpey:

The appropriate sanction can, and does on occasion, extend to loss of employment at the extreme end-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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How often are you aware that that has happened?

Mr. Michael Torpey:

I am aware over my many years in banking of a ... for gross misconduct, in other words gross dereliction of duty, I'm aware of quite a number of instances where people have lost their employment. As we'll be aware, one has a burden of proof in relation to the treatment of employees and treating them fairly and respectably, which is a very high burden of proof but, nonetheless, I have over my years encountered a significant number of instances where that proof was forthcoming, where people had stepped outside the rules to a level which warranted sanction extending to in the extreme case dismissal.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And can people be dismissed for incompetence?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, you're getting very general now, Senator, but I'll give you a bit of space in this but we'll return to the inquiry lines.

Mr. Michael Torpey:

Incompetence in general terms, Senator, incompetence will lead to a requirement to improve one's capability or skills or an assignment to a position for which is one is competent. It would be rare and very difficult to simply dismiss people for incompetence. It would be entirely normal to bring them to a skill level which would equip them with the skills necessary to discharge their function.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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In evidence yesterday, I put it to Mr. McCarthy that the Ulster Bank sector of the RBS was about 3% in the year that you left; '08, 2%; '09, 3%. So it was ranging between 3% and 2% and yet of the €46 billion that were placed into Ulster via RBS, via the UK taxpayer, Ulster Bank took about a third of it. How would you describe the handling of Ulster Bank since you joined from First Active to your leaving Ulster Bank? And it's for Mr. Torpey, please.

Mr. Michael Torpey:

The British state put something like €45-€46 billion into RBS at a time prior to the requirement for capital in Ulster, so it is not a like-for-like comparison to compare moneys put in for one purpose to moneys that were subsequently required by Ulster Bank from its shareholder. Notwithstanding that, Senator, the scale of support required by Ulster Bank from RBS was extremely large and there is no denying that. That requirement came as a result of a strategy which was implemented in good faith but proved with the benefit of hindsight to be founded on poor assumption, and, very specifically, the universal or near universal assumption of the continued growth prospects for the Irish market and all of the opportunity that that would offer, that assumption, which was a critical underpinning of the RBS approved strategy for Ulster Bank, proved to be an ill-founded assumption. And the direct outcome of that was the level of provisions that had to be taken by Ulster Bank in relation to loans and while I wasn't there to see what the ... how that played out, I understand from the testimony ... part of the testimony I did hear yesterday, that related to provisioning levels, some of which may or not be clawed back in the future.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Can I ask, Mr. Torpey - I don't have very much time left - you said that the pay levels at the time were very, very high, that was ... that's your quotation. Are the pay levels at the moment very, very high in the banking sector?

Mr. Michael Torpey:

Deputy, the pay levels in the banking sector and the pay structures in the banking sector, at the height, shall we call it, were very high and it would be very, very difficult to argue that they weren't excessive. In response to developments within Ireland and internationally, in general terms, the authorities, the EBA in particular, have introduced guidelines in relation to remuneration to ensure that remuneration structures are appropriate to the nature of the business and I believe that the EBA response is an appropriate response and will lead to pay levels being driven by competitive factors but being appropriate to the nature of the industry.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And, Mr. Torpey, you're working with Bank of Ireland now?

Mr. Michael Torpey:

Senator, yes I am.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Yes. Would you like to share what your current pay is with Bank of Ireland?

Mr. Michael Torpey:

Senator, that's not something which I would be prepared to discuss at this point.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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That's a no?

Mr. Michael Torpey:

Correct.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. Mr. Gallagher, you're now working with a private equity firm; is that correct?

Mr. Robert Gallagher:

As an asset manager, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Yes. Would you like to share what your current pay is?

Mr. Robert Gallagher:

No, Senator.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right Senator ... Deputy ... there's about three minutes and we need to complete a line of questioning here as well.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Thank you. When you left Ulster Bank, Mr. Torpey, did you receive a golden handshake?

Mr. Michael Torpey:

Deputy, I received a termination payment on my departure from Ulster Bank. It was disclosed in ... I guess it must've been the 2008 accounts of Ulster Bank Ireland Limited.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And how much was that?

Mr. Michael Torpey:

The termination payment I received amounted to £1.2 million.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And, Mr. Gallagher, did you ... when you left Ulster Bank, did you receive a termination payment?

Mr. Robert Gallagher:

I received a payment for a notice period.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And how much was that?

Mr. Robert Gallagher:

Some ... I can't remember exactly, Senator. Some portion of ... some portion of my salary, so ... I'm trying to recollect here now. Numbers of hundreds of thousands. I don't recollect.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Chairman, just some of the ... I mean, there seems to be a ...it was somebody else's fault, it was somebody else's ... it was a system, it was the model, it was the banking accounting rules, it was the crisis management, group risk committee. There just doesn't seem to be any taking possession of responsibility and we have two senior bankers at the moment and-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Senator, I would be mindful that kind of value ... value judgments and assessments is something that the committee will make when we move to the completion of this report. I think we're now in question time-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----to establish and inform ourselves when we get to that space. So, if I could push you to-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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------play ... some questions, please.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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What I'm saying is we have one person in a bank and one person in a private equity firm. Is the responsibility there today in relation to taking ownership of potential difficulties that may be in the banking sector or, for Mr. Gallagher, in the private equity sector? The private equity sector is less regulated than the existing banking sector. That's a question for both, please.

Mr. Robert Gallagher:

So, Senator, I'll answer the question as it pertained to my career in Ulster Bank, which-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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No, I'm trying to pursue your opinion now that you're in a private equity firm.

Mr. Robert Gallagher:

Senator, I'm addressing the topic of the banking inquiry.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Maybe we'll take a more focused position on this. I think an earlier testimony, I think it was by Professor Lane, an American academic and significant commenter upon the financial sector ... I think one of the things that Mr. Lane said in his testimony at that time was that the penalties that picked up by the financial services banking sectors, post-crisis, is in around the figure of £150 ... 150 billion euro ... sterling. That's by the banks, globally now that figure is. Quite a significant sum, €150 billion, but that a behaviour in financial institutions will continue to carry the risk into the future if the financial penalty is borne by the bank, as opposed to actually borne by the individual executives. Do you have a view on that?

Mr. Robert Gallagher:

So, Senator and Chairman, I have a view that in general the leadership of banks, and I equally say this of Ulster Bank, acted to the best of their ability and with integrity. And I think, as has been addressed earlier and is acknowledged, the assumptions on which we built the business were wrong. There is a difference between that and a jump to an assumption that people acted with lack of integrity, or lack of good faith, or did their best. In my opinion, and I speak for myself and I can't speak for others, but I did my best, I acted with integrity and I executed to the best of my ability.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you.

Mr. Michael Torpey:

Chairman, I think I'd broadly echo that. I believe that, you know, banks did pay very significant penalties, as you have mentioned, and, indeed, executives did pay material penalties as well. However, there are lessons that have been learnt from the crisis internationally and there has been a very major effort to ensure that interests are aligned, going forward. And I would subscribe to that; I think it's very important that they are. Shareholders in many banks had their shareholding values wiped out, they took a fair share of losses, there's no doubt about that. Banks themselves suffered further penalties and executives in many cases suffered as well. However, the measures that have been taken on the international stage to ensure the alignment of interest, to make sure that both short-term and long-term value is maintained, such that banks continue to act in a way ... or improve their actions in a way that will support the medium and long-term development of economies are very important.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Michael McGrath, ten minutes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. You're very welcome, Mr. Torpey and Mr. Gallagher. Mr. Gallagher, can I start with you and just tease out the impact of the bank guarantee on Ulster Bank and on your deposit base in the immediate aftermath of the guarantee? You made reference earlier on to the €4 billion. Can you just clarify is that the quantum of deposits which flowed out of the bank in the immediate aftermath of the guarantee?

Mr. Robert Gallagher:

So, Deputy, it's ... broadly the answer to that is yes. As measured by the requirement for an increase in our intergroup limit from RBS, which filled a gap which was created by a loss of deposits, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. We heard yesterday from Mr. McCarthy that the deposit base was of the order of €20 billion to €25 billion. Is that your understanding as well, broadly?

Mr. Robert Gallagher:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And, when you said 4 billion, that's in euros?

Mr. Robert Gallagher:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. So, somewhere up to 20% of your deposit base potentially flowed out of the bank in the aftermath of the guarantee; is that-----

Mr. Robert Gallagher:

Broadly.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----broadly accurate?

Mr. Robert Gallagher:

Broadly, over a four-week period, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And how serious a situation did that become for Ulster Bank?

Mr. Robert Gallagher:

That's a very significant change and if we hadn't been part of a ... the RBS Group ... and the access through the intergroup limit, that would have been very challenging. Very, very challenging. And the support of RBS and the subsequent support that the RBS organisation received from the State meant that that flow diminished-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure.

Mr. Robert Gallagher:

-----but if that flow had continued, it would have been significant.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But, in that critical two-week period, your main life support was the intergroup lending?

Mr. Robert Gallagher:

Well, pre-29 September, we did have an intergroup limit of-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Robert Gallagher:

-----if my memory serves me right, approximately €6 billion, €7 billion, so it was always important. It became much more important post-29 September.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Just staying with you, Mr. Gallagher, for a moment. On page 6 of your opening statement, on the issue of valuation policies and assumptions to assess loan security, you make reference to loan-to-value of 70% was required for commercial property. Was that applied in all cases?

Mr. Robert Gallagher:

So, Deputy, it was a specific requirement of the security policy document.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Robert Gallagher:

It was a guideline, not a policy, to be clear.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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A guideline.

Mr. Robert Gallagher:

So, a credit committee, in instances, could make an assessment based on other matters in the case that it could be beyond 70%. So it was a guideline and any exception from a guideline had to (a) be separately supported by the independent risk credit function of the organisation and, secondly, be highlighted on a credit paper and, thirdly, be approved at credit committee.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But in the main 70% was the requirement?

Mr. Robert Gallagher:

In the main, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And then what was the nature of the 30% equity from the borrower which was acceptable?

Mr. Robert Gallagher:

Yes. So, Deputy, it was a combination or alternatives of either cash, cash or other assets, or other assets.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Could it have been unrealised gains from previous developments which the bank might have bankrolled through lending, unrealised equity gains?

Mr. Robert Gallagher:

Deputy, it could have been, and this is a feature of the industry, it could have been the provision of extra capital against other assets which were unencumbered, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Based on market valuations at the time?

Mr. Robert Gallagher:

Based on independent valuations carried out by approved panel valuers, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. We know in relation to the loans that NAMA acquired from the other banks that certain issues arose around loan security, about the documentation, cross-collateralisation and so forth. Obviously we don't have the same oversight in the case of Ulster Bank, but when you did have to review your loan book, and tried to work out bad loans, did you encounter difficulties with the quality of the loans and security?

Mr. Robert Gallagher:

So, Deputy, in the ... in general, no, insofar as ... but if I can just peel that onion a little bit. In the larger cases, the big property exposures, the big corporate exposures, the documentation was complete, carried out by large law firms, and was comprehensive, and well-archived, and stored.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes?

Mr. Robert Gallagher:

I did acknowledge in my statement that in the business centre networks, smaller cases around the country-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Robert Gallagher:

-----it wasn't as perfected. I, equally, in my remediation period in the organisation had not ... have not experienced that any incompleteness of that small exposure has resulted in material loss to the organisation. What's happened is that it's been needed to be remediated over a period, so the security documentation and the perfection of it has not been a cause of material loss in the Ulster Bank Group.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Mr Torpey, what did you see as the main purpose and, indeed, the main outcome of the round table discussions held with the Central Bank post-publication of the financial stability reports from 2004 onwards?

Mr. Michael Torpey:

As I understand it, Deputy, the round table discussions that will have occurred between the Central Bank and the market participants were designed to communicate with market participants the evaluation by the Central Bank of financial stability in markets ... or matters in the marketplace.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And who would have attended on behalf of Ulster Bank during the years when you were in position?

Mr. Michael Torpey:

I believe ... I recall attending once myself, and I believe various senior executives will have attended at different times, probably extending to the chief risk officer, as I seem ... I recall attending once myself, and it's entirely possible, but again I'm open to correction, that somebody like the group economist may have attended, given the-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And how would you characterise the bank's relationship with the Financial Regulator during the years when you were finance director?

Mr. Michael Torpey:

The ... my own experience of engagement with the regulator was very much consistent with the ... I think the external perception of a regulator who conducted himself in a professional manner but in a somewhat, as I've articulated, formal manner in terms of investigation. A high proportion of the engagement with the regulator, in my experience, focussed on consumer matters, such that as the finance director in the organisation, my direct level of contact with the regulator was quite low. I'm happy to say that the areas in which I had responsibility were not the subject of any major difficulties from a regulatory point of view, such that it wasn't something that I was ... found myself engaging in-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Michael Torpey:

-----regularly.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Can I ask you as well about loan impairment provisioning, and you refer to it on page 8 of your opening statement, that it complied with both the RBS Group provision policies, and the accounting standards in place during the periods? Can you give us a sense of how that worked, and whether you were inhibited from making what you might have regarded as adequate provisions for potential losses by virtue of the constraints of the accounting standards that applied?

Mr. Michael Torpey:

Yes, Deputy. The accounting standards required that provisioning be made on an incurred loss basis.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes?

Mr. Michael Torpey:

And, in other words, in order to comply with the rules, there wasn't a matter of choice in this, provisions could be made only where there was objective evidence of impairment, and that-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Had already occurred?

Mr. Michael Torpey:

Precisely.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Loss that had occurred.

Mr. Michael Torpey:

Loss, that had occurred. And it has been highlighted on some of the commentaries on the accounting side that anticipated loss, no matter how likely you thought it to occur, we would simply have been failing to comply with mandatory regulations by attempting to provide for that. So it has been highlighted, I know, in quite a number of places, that the effect of those accounting standards, themselves brought in for very good reasons previously-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Michael Torpey:

-----but the effect of those was to in some respects exaggerate the cyclicality of the developments in the market. The mere happening of a good period in the market, such that there is no objective evidence of impairment, causes you not to be able to make an impairment provision, and some will argue that the mere continuation of a benign cycle means that you must be getting closer to some sort of a downturn in the market, and that pro-cyclicality element in accounting standards-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes?

Mr. Michael Torpey:

-----will not have been helpful through the period.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure?

Mr. Michael Torpey:

And it's pleasing to see the accountancy bodies have responded to that, and in the next couple of years-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes?

Mr. Michael Torpey:

-----there is a revised accounting standard coming in.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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We will be meeting auditors starting from next week. I suppose one question I would have for you is, you know, if you had solid grounds to believe that there would be an issue with asset values in the next, you know, 12 to 18 months, and you could foresee that those values wouldn't stand up to where they are today, but that loss event had not occurred, had you any option open to you to reflect that in the accounts, the financial statements?

Mr. Michael Torpey:

No, I believe I had no option in that matter. The rules were entirely prescriptive, and-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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No discretion, no general provisioning?

Mr. Michael Torpey:

There was no general provisioning under the IAS 39 rules-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Michael Torpey:

-----which were the standard we had to apply, because of the rules. The accounting rules were highly prescriptive, such that a discretion did not apply.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you. Just on that issue, and we do have the accountancy representatives coming in before us in the coming weeks, but in your earlier questioning there to Deputy McGrath, how do you square this with the mandatory accounting regulation for a true and fair view of the bank's books?

Mr. Michael Torpey:

Chairman, it ... the requirements are entirely specific, and a true and fair view of the accounts represents, under the accounting rules, as I understand it, a snapshot of the position as it now stands. And the requirements, as I say, they are in the process of changing these rules because of the deficiencies that have been identified, but the rules as they applied were very clear, that only on an incurred loss basis could you make provisions, and that is a weakness. I think we all now recognise that weakness, but it is ... they were hard rules, not discretionary rules.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And does that not ... does it or does it not kind of raise a paradox that you can be compliant at one side and be in conflict in terms of what the bank should actually be seeing at another side?

Mr. Michael Torpey:

It did present, and will for so long as such rules apply, present a conundrum, that, you know ... accounts have their limitations, and the accounts are a snapshot at a point in time and, as I understand it, because of weaknesses in the previous accounting rules, the rules were made very, very prescriptive in this space, and the flexibility to do other than account on that basis was simply not there. We would have been ... we would have been in breach of the rules and, by extension, in breach of company law, I believe, if we had reported in any other way.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Pearse Doherty. Deputy, ten minutes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat. Tá fáilte roimh an tUasal Torpey agus Gallagher. Mr. Torpey, if I can ask you just in relation to Ulster Bank, UBIL, relied heavily on intergroup funding from RBS Group to fund the growth in its loan book. Did this ability to borrow from its parent company lead you to expand the loan book at a faster rate than you would have or could have if you had to rely solely on third party funding?

Mr. Michael Torpey:

Deputy, it's a very reasonable question and I think in ... in some circumstances that well may have been the case ... but as it happens in the circumstances following the entry of ... or the adoption of the euro as our currency ... that becomes very light, if any ... in terms of an influence. The reality of the marketplace through the years that we are discussing was that liquidity was ... pretty much freely available to all of the banks operating in the Irish marketplace because of the willingness of ... of international debt markets to ... to finance the Irish banks. So the access ... the assurance of access to funding from RBS did not single out Ulster Bank from the other banks in the marketplace. What it did do was create certainty of funding or stability of funding so it, to the extent that any financial institution would finance itself, particularly in short-term debt on the international markets, there is a risk that ... that might be repaid. The advantage in relation ... that Ulster Bank had was the RBS assurance meant that that risk wasn't there on the balance sheet.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Mr. Gallagher, I would like to refer to board minutes of 5 December 2007. The full minutes aren't available in hard copy version of the booklets of the core documents but they have been provided in electronic form. The electronic reference for the screen is UBI 00329-006. The final paragraph and I will quote it anyway on the page states: "The Board noted that the Group's percentage growth in contribution was in excess of its main competitors in the Republic of Ireland, notwithstanding the high level of business investment in support of the Group's ambition to be the Number One Bank in Ireland". Can I ask you Mr. Gallagher, is that an accurate reflection of Ulster Bank to be the No. 1 bank in Ireland?

Mr. Robert Gallagher:

So, Deputy, the ambition of Ulster Bank was to ... much, much, much more materially compete with AIB and Bank of Ireland. It was to ... in-fill its physical presence where it didn't exist, to open networks that allowed it to win more customers and as part of, what was then the fifth biggest bank in the world, it was a legitimate aspiration to compete meaningfully with the top two banks.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Just the minutes again, I'm just going to ... the minutes reflect in 2007 that you wanted to be the number one bank in Ireland. Is that the case?

Mr. Robert Gallagher:

We had ... we had an ambition for that, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes. So it wasn't just to be a third force. You wanted to be the biggest bank in Ireland, the number one.

Mr. Robert Gallagher:

We had an ambition to be -----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. And how would Ulster Bank set out to be the No. 1 bank in Ireland? Was the ambition possible through residential mortgage business alone? And if not, where did you need to enter into?

Mr. Robert Gallagher:

So the ... as I said, as I said, Deputy, as a statement of fact, Ulster Bank has and had far fewer branches than the two main banks, has and had far fewer customers than the main banks, has and had far less deposits than the main banks, has and had far less, by any banking product category, far less. So it was a strategy to create a universal bank across the banking needs of an economy ... supported by material investment by its shareholder ... material investment ... I would say reasonably unprecedented in the history of this State in terms of the number of branches and business centres opened across the country. So the actions and the investment and the commitment were about actually building a permanent architecture, as opposed to a property business.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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If I can ask you just relation to Mr. Daly from ... from NAMA, who presented evidence to the committee. He gave an assessment and I'll quote you from ... from his evidence. It said: ''Few, if any, financial institutions wanted to be left out of what was seen as a profitable business due to the larger lender margins and the relatively low operating costs''. He went on to say: "In the Irish market up to 2007, there was far too much bank funding available and, ultimately, it found its way not only to a finite number of development projects which were viable, but also to many other projects which could be viable only on very heroic and often mistaken assumptions''. Did or did not Ulster Bank fund projects that in the words of Frank Daly could only be viable ... could be viable only on very heroic and often mistaken assumptions?

Mr. Robert Gallagher:

Yes, myself?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. Robert Gallagher:

I said in my opening statement, Deputy, that the outcome of Ulster Bank's requirement for capital and provisions was ... a ... an input of assumptions which turned out to be wrong. So by definition, we incurred impairment because the assumptions were wrong. So I would differentiate between that and heroic assumptions. But ... but the broad thesis I ... hard to disagree with.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. How much did the ... how much was Ulster Bank bailed out by RBS?

Mr. Robert Gallagher:

Over the period ... I think it's approximately £15 billion.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And in relation to the fact that your bank needed €15 billion of a bailout - and that's sterling - what responsibility do you see, both of you personally, in relation to causing your bank to require that amount of money to be bailed out or do you see yourself as having no responsibility in that regard?

Mr. Robert Gallagher:

I mean, I think we, Deputy, address some of this ... so clearly as directors of the bank and clearly as executive management members and our respective responsibilities, you do have a responsibility. So as I said in the opening statement, I regret for the fact that the ... whilst the governance and processes were robust, that the inputs and assumptions we made, as others in the economy made ... proved to be not valid, which resulted in the losses.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Mr. Torpey?

Mr. Michael Torpey:

I would, I would echo that comment, Deputy. You know I was, I was a director of Ulster Bank at the time and, you know, I would have to freely state that I very much regret those decisions which led to the losses and the damage to the economy in general. Decisions were made on the basis of a growth strategy in pursuit of the objectives of the shareholders. They ... there were decisions which were founded on a poor ... assumptions as we now know with the benefit of hindsight. You know, I would wish that those assumptions had not informed that strategy because that would have led to a different set of decisions and a different set of outcomes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Mr. Torpey, can you explain to the committee how a person ... like yourself who has accepted collective responsibility in relation to your bank required €15 billion ... or sterling, pounds, bailout, ends up in the NTMA, head of the banking unit in the NTMA and seconded to the Department of Finance managing the State's assets in our banks up until the end of 2012?

Mr. Michael Torpey:

I think, Deputy ... you know what I would say of my ... of my time in banking and in Ulster Bank is that I acted in ... in good faith at all times. I acted very professionally and in many respects I was successful, notwithstanding the failures that occurred. The ... the reasons ... and what I brought to subsequent employments are ... are in a space which ... you know is not for me to judge and ... and I ... and Chairman, I wonder is it appropriate that I should ... I should get into comment on that?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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That ... that's ... I think you have answered, that's fair enough. I'm not going to push you on the question. It's just if you wanted to give your opinion on it and I welcome that. Can I ask you, Mr. Torpey, with the benefit of hindsight in relation to 100% mortgages, were you aware criticism of the 100% mortgages when it was introduced by Ulster Bank at the time?

Mr. Michael Torpey:

Deputy, I think it's fair to say yes, there were critics of 100% mortgages, we would have been aware of that. There were very real challenges internally in the bank, which had to be addressed. The 100% mortgage question had to be addressed objectively in the context of what it brought, of what the risks were and so forth. And it went through a very, very thorough governance process and the decision, to which I was a party, was that it was an appropriate product to bring in at the time, which, with the benefit of hindsight was not a good decision.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And let's just look at what, forgetting about hindsight, let's look in at what happened in 2003. Were you aware that Michael Dowling, which was the president of the Independent Mortgage Advisers Federation, said, ''We were a little surprised that the product came on the market at a time when the Central Bank [had] been warning banks about the amount they are lending'', and there was others as well who wrote articles in relation to that time? But you were ... were you aware that that body were critical of your product at that time?

Mr. Michael Torpey:

I won't suggest that I can at this stage recall the specific criticisms. But I have no doubt that there were people, for their own reasons who will have criticised the product. But I would stress, Deputy that we ... did put the product through a very ... a very severe ... testing in terms of ... of our analysis. We did engage with the Central Bank in relation to the introduction of the product and as such, we would have addressed, honourably and in an appropriate way, the ... the circumstance leading to the introduction of that product.

And I think it is worth recalling that the actual volume of the product which was issued on the market was a small, low single digit percentage of the total mortgage lending that we did over those years.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy O'Donnell. Ten minutes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Torpey, would you accept that the arrears that have arisen since the ... those 100% mortgages came in, have proven to be far higher than the arrears on mortgages issued prior to that date?

Mr. Michael Torpey:

Deputy, given that I in fact left Ulster Bank at the end of '07, I don't have sight of the arrears figures in relation to that product since then.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But in your role in banking within the Department of Finance and the NTMA, you would have had access to that information.

Mr. Michael Torpey:

I haven't had occasion to look to the specific product and its arrears pattern, Deputy, so I'm not in a position to confirm the arrears number in relation to that product, either for Ulster Bank or for the market generally.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Torpey, what's your current view on the appropriateness of the bank guarantee that was put in place on that fateful night in September 2008?

Mr. Michael Torpey:

Chairman, may ... may I ask for your help on this situation?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Indeed.

Mr. Michael Torpey:

You know I .. I ... while I wasn't around for the guarantee - and I appreciate the Deputy's question - I have been involved in a lot of matters connected with the State in the period since and I'm not sure is it appropriate that I should be offering an opinion on the appropriateness-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I won't stop you offering an opinion, Mr. Torpey, if it's within the terms of the reference. I will give you the freedom to offer an opinion on the specific matter with regard to the guarantee. The world and its dog has a view on it, you're more than welcome to give yours here this morning if you wish. The question is, how pertinent and related is it in terms of evidential information that informs this inquiry in doing its work.

Mr. Michael Torpey:

I think-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And if you are just offering an opinion, I'd ask you to cite it as that, rather than actually evidentially, empirically-based evidence to this inquiry.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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My line of questioning, Chairman, revolves around ... that you were group financial director with Ulster Bank up to the end of '07, which is a relatively short period of time before the guarantee was put in place. So, it's more in terms of your perspective on the state of the banking system, the liquidity in the market, solvency in the market and did ... the actual ... the type of guarantee that was put in place. So I'm running from that perspective. But it is correct that you .. and I suppose I'm asking you in the context ... you weren't there on the night of the guarantee but you certainly were there up to a relatively short time prior to that, Mr. Torpey. So it's in your role in Ulster Bank I'm asking you-----.

Mr. Michael Torpey:

I appreciate that, thank you, Deputy. And, indeed, I was in Ulster Bank until the end of 2007 and there were the beginnings of the emergence of liquidity stresses in the marketplace at the end of 2007 but nothing at that point that would point towards a severe liquidity crisis in the marketplace. Given my absence from the financial sector, and indeed from the country, for much of 2008, I don't have a fact pattern as to how things emerged through 2008, so very much in the opinion space I would have to say that to the extent that the liquidity position of the banking system, in aggregate, deteriorated to a level where there was a crisis imminent, I can understand why the authorities would have had to look towards taking very severe action. I'm not competent to opine on the appropriateness of the action taken because I simply don't have the information about the detailed events that led to that action and the action has to be a consequence of the circumstances.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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How did the liquidity squeeze manifest itself in terms of the running of Ulster Bank, of which you were group finance director?

Mr. Michael Torpey:

While I was in Ulster Bank, the liquidity shortfall internationally led to an inability to do certain planned transactions late in 2007, so that at the time the view was to-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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When you say ... you might elaborate on that. What do you mean by certain planned transactions?

Mr. Michael Torpey:

From memory, there were capital markets transactions to raise money on the international side that had been approved by RBS Group for Ulster Bank to undertake specifically a securitisation transaction to raise funding. The appetite of capital markets late in 2007 for such transactions had diminished to a point that the economics of doing such a transaction were not attractive and the view taken in Ulster Bank when I was still there was that the transaction contemplated would be deferred into 2008 rather than do it at the price obtaining at the time. And, Deputy, I think that informs a lot because it describes an expectation internationally, if I use RBS Group as the international benchmark, that we were in a temporary liquidity crisis, not in what was going to lead to a sustained-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And was it affecting your day to day business in terms of access to liquidity to do your day-to-day business as a bank?

Mr. Michael Torpey:

There was no impact on ... that I'm aware of, on the day-to-day liquidity issues because the position of Ulster Bank, with the support from RBS Group, meant that day-to-day liquidity matters were addressed and met by RBS Group through that period, so there was-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But was there issues for Ulster Bank Ireland itself? Did you ... were there times where you were not able to raise it through the normal interbank market in a normal way ... that you had to -----

Mr. Michael Torpey:

No, Deputy, the only ... the only issue that I will alert you to is the fact that we deferred raising some long-term funding-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I ask you one quick question, Mr. Torpey.? The issue you spoke about ... the accounting standards, if you had wished, could you have put a note to the financial statements as distinct from ... could you ... a provisioning, could you have put a note to the financial statements that you needed to provide a potential contingent liability in terms of reduction in the, we'll say, in terms of provisioning for the loans?

Mr. Michael Torpey:

I believe, Deputy, that it would have been deemed inappropriate. The form of production of statutory accounts for the bank or, indeed, for any company I guess, at the time was highly prescriptive. Clearly ... clearly any management is free to make a comment in general about his view of the market, but, you know, the view of the market was ... the universal view was that growth prospects were still positive in the Irish marketplace for so long as I was working in Ulster Bank.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And finally, Mr. Torpey, why did you leave Ulster Bank at the end of 2010?

Mr. Michael Torpey:

I thought, Deputy -----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Sorry, the end of 2007.

Mr. Michael Torpey:

I sought, Deputy, to bring colour to that in my statement. I joined Ulster Bank as part of an acquisition of First Active and I came from a background that was heavily rooted in treasury and capital markets. I presided over an integration of financial systems such that the role ... and putting it as briefly as I can, the role became very much a specialist accounting role. So there was a very different nature to the role post-integration compared with the background expertise and preferences I had in the marketplace. So, it suited RBS that they would get somebody who was a more specialist accountant and it suited me, frankly.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Gallagher, when you took over ... you joined Ulster Bank in 2005. And you ... the question, I suppose, I want to ask is that your role was ... you were brought in to head up business banking in Ulster Bank. Correct?

Mr. Robert Gallagher:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay, and very much, I suppose, to grow the loan book and it would appear as if there was significant growth in the loan book in '05, particularly around the Ballsbridge site, the Sean Dunne loan, which was well over €300 million. What type of measures would ye have had in place in terms of relationship management with loans of that size where you would have done proper due diligence? How did it arise that you'd a site that had no planning, that was ... a trophy project at the time ... that Ulster Bank gave that level of funding? What would have been the due process that would have arisen? And, obviously, I've no doubt it would've fallen in under your remit because you were heading up business banking.

Mr. Robert Gallagher:

Specifically ... I joined in September '05. If I read the media, that transaction was consummated before I joined the organisation, so I have no comment on ... on that. If your general question Deputy is, what is the level of due diligence around opportunities ... it includes-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Around risk.

Mr. Robert Gallagher:

Yes, sorry, risk ... it includes a myriad of things. It includes what is the market opportunity for the business or property situation, what is the assessment of management, what is the location if it's a property, what is the assumption on sales prices, what is the assumption if it's on volume, what are the costs.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Typically, how long would that due diligence take?

Mr. Robert Gallagher:

It takes a reasonable period, Deputy. I mean-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What would you regard as a reasonable period?

Mr. Robert Gallagher:

It could ... if I was saying on average, I would say on average two to three weeks.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Two to three weeks to approve.

Mr. Robert Gallagher:

So what happens, Deputy, in the process is a relationship manager and his team would assess an opportunity. They collectively would write a comprehensive assessment on a risk reward-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, you're saying that by the time you joined Ulster Bank that deal was already approved by the bank.

Mr. Robert Gallagher:

Specifically, I'm saying I joined in September '05 and in the media that sale and purchase happened in-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You were over the loan book, Mr. Gallagher. It was your responsibility. So are you telling us you know absolutely nothing about that €300 billion plus loan by Ulster Bank to the Ballsbridge site, Sean Dunne?

Mr. Robert Gallagher:

No, no ... well ... sorry, Deputy, first of all, we can't speak about any customer situation specifically.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That scrum ... that scrum has been covered, Deputy, so I'm going to ask you to push on.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No, I suppose, the line, really, I want-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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This is your very final question. Final question.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The point, really, I want to get is-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Make the question.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----there's a danger here, Chairman, that we've had many people in and they were getting the fool's pardon, that people didn't know what was going on. I think people are entitled to know the process. And you're saying ... and this particular loan, Mr. Gallagher, was of such a magnitude. So I'm trying to find out the process, that how do we read in the media that a loan of this magnitude appears to have been approved in a week. You're telling me typically a loan would take two or three weeks.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, look, Deputy, I'm not going-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----to be accusing you of showboating, but this is a very simple matter that has been dealt with in yesterday's hearings. Mr. Gallagher and Mr. Torpey, completely within their legal rights, and you know the rules of this inquiry. You were there in putting them together.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No, well, Chairman-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Hear me out.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And you were there in putting these rules together along with the other ten members, myself inclusive. So the issue of a customer relationship matter specifically cannot be dealt with. However, I would advise you and encourage you, and I'll give you time for this, is if you frame your question on the grounds of how this ... the modelling that this type of loan presented ... was it common practice inside in Ulster Bank and what were the rules of governance and due diligence and examinations were actually in place?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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That's-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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If you want to go into that space, I'll facilitate it but I can't specifically take the question.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I thought that's what I asked actually, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Well, no, it wasn't. You were asking specifically around this particular loan.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I'm asking, Chairman, because I think that people are entitled to know. We're getting woolly answers and, I suppose, I'd like to ... if you could give us the process, how you assess risk. Do you provide loans where there's no grant of planning in respect of the loans? Would you look for loans that were subject to planning? In this particular case, what we're reading in the media reports, this loan was given without any planning being granted on this site. What's the process?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy, I'll have ... if you start going into that loan specifically, the ... Mr. Gallagher and Mr. Torpey-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No, no, generally, generally.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Well, be general so, because you're not being general, you're being specific.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Generally, can you go through how those parameters would be looked at, Mr. Gallagher?

Mr. Robert Gallagher:

I can. And just for the avoidance of doubt, Deputy, the transaction that you refer to, which is covered in the media, I was not in the organisation when that transaction was consummated so-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay.

Mr. Robert Gallagher:

-----even if the Deputy ... or the Chairman instructed me, I would be unable to.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay.

Mr. Robert Gallagher:

So be clear on that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay.

Mr. Robert Gallagher:

To ... so your question then is: what is the general basis on which opportunities are considered? With regard to planning first of all, lending to unzoned land was capped by the speculative lending policy of Ulster Bank and speculative lending could not exceed 3% of the commercial loan book. The effect of that is that Ulster Bank had a very, very modest unzoned planning exposure. The bank did lend to zoned land, to planned land, and to land in process.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes.

Mr. Robert Gallagher:

The assessment of investment property, first of all, and then I'll come on to ... I'll come on to residential development property. The assessment of investment property, two points: one, the bank had an entirely constrained ability to finance the development of office or investment space which had no tenant. So we ... that was captured by the speculative lending policy, the same 3%. So we ... the firm ... the bank was entirely constrained in that and did very little in any of it. To the extent that the bank funded investment property, the bank would look at things like the quality of the tenants, the mix of tenants, the location of the asset, the level of cash coverage generated by the rental income, the term of the lease, and would lend based on that and an assessment of the owner and an assessment of the valuation. And those assets on the investment portfolios tended to be large assets and tended to be in large conurbations, including London and Dublin. And those assets had a repayment capacity through the cash generation from the rental income. On development lending, Deputy, the location was critical; the nature of the number of homes that could be put on the asset; the assumption of a sales price; the cost to construct; a sensitivity that said, "Well, what happens if price drops?"; an assessment of how long the build is to take; a look at the track record of the developer - what has they ... what have they done in other sites? Have they finished on time? Have they had cost overruns? Have they sold? Who does selling for them? - a comprehensive assessment captured on paper over a detailed analysis; a second paper from the credit function of the organisation independent of the guy or individual sponsoring the proposition, either supporting or not; that going to a committee in Ulster, where it's challenged by a group of at least three people, one of whom has to be independent of the business ... or two have to be; then if it exceeds approximately €35 million, it goes to RBS for the same challenge and approval. So there is a first line, a second line, and a third line of defence. So the process was robust.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Where does planning come in?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Last question.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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That's the last question, really, Chairman. Hypothetically speaking, a site ... buying ... lending a substantial amount of money, of the order of a couple of hundred million, on a site which is for a residential commercial development without planning, would that happen in the normal circumstances within the Ulster Bank that you would have been managing, in terms of the business side?

Mr. Robert Gallagher:

I've said, Deputy, that the speculative lending policy constrained, even if anybody wanted to, constrained the ability to do substantial unplanned land to-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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3%?

Mr. Robert Gallagher:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Whatever supplementary you may have there, Deputy Phelan, I'll just give you a bit of time.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes, I have one for Mr. Torpey, and it follows on from an area that was touched on by Senator MacSharry. Yesterday, following questions from Deputy McGrath on the matter of loan-to-deposit ratios, Mr. McCarthy indicated that there was an error in the 2007 figures, which was subsequently corrected. I just want to ask you, Mr. Torpey, what was the error? How did it occur? How did the figures end up being published as the final figures for Ulster Bank for 2007? You were, at that stage, still, as I understand it, the chief financial director, I think, was the title of your role within the organisation?

Mr. Michael Torpey:

Unfortunately, Deputy, I can't answer the question, because I left the bank in December 2007, and the preparation of the financial accounts will have been subsequent to year end. So I had no hand, act, or part in the putting together of the accounts, so I simply don't know what led to that number coming out. I think, to the substance of the point, I think the funding of the balance sheet through 2007 was driven by the stability of funding assured by RBS, and so I think the substantive point is that the balance sheet was managed appropriately and stably through 2007. But, as to the ... as to the ... as to the accounting error that led to the misstatement or whatever it was of the loan-to-deposit ratio in the end-2007 accounts, frankly, I have no information.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I was under the impression, and you might correct me if I'm wrong, that you retain ... that you retained the position until your successor was appointed at the end of quarter 1 in 2008, as chief financial director. Is that-----

Mr. Michael Torpey:

My-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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When-----

Mr. Michael Torpey:

I ceased working in Ulster Bank in December 2007. Formally, my resignation date was the ... in the first week ... I think it was 5 February 2008 and the financial accounts were completed subsequent to that.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So you had no role in those figures?

Mr. Michael Torpey:

I was actually out of the country through that period, in fact, so I had no contact whatever with Ulster Bank through the period or through the compilation of the year end accounts.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, thank you. Deputy Higgins.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. Yesterday and today, the issue of the 100% mortgage has been raised. Can I raise it and ask for your opinion from a different perspective, to comment on a view that the problem was not so much 100% mortgage, but it's 100% mortgage against a background when a home, as a basic human right, becomes the subject for massive speculation and outrageous profiteering by developers and bankers as happens in the capitalist marketplace?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You have to be mindful of the language now, Deputy. It might even be ... just in terms of being overly prescriptive or value judgment laden and ideologically promoting as well.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. I'm putting a view-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, I know that, and I-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----and an object ... or a-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----corrected another Deputy earlier for putting a view.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Or ... and against a background when intense competition between bankers to try and match their rivals for profits makes the prices of a home even higher. And, gentlemen, could I ask the two of you ... between 1996 and 2006 our research and PTSB house price surveys, etc., found that the price of a home increases by the ... the equivalent of the average industrial wage of a worker each year ... each year for ten years. And then compelling young working people to unsustainable mortgages, by common consent, Chairman, and perhaps for 30, 35 or even 40 years. Can I ask you, in your career in Ulster Bank, did either of you ever feel this is not good for society, this is immoral, it's unjust, it's bad for people, bad for society and to ... and to go to your board and bring such a concern to your board and have it discussed, and maybe then to go to the general banking situation with ... with these types of concerns. Just a comment on what was happening in house prices for ordinary working people? Mr. Torpey?

Mr. Michael Torpey:

I think, Deputy, the ... you know, the ... house prices did increase dramatically through the period, as you rightly say, from 1996 through to the peak of house prices. That happened in the context of a dramatically changing environment in the Irish marketplace. It happened in an environment where the cost of debt service, for example, was falling very substantially. Interest rates fell from the very, very high levels we experienced in previous decades-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes ... but, Mr. Torpey, I'm not asking you the whys ... I'm asking you against the intolerable pressure it put on young working people trying to buy a home. If you understand the difference. Is that... was it moral, just, or not?

Mr. Michael Torpey:

We sought ... we sought to offer finance to people who wished to purchase properties. We sought to offer that in as competitive a way as we could so as to maximise the affordability. And, we responded to the market forces in ... in that respect. I think you have instanced the 100% mortgages, for instance, and in certain respects that would have been a help to people because our research at the time showed us that a significant number of people were actually borrowing the balance over the 90% or 92% through a credit card or other borrowings. So our ... our efforts will have assisted affordability in that very tiny segment of the market to which we provided that ... that product. So, I think ... I think, Deputy, it is fair to say that we were in a very competitive marketplace. We competed in that marketplace. We sought to offer the best value product to people who needed to borrow money to buy a house ... houses at the prices they were there at the time.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Gallagher, did you've any qualms about what was happening and the pressures that young people were being put to as a result of practices inside land and banking practices and speculation banking practices?

Mr. Robert Gallagher:

Well, Deputy, I think fast rising home prices is not a good thing for society. And the effect of that is that home ownership becomes more expensive. And the effect of that is that ... that leverage can be created in society. So in an environment which has a sustainable level of home price increase, which facilitates sufficient homes being built as opposed to no homes being built, is probably where we need to get to and it is probably where we should have been. So the effect of high price ... asset price is problematic for all of society. Young people, included, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just to finish on that point, and Deputy Higgins has portrayed that this was a societal impact and the consequences that people are living with today. But just boiling it down to a business model, did at any time, at any level in Ulster Bank, was it considered that a product ... that the mortgage product that you were now issuing was becoming unsustainable given 100% mortgages, given LTV rates of 100% - you didn't have to come up to ten ... with the traditional 10% - income ratios with regard to the price of the house were moved off the map several multiples of ... schedules moving from 20 years out to 40 years and just the affordability factor? I mean ... like the basic business concept of selling cars, is if you want to sell new cars somebody has to buy second hand cars ... and it was becoming increasingly impossible for first-time buyers to come into the market because of affordability. Did anybody ... at anybody ... at any stage in Ulster Bank say this is ... this product is becoming possibly unsustainable?

Mr. Michael Torpey:

I think, Deputy, or Chairman, you ... you touch on a very important point. I think the system, as a whole, failed to realise-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, we know that.

Mr. Michael Torpey:

-----the pressures and stresses that were there and within Ulster Bank we had a growth strategy which sought to compete in the marketplace. The assumptions we made, unfortunately, were the wrong assumptions and it ... it is unfortunate and in every respect - and it's something that I very much regret - that we didn't in fact challenge sufficiently on the variety of assumptions that underpinned the expectations of continuing growth in the market.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, I'm going to bring matters to a conclusion. Is there anything further Mr. Gallagher, Mr. Torpey you'd like to add? Okay, with that said, I'd like to thank Mr. Torpey and Mr. Gallagher for their participation today and for their engagement with the inquiry. The witnesses are now excused and I propose that we suspend up to 3 p.m. Is that agreed? Okay, thank you.

Sitting suspended at 2.15 p.m. and resumed at 3.12 p.m.

Bank Economists - Mr. John Beggs, Mr. Pat McArdle and Dr. Dan McLaughlin

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I now propose that we go back into private session ... or, sorry, public session for this afternoon's proceedings. Is that agreed?

We now commence this afternoon's session ... session hearing No. 2 with Mr. John Beggs, former chief executive of Allied Irish Banks, Mr. Pat McArdle-----

Mr. John Beggs:

Sorry, Chairman, I was the chief economist.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Chief economist, sorry. I was probably giving you a promotion there. My apologies for that. Mr. John Beggs, former chief economist, Allied Irish Banks, Mr. Pat McArdle, former group chief economist, Ulster Bank, and Mr. Dan McLaughlin, former chief economist at Bank of Ireland. The committee of inquiry into the banking crisis is now resuming in public session. Can I remind members and those in the public gallery to ensure that their mobile devices are switched off. Today we continue our hearing with senior bank executives who had roles during and after the crisis. This afternoon we will hear from former chief economist from Bank of Ireland, AIB and Ulster Bank, Mr. Pat McArdle, former group chief economist, Ulster Bank, Mr. Dan McLaughlin, former chief economist, Bank of Ireland, and Mr. John Beggs, former chief economist, Allied Irish Banks.

Pat McArdle is the former group chief economist with Ulster Bank, a position he held from 2002 until his retirement in 2009. From 1996 to 2002, he was Ulster Bank's chief economist. Prior to this, he was head of research at NCB. He is chairman of the International Institute of European Affairs economist group and is a member of the economic and monetary affairs committee at the European Banking Federation. Mr. Dan McLaughlin was chief economist with Bank of Ireland from 1999 until his retirement in 2013. Previously he was chief economist with ABN AMRO and Riada Stockbrokers. Mr. John Beggs was chief economist ... AIB Bank from 2011 until his retirement in 2012. Prior to that he was chief economist of AIB Global Treasury from 1992 until 2011. Previously he was chief economist of Goodbody Stockbrokers, the stockbroking arm of the AIB Group, and chief economist of Allied Irish Securities. He began his career in the Department of Finance in 1975. Mr. McLaughlin, Mr. Beggs and Mr. McArdle, you're very welcome before the committee this afternoon.

Before I commence proceedings, I wish to advise the witnesses 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. So, therefore, 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, these 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 witnesses have 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, will be relied upon in questioning and form part of the evidence of the inquiry. So, before I commence proceedings, can I ask the clerk to administer the oath to Mr. McLaughlin, Mr. Beggs and Mr. McArdle.

The following witnesses were sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Once again, welcome to Mr. McLaughlin, Mr. Beggs and Mr. McArdle. If I can invite Mr. McArdle to make his opening remarks please.

Mr. Pat McArdle:

Thank you, Chairman. By way of preface to my opening remarks, might I say that I prepared my witness statement about a month ago. I got the notice relatively late in the day and I was away when it came, so it was late when I got it. Therefore, I hadn't the opportunity to do a full perusal, as I said in the cover letter. So my opening statement will, in some senses, add to that and reflect the benefits of reflection and research over the past month. It, therefore, is a bit different and if this causes confusion to some of the members of the committee, I apologise for that. But I have here with me hard copies of it, if necessary, if you wish to accept them. Do you wish me to give them to you?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I can ask the secretariat to issue them as you are speaking to us.

Mr. Pat McArdle:

Therefore, I am going to take, Chairman, my witness statement of 10 April and supplementary statement of 27 April as read, and highlight some of the issues that arise.

While my main focus as chief economist in Ulster Bank was external, and while I was not formerly part of the internal UB decision-making process, I accept that my voice was probably an influential one within the bank, particularly as regards to so-called soft landing. My team's emphasis was on short-term forecasting and we produced and published quarterly forecasts for GDP, inflation, employment, etc. These high-frequency short-term forecasts are designed to paint a picture over a two-year time horizon or occasionally less. Longer-term projections in Ireland are published by the ESRI, which produces forecasts for up to a quarter of a century ahead every two or three years. And, you've already discussed these with Dr. FitzGerald. For the economic input into the five-year planning circle ... cycle, Ulster Bank used the ESRI medium-term forecasts. As all ESRI forecasts, benchmark, high and low variants, envisaged a soft landing - and I refer you to my table in my supplementary witness statement - it follows that all UB medium-term planning was also predicated on a soft landing. I effectively buttressed this view in terms of my rolling quarterly short-term economic updates and ad-hocreviews. My forecasts, and those of all other short-term forecasters, remained positive up until early 2008. The turnaround was then dramatic. At that time, the central expectation was that 2009 GDP would grow by 3.6%. Eighteen months later, the consensus was that it would fall by about 8.3%. This about-turn came too late to influence events, as the credit that fuelled the boom had been extended between 2004 and 2007. I was generally regarded as being towards the more pessimistic end of the range of short-term forecasters ... certainly over that period.

I should add that any views in the UB publications were mine alone and there was no difference between the internal and external positions I adopted. I was given freedom of speech by Ulster Bank, even if some of the things I said made them uncomfortable on occasion. I was a trenchant critic of the loose fiscal policy adopted and I was an outspoken advocate of a soft landing. In general, I did not input directly into the credit, the risk or the lending functions in Ulster Bank. Instead, my job was to produce regular economic briefings and they used them as they saw fit. However, there was the occasional exception and I recently came across a case where UB credit drafted a report based on my output and, somewhat unusually, I received a copy of it. It summarises my views in early 2004 and if you don't mind, Chairman, I'll quote from it:

UB Economic Research unit (Pat McArdle) views on the ROI Housing Sector remain positive in the updated report dated 25 February 2004. Its rating however is amber, taking due recognition of the cycle. ... Neither of the usual major negative influences on the housing market (rapid rises and interest rates and unemployment) is forecast. ...

Major changes are due on the supply side - last year['s] completions were in excess of 68 [thousand] but underlying demand is believed to be [around] 50 [thousand]. The difference is accounted for by pent up demand and holiday homes. There are signs that the building industry is aware of this and has the capacity to orchestrate a smooth transition but this is not certain. Pat McArdle does not rule out the possibility of a price correction of up to 20%. Even if this were to happen we do not think that this would have major knock-on effects, given bank capital requirements and stress testing.

A 20% fall in nominal prices would've equated to a much greater fall in real prices, about 35%, that's when you're after making allowance for inflation. In effect, therefore, I warned, in February 2004, that real house prices could decline by 35% ... that's within the 30% to 50% range predicted by the two main contrarians some three years later. My main regret, Chairman, is that I did not continue in this vein. I should have stepped up my warnings as the housing market initially slowed and then regained momentum and even stronger growth. However, if anything, my later pronouncements are more consensual in that I did not disagree with the projected 15% to 20% fall in real prices advocated by the Central Bank and the ESRI. Of course, had I continued in the vein I just outlined, I would've been treated as a contrarian. Few agreed with them, and while it's cold comfort, it's unlikely that I would've been listened to either. Indeed, it's ironic that even though I disagreed with the contrarians later, we had stress tested in Ulster Bank for their more extreme predictions. The problem was not house prices, per se, but developer and real estate lending and we did not spot it or stress test for it, certainly sufficiently.

I want to make the following points. A soft landing and it's perhaps no harm to dwell on it for a minute since this has received such currency and it may not be as understood in the sense that I understand it. So a soft landing would've been quite bumpy, involving substantial job losses and up to €3 billion, I had estimated, in tax revenue foregone. In other words, it would've left a major hole in the budget. The regulators, management and board bear most responsibility for the collapse here as elsewhere, and I'll come back to that. Ulster Bank rejected the hard landing hypothesis, but stress tested for house price declines of 56% in real terms. That was at the very upper end of the range predicted by the contrarians. This was insufficient because the actual recession was much greater than anyone predicted.

I go on now, Chairman, to talk about the implications of a soft landing for a moment. It could've been, as I said, quite bumpy. A soft landing that saw house completions fall from their peak around 90,000 to the 50,000 sustainable medium-term level estimated by the ESRI would've had significant implications. I'd calculated that every 10,000 houses represented one percentage point off growth and that a soft landing would involve 30,000 construction job losses and up to €3 billion in tax revenue foregone.

I go on to speak about the regulator. There were no strong incentives for banks to make arbitrary judgments about the prudent limits of credit expansion. Hence, the infamous comment by Chuck Prince, chairman of Citigroup: "When the music stops ... things will be complicated, but as long as the music is playing, you've got to get up and dance." The regulator's job is to stop the music, or as it's more often put, "To take away the punch bowl just as the party gets going". All regulators failed to do this. This was a major failing and much of the focus post-crisis has centred on improving bank supervision. Indeed, responsibility for bank supervision of euro area banks has been removed entirely from national supervisors.

When I worked in the banking area of the Department of Finance in the '70s and '80s, I had the distinct impression that when the regulator said, "Jump", the bank's response was, "How high?" I was therefore shocked to read in the Honohan report that the regulator spent almost a decade in fruitless correspondence with one financial institution without ever achieving anything. Clearly, the boot had shifted to the other foot and the regulated, instead of the regulator, were now calling the shots. However, it seems, and I've only learned this recently, it seems that this only applied to prudential regulation, as bank representatives have testified to this inquiry last week that the regime on the consumer side remained quite strict, which would've been my memory of it from 20 years earlier. Therefore, I disagree with the conclusion in the Honohan report that the major responsibility lay with the directors and senior managements of the banks that got into trouble. In my view, the regulator had a higher degree of responsibility. And this should go without saying, really, because the regulator's job is to promote the safety and soundness of the banking system.

If the banks were capable of regulating themselves, there would, of course, be no need for rules and regulations and regulators. In saying this, I just want to emphasise that I am by no means trying to absolve the banks from blame. As is clear from the Nyberg and other reports, that there were many actors involved and that the banks were up there at the top. However, the regulator was the only one who had full information on large exposures and, critically, the only institution that could have sought to curb excessive balance sheet growth. It was only when the loans were transferred to NAMA in 2010 that it was revealed that the big developers had multiple exposures to the different banks. The regulator should have had full details from the large exposures reports that it received - I think they were quarterly - and it would've been a simple matter to add them up. Finally, in this section, in 2009, Patrick Honohan, then professor of economics at TCD, wrote, and this has been quoted here yesterday:

A very simple warning sign used by most regulators to identify a bank exposed to increased risk is rapid balance sheet growth. An annual growth rate of 20 per cent real is often taken as the trigger ... Anglo Irish Bank, crossed it in eight of nine years, and indeed its average annual rate of growth 1998-2007 was 36 per cent ... So this was a very obvious and public danger sign.

On this basis the alarm bells should've been ringing for the best part of a decade.

Stress testing. Ulster Bank stress tested for a 36% fall in nominal house prices in its severe stress scenario. That was equivalent to a real fall ... a fall in real prices, sorry, of 56%, i.e. it was at the very upper end of the range predicted by the contrarians. Indeed, it was slightly above the upper end, I think. However, the real problem was commercial and not mortgage lending, and this was not adequately stress tested. In 2007, at the behest of the Bank of England FSA, global adverse scenarios for the UK, US and euro area were produced by RBS Group economics and we commissioned the ESRI to help translate them into three Irish shock scenarios: a mild, once in a decade, a medium, once in a quarter century, and a severe, once in century recession. I supplied the ESRI with the external ... these external global assumptions for the three shock scenarios in April 2007. These scenarios are based on global economic shocks, which severely affected growth, employment, credit, etc., and we left it up to the ESRI and their model to determine the impact of this on the Irish economy and on Irish house prices.

The severe scenario envisages a downturn of a magnitude not seen in the post-war period, greater than the 2009 UK recession and greater than any ... anyone else ... there was no other one that was known at that time. It entailed GDP everywhere going negative for a few years, unemployment rising to low double digits, short-term interest rates falling to be 1% or below, and Irish credit contracting by 5% per annum for a few years. This results are given in the accompanying table. In general, the outcome was worse than predicted ... that's the outcome in the event was worse than the scenarios we utilised I just should say for clarification ... and this was mainly because the impact of the construction rate of decline ... related decline, was vastly greater than expected, with new house completions virtually coming to a halt, whereas the model had predicted a fall of 20,000 units only. The predicted nominal house price fall, however, was 36% and, of course, the actual, as we now know, was 50%.

In conclusion, Chairman, the financial crisis has been described as an example of groupthink. In my experience, and I've now been through it, groupthink is almost impossible to understand unless you've experienced it. I suggest that a useful way to approach it is, perhaps, to look at two more recent examples. First, the Central Bank's proposed macro-prudential limits on mortgage lending were eminently sensible and less severe than the regime that applied when I took out my first mortgage, yet they were almost universally opposed, even by the Department of Finance, and were watered down in the event. Second, the expansionary 2015 budget was condemned by IFAC, the Irish Fiscal Advisory Council, a body expressly established to advise on policy and also by most economists, yet the Government persisted with widespread support from beneficiaries and politicians. So in my opinion, groupthink may well be alive and well.

The Bank for International Settlements was the only major institution I know of to warn of the crisis and I want to end with a quote from it. In a presentation in 2013, Bill White, who was the former chief economist there, reflected on why his warnings were ignored, and this is also relevant to groupthink. He said, and I quote:

There were a few who did warn that there were serious problems building up under the smooth surface of the Great Moderation. I would like to believe that we at the BIS saw it more clearly than many others, though certainly the timing and the precise nature of its unfolding eluded us ... Why were these warnings (both public and private) not heeded? Why were the historical antecedents not given more emphasis? I am going to suggest in the immortal line of Flanders and Swan, that it was "A Tale of Seduction". All of the parties who contributed to the crisis (borrowers, lenders, regulators, central banks, academics and politicians) were each seduced by [the] various influences into believing different things that were not true. Moreover, since seduction normally involves more than one party, the relationships between these various parties also contributed to their having 'no eye to see and no ear to hear'.

Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Mr. McLaughlin.

Dr. Dan McLaughlin:

Thank you, Mr. Chairman. Good afternoon, everyone. Thank you for inviting me along to speak to you. As requested, I've furnished a statement addressing certain designated lines of inquiry to the banking crisis. I've also included some general points which I feel are relevant and rather than read out the full statement, I just want to summarise a few remarks.

Just by way of background, I was employed by Bank of Ireland in the role of chief economist from February 2001 to August 2013. I think Mr. Chairman, you ... in your opening remark, you said 1999. Just to clarify, it was 2001.

During that time my office was in the dealing room of global markets, which was responsible for executing the bank's funding strategy and in providing a service on foreign exchange and interest rates to the customer base. I was in charge of the bank's economic research unit, which produced analysis and commentary on the Irish and UK economies and in developments in the financial markets. The unit also provided support to other areas of the Bank of Ireland Group, including a written monthly summary of economic and financial developments to the chief executive. As chief economist, I also participated in meetings with rating agencies, counterparty banks, and on occasion, debt and equity investors, as well as presentations to customers on economic outlook. I reported to the head of global markets.

I now want to turn to a couple of general observations on the banking crisis. The first relates to the banking system that operated in Ireland prior to the crash and to highlight that although there were common features, the range of the subsequent losses illustrates that the banks differed greatly in terms of credit standards, risk appetite, geographical spread and exposure and degree of loan concentration. Second, banks are mainly staffed by specialists, and in light of the fact that the bank is a publicly-traded company, other than information published in the market, everything is done on a need-to-know basis, which is particularly true in terms of crisis. A third point relates to the narrative that has developed around the banking crisis, which, given the benefit of hindsight, risks overstating what was known at any point in time. Our knowledge of the outcome makes it difficult to judge past events. We should also be clear as to what published data was available and when, an issue I address in more detail in my furnished statement.

In my view, there were three separate factors contributing to the crisis, each overlapping in exacerbating the other. The first was the property market: Ireland experienced a residential property boom which lasted well over ten years, and in my view, until around 2005, was mainly driven by fundamental factors, including strong growth in employment, rising household incomes, a move to a lower interest rate regime following euro membership and an extraordinary increase in population of, it was a 17% rise in the decade to 2006 of 615,000. It was only in the latter stages of the boom which saw an easing of credit standards and the Central Bank quarterly survey data of credit standards shows this, particularly from 2005. Affordability also started to deteriorate and my own affordability model pointed to a marked increase in the cost of servicing a new mortgage in 2007. Particularly following the monetary tightening initiated by the ECB, we saw the repo rate rise from 2% to a high of 4.25%, which wasn't reached 'til July 2008. I initially felt, in 2007, that the slowdown in the housing market would involve flat or falling real prices and not a fall in nominal prices, as the latter had only happened once in Ireland over the previous 30 years. The Irish economy is very open and hence heavily influenced by the international economic cycle, although from 1970 onwards, the Irish economy had contracted in GDP terms in only one year, which was 1982. The consensus view in mid-2008, which I shared, was that any US recession would be as short-lived as had been the case in the previous two, which had been 1990-91 and 2001. Both had lasted only eight months. This didn't prove to be the case, of course, and I believed that the unprecedented collapse of the global credit markets which followed the Lehman bankruptcy in September 2008, was a second and decisive negative which hit the Irish economy and the banking sector. The chairman of the Federal Reserve, Alan Greenspan, called it a "one in 100-year event". We will never know how steep the Irish property correction would have been in the absence of that collapse and I find it at variance with the facts that some people appear to play down its significance in relation to the banking crisis. The impact of the credit crunch was certainly extreme, both internationally and in Ireland. The S&P index fell by 50%, GDP in the developed economies experienced its largest post-war contraction, and Irish GDP, which actually rose by 1.2% in the third quarter of 2008, on the initial figures that were published at that time, contracted by an extraordinary 7.1% in the final three months of 2008. The total contraction in the recession was about 12.5%. So over half of that was experienced in just three months, post-Lehman.

Commercial property prices also tumbled, a prime factor behind the decline in the value of bank assets, with record falls recorded in many countries. UK prices fell by 26% in 2008, while the plunge in Irish values was also unprecedented. Capital values had fallen by 10% in the first half of the year, before falling by 15% in the third quarter and 18% in the final quarter of 2008 and a further 18% in the first half of 2009. It is also noteworthy that Ireland chose to mark to market these assets at an extreme stage of the cycle. It is also noteworthy that not many other countries, if any, followed that example.

Few, if any, envisaged the effective collapse of the global credit system, while the unprecedented scale of the policy response, including massive state support for banks, zero and even negative interest rates, which are still with us, seven years later, QE and new capital and liquidity rules for the global banking sector, is also testimony to the singular degree of financial disruption that emerged post-Lehman, with the ramifications still being felt, noticeably of course in the euro area. Finally, a third factor emerged in 2010, and again I don't think this is given enough attention, which relates to the sovereign debt crisis, which by 2012 had developed into an existential crisis for the euro. State support for the banking sector, initially seen as positive, was now perceived as adding stress to already high sovereign debt levels and the subsequent fall in government bond prices added to bank losses, given their holdings of government debt, a phenomenon that became known as the doom loop. In that context, it is noteworthy that a number of official reports into the banking crisis in Ireland, including Professor Honohan's, was commissioned in 2010, presumably on the view that the worst was over, but ECB lending to Irish-headquartered banks was higher in early 2011 than in 2008, and ELA support also peaked in 2011. New regulatory capital requirements also resulted in widespread bank deleveraging, so adding a further downward pressure to asset property markets.

In 2012, the Central Bank's housing models show that Irish residential prices were now as much as 26% below fundamental value. It is also of note that the Central Bank's prudential capital assessment review, or PCAR, which began in, which was in March 2011, identified a large capital shortfall in the main Irish banks and that ... and then substantially overestimated the projected pre-impairment profitability. In the event, the requirement to offload assets and to increase deposits put significant pressure on net interest margin. The scale and extent of private sector deleveraging in Ireland, which is still apparent, also resulted in a larger fall in bank assets than envisaged in the PCAR.

In summary, the correction under way in the Irish property market in 2008 turned into a crisis for the economy and the banking system in the wake of the post-Lehman collapse in the global credit system and a fallout from the subsequent sovereign debt crisis in Europe was a significant factor in delaying the return to bank profitability and in slowing the pace of economic recovery in Ireland. Thank you very much for your attention.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you.

Mr. John Beggs:

Thank you, Mr. Chairman. You asked me to give evidence on eight lines of inquiry relating to my role as chief economist of Allied Irish Banks. Now I've covered these as best I can in my written statement of 9 April, and I propose today just to summarise the main points of those lines of inquiry. Before I do so, I want to clarify that I was not the chief economist of Allied Irish Banks in the period leading up to the banking crisis. I was promoted to this role in a restructured bank in late 2011, a position I held briefly until my retirement in 2012. My actual position from 1992 to 2011 was that of chief economist, global treasury. My role was primarily focused on advice within wholesale treasury and supporting corporate and commercial treasury in relation to general economic issues, particularly around the outlook for interest rates and exchange rates. The economic research unit which I headed was located within wholesale treasury in the capital markets division. The AIB Group's property-related Irish exposures were in the retail Ireland division. Overall risk management, capital management and relations with the supervisory authorities were handled at group division level.

Though part of global treasury, my unit was a limited resource available to other business units across AIB and provided on-demand services to other parts of the group. One area of support was in relation to stress testing. My unit produced and published research and I will deal with aspects of that in the questions following my statement.

In giving evidence before this committee, on the lines of inquiry indicated to me, I believe therefore it's important to clarify that I did not occupy a central role within the AIB Group, or a management role in the lending strategy of the retail division. Furthermore, in relation to some of the lines of inquiry in which I've been asked to give evidence, I must point out that I had very little involvement with the Department of Finance or the Central Bank - Financial Regulator, during my career in AIB.

The first line of inquiry you asked me to comment on was in relation to banks' risk appetite and the appropriateness of their property-related credit policies. In relation to risk appetite, I make the point in my statement, I use a risk appetite statement from AIB from 2007, and then contrast it with the concentration of property as set out in the bank's presentation on their results for 2006, which shows that property lending constituted 33% of total lending. I make the point that reconciling the two is only possible, in my opinion, on the basis that AIB believed that its business was well diversified geographically and sectorally, well managed, of good quality and low risk, based on its customer profile and knowledge of its customers' financial standing. I believe that banks focussed primarily on what they perceived to be the quality of their individual loan books, with less consideration of the potential systemic risks in the Irish banking system as a whole, and the contagion risks, should serious problems emerge in an important bank, particularly given their overall dependence on external funding.

As to the appropriateness of property related credit policies, I'd make a general point that the sustained growth in the Irish economy in terms of real GDP and employment meant that the assets of the banking system became increasingly tied up in bricks and mortar in one form or another over the period. As banks are the main source of finance for the Irish private sector, there is a high correlation between the growth in credit and GDP-GNP. The appropriateness of Irish bank lending policies cannot be divorced from the stance of fiscal policy, other macroeconomic policies, and the role of monetary and prudential policy. Here, I want to integrate a comment on the third line of inquiry as to the appropriateness of macroeconomic and prudential policy, in commenting on this first issue. Strong growth in bank lending occurred against a very expansionary fiscal policy which provided misguided support to bank lending policies. Monetary conditions were also very favourable. Interest rates were too low. Prudential policy was too deferential and failed to pick up on warning signs. Last but not least, banks, as described by the Nyberg report, were engaged in high-risk growth strategies involving a significant expansion of credit. There were no countervailing policies in operation.

Research shows that while the decade of 1990s was primarily driven by exports, the expansion of credit was also a key contributory factor. Strong employment growth and the rise in the population led to a large increase in house building. Furthermore, the ratio of private sector debt to GDP was well within the range of other countries. In the period after entry into EMU, in my opinion, developments prior to around 2002-03 could be characterised as still within acceptable ranges for many key ratios. A period of slower growth was warranted thereafter as the growth in total lending carried increasing levels of risk as property price inflation and investment and construction headed for unsustainable levels based on international standards. I set out a number of statistics in my written statement relating to credit expansion which I won't go into here in this summary.

On the second line of inquiry, relating to risk concentration in base, and in adverse scenarios, I would say that stress testing was undertaken within AIB by the stress testing steering group which was part of the central group risk management framework. My role was to present an overview of the economic scenarios to the STSG based on, for instance, the initial economic data provided by the regulatory authorities, either in the UK or in Ireland. The aim was to provide group and divisional risk management, finance and credit units, with the fullest possible understanding of the transition from the base case to the adverse economic scenarios. The actual calculation of the effects of the adverse economic scenarios on the bank's capital and other metrics was undertaken by analysts within the group and divisional risk and credit units. When it comes to concentration risk, the methodology changed over time to include additional studies to examine the correlation between sectors, particularly in relation to property. Adjustments were made to the impact on credit provisions to take account of this factor.

As to the third line of inquiry, the adequacy of the assessment and communication of both solvency and liquidity risks in the banking institutions and sector, here I'm really looking at the role of the three policy makers, and I want to focus particularly on fiscal policy, because it seems to me, and certainly from my experience of the Department of Finance, that far too much of the time of the Department is taken up with the annual budget process. Macroeconomic issues over the medium term, or other issues, are not really handled effectively within the Department. And in terms of publications from the Department, they tend to just simply back up what's contained in the supporting ... what's contained in the annual budget statements. So therefore, there were no commentaries, that I'm aware of, from the Department, relating to the property sector in the period leading up to the crisis. The prudential practice covered both micro and macro policies and, I'm quoting here from the Honohan report which pointed out quite a lot of deficiencies in the way in which these policies were carried out, but at no stage did the assessment of the banking system, such as it was, show any concerns about liquidity or solvency issues.

On the macro prudential side there were annual financial stability reports published between 2004 to 2007. These reports failed to trigger a more cautious approach within the banking system. An important earlier point worth noting is that several research papers produced within the Central Bank and by the ESRI, the IMF and the OECD, consistently came to the conclusion that Irish house prices were overvalued, often by significant amounts. I believe that the consistency of this conclusion should have alerted the supervisory authorities to investigate the implications of this more rigorously with the financial institutions.

On the fourth line of inquiry, appropriateness of the expert advice sought, quality of the analysis, and how effectively this was used, I again refer to quite a number of international organisations that provide analysis and advice to the supervisory authorities. However, I also feel that these reports are often subject to a little bit of suasion from the domestic institutions as to what's contained in them. However a more ... I suppose, a better form or research from these organisations might well be found in the number of housing market reports published by the OECD and the IMF, in the 2003-04 period, and by the OECD in 2006, which raise quite a number of issues in relation to the Irish property market. And other studies produced by the OECD in 2006 raised issues about adjustments in the property market in the context of a monetary union and these, I believe, were important and useful studies for consideration by the authorities and also by financial institutions.

In the area of contrarian views, I would say that, by the time these contrarian views became public knowledge and got a great deal of publicity, the Irish property market was already in slowdown mode. I found the reaction to them to be quite surprising because research, I think that we had published, showed that by 2005 the ratio of house prices had already risen quite dramatically, affordability was deteriorating, interest rates were on the rise, investors were increasingly worried about the market, employment growth had levelled off, so we were in a situation where there was a turning point already on the way.

As to the remaining lines of inquiry, Mr. Chairman, I don't propose to read into my ... anymore out of my statement. I will make the point, though, in relation to the liquidity issue in banks, I sat in the dealing room of AIB during this period and every event, and there were quite a number of them, from mid-2007 to the collapse of Lehman Brothers, was a big event and was quite troubling in the context of how the markets saw it. I think, if you're not in that space, you don't really have a full appreciation of just how difficult that was.

So, Mr. Chairman, that concludes my summary of the main lines of inquiry, but with your permission, I propose to deal with the issue of Professor John FitzGerald's reference to me in his testimony to the committee on the 11th.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Certainly, just procedurally, this is a section 25 statement regarding the testimony of Professor John FitzGerald to the joint committee on 11 February 2015 and you want to address that matter specifically, Mr. Beggs, yes?

Mr. John Beggs:

I do indeed.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. John Beggs:

I provided the committee with a statement on this matter on 27 March. Well, first of all, I confirm that I did meet with Professor FitzGerald in relation to stress testing. I do not recall the exact date but I'm happy to accept from his records that it was in October 2005. Professor John FitzGerald himself, in his e-mail of 16 February to the committee, accepted the possibility that his recollection of the content of the meeting was faulty. Professor FitzGerald's recollections of the content and the nature of the meeting were in many key respects very different from mine. Specifically, I am certain that I expressed no concerns on the part of the AIB board about stress testing. The board never authorised or was aware of the meeting. I did not report back to the board on the outcome of the meeting. The meeting was an exploratory, technical one between economists to ascertain whether the ESRI's model could be used to enhance the scene setting of base and stressed economic scenarios by providing more economic variables than contained in regulatory exercises at the time. It was never the intention to ask the ESRI to carry out stress tests independently of regulatory ... of the regulatory ones and it was certainly never envisaged that the ESRI would apply macroeconomic scenarios to the bank's internal data. I never asked Professor FitzGerald to carry out stress testing on behalf of AIB. I sought to explore whether prescribed regulatory economic stress data, which consisted of only a limited number of indicators, could be run through the model to generate a more graphic and detailed economic picture of the stressed outcomes. The meeting failed to produce any results. As I recollect, Professor FitzGerald indicated that the ESRI would not undertake private unpublished work. There were some limitations as to what the model could do, but he was prepared to make data from the forthcoming medium-term review available to us. It was an inconclusive meeting and my unit never followed up on that.

If Professor FitzGerald did any other work for AIB or other banks on stress testing, I am not aware of it.The impression created by Professor FitzGerald's testimony is that the AIB board was concerned about the lack of severity in the stress test exercises as far back as late 2005, which may imply a broader level of concern. I have no knowledge of the board's opinion on the matter. I never received any negative feedback or reports from the board or board risk committee on stress testing. As a result, I have no reason to believe that the AIB board had any misgivings about regulatory stress testing. It was not my practice in AIB to attribute comments or opinions to other AIB business units or committees, least of all the board of the bank.

Stress testing in AIB is executed through the stress testing steering group, which is responsible for ensuring that a comprehensive stress testing programme is embedded in risk management and to ensure that an effective framework is in place to enable stress testing across the group. I attended the meetings of the stress testing steering group when a stress test exercise had to be carried out. My role was to communicate the evolution of the scenarios from base case to stress scenarios to the committee and onward to divisional risk management and business units, as appropriate. I was not involved in the application of the economic variables to the bank's internal data. This was ... sorry ... carried out by analysts within the divisional risk and credit units as well as in the group risk unit.

From an early stage, probably prior to 2005, I felt that the regulatory stress testing exercise could become too procedural. Banks were provided with stress tests, the work was carried out with great care and attention to detail, signed off by bank boards and reported on by the Central Bank in various reports, such as the annual financial report. I also felt that the stresses were too mild, though not on every occasion. I was also concerned that the moderate nature of the stresses were not conducive to maximising management buy-in of the risks involved. This was my personal opinion and had much to do with the view that people performing the stress tests in various business units needed to understand the broader economic and financial implications of a given shock to a base case scenario. To do this, one needed a model and the ESRI had one. A model would provide more outputs for consideration, a wider context to the changed economic environment and given the likelihood of a growing stress testing framework, a more consistent approach to the exercise over time. I raised these issues with the stress testing steering group and suggested that I talk to John FitzGerald in the ESRI to see what could be done. I stated this would have some cost implications.

I quote John FitzGerald from his testimony to the committee:

We did macro-economic scenarios. The difference compared to what the Central Bank and so on was doing was that we used a model, so it was consistent. One did not get a housing price crash and no change in unemployment; one got a housing price crash, unemployment going through the roof and Government revenue collapsing, all coming together which is the way to do it. That was my concern. It was not just the Central Bank. It was interesting doing something similar with a British owned bank. The Bank of England and the Financial Services Authority, FSA, had a similar inappropriate approach to stress testing.

So, I also felt that the amount of data provided and scenario scene setting between the base case and stress tests were too limited. This applied to both Irish and UK regulatory tests. I wanted to bring more information to bear on the process of assessing the risks to the business from the economic deterioration under consideration in the stress. I carried out, personally carried out, most of the work on the macroeconomic inputs for stress testing in AIB. From year to year, I endeavoured to be consistent in how I interpreted the shocks and in producing additional information for the divisional risk and business teams, particularly the changes in employment, which were not specified in the macro-aggregates in the base or stress scenarios. This had to be estimated within individual banks from the changes in real GDP and unemployment rates supplied for the exercise.

In his testimony, Professor FitzGerald stated on several occasions that his recollection of the meeting in October 2005 might be faulty. In his letter to the committee of 16 February he states: "However, as my recollection of the timing of the meeting was faulty, there is always the possibility that my recollection of the content of the meeting was also faulty." Mr. Chairman, much emphasis has been placed on the importance of this meeting between the ESRI and AIB in October 2005 at the committee hearing on 11 February but it did not have the imprimatur of the AIB board. Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Beggs, and maybe if I can just deal with that matter before I move on to the lead questioners. In my opening commentary with you today and in your own ... start of your own engagement, you're making it very clear that you were the chief economist of global treasury between 1992 and 2011, and in your section 25 statement, you're making that very, very clear as well. Who was the group economist at AIB during that time?

Mr. John Beggs:

There was no chief economist of AIB ever, as far as I know, and I just want to make clear that does not make me the de facto chief economist by virtue of the fact that I was the chief economist of treasury.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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How many economists at the sort of similar managerial level to yourself were at AIB?

Mr. John Beggs:

I would have been the only one at my level.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And who would have been the most visible AIB economist during that period?

Mr. John Beggs:

I would have had a public profile through most of that period, but again I'd make the point that having a public profile doesn't give you a senior decision-making role.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And was your reporting line solely into global treasury, or did it go beyond global treasury?

Mr. John Beggs:

My reporting line was to the head of wholesale treasury, who reported to the head of global treasury, who would report to-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. John Beggs:

-----the head of capital markets.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. So, your views would not have been confined just to the global treasury side of things, they would have travelled ... excuse me, to broader realms of the bank, yes?

Mr. John Beggs:

Yes. One of the key services that we provided within global treasury was to the corporate and commercial treasury and there we had quite a lot of our clients who were interested in particularly interest rates and exchange rates and, of course, general economic issues. They were importers and exporters, by and large, but over time their interest in exchange ... in interest rates grew as they became more involved in the property market. But we expanded our research in 2004 to start thinking about the housing market and to try and understand what was going on.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. So, in your role, the title of which was "chief economist global treasury", between 1992 and 2011 were you ever asked to talk to the board or any other committees outside treasury about your views on the economy?

Mr. John Beggs:

Okay, in relation to formal presentations, in my 20-year career in AIB, I made two presentations to the board of AIB. I think one was in 2005 and I'm not sure what the date of the other one, it could have been 2009-2010. Two in 20 years. The group executive committee, which was the most senior executive committee in the bank, I made two presentations in my 20-year career. And to the management committee of the retail bank, I never made any presentations whatsoever.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Before we return to the content of the meeting, the engagement with Dr. FitzGerald, after that meeting, did you report back to your divisional head, the managing director of AIB capital markets, or anybody in treasury, in regards to this meeting, or any other segment or functionary within AIB?

Mr. John Beggs:

No, I reported back to the stress test steering group that the meeting had ... wasn't going to be very fruitful.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. John Beggs:

And that was the end of it. I should say that, perhaps with my colleagues here from other financial institutions, that I had a great deal of independence within AIB. My research was not vetted by anyone. It certainly wasn't vetted by the retail bank and it wasn't seen as supporting their business. We produced research. We obviously operated within certain constraints in relation to stock market and other, I suppose, compliance rules, but otherwise we were very independent and the bank were happy to have that situation prevail.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Returning to the meeting with Professor FitzGerald, what was the motivation and the reasoning ... am I correct in that you instigated that meeting, yes?

Mr. John Beggs:

Yes. I have to say I was very, very surprised to hear what Professor John FitzGerald had to say at the committee meeting. I've known him quite a long time. We've worked together in the Department of Finance in the 1970s. We've had some interactions, over the years. I ... I suppose, at my own initiative, I decided that what we needed to do ... I was doing the stress testing, shall I say. I may not be doing the stress testing, you know, indefinitely and I wanted to bring some consistency to the way in which these stresses and the scenarios were being presented to the risk analysts who had to carry out the exercise. A model was one way of doing it. So, I approached John FitzGerald with a view to, first of all, inputting the regulatory stress test, the data that we were given by, say, the Central Bank, which were very limited in number. I wanted to run those results through the model to generate a wider scene setting because the model generates quite a lot of information. And as Professor FitzGerald states in his ... in the letter to the committee, the model could do that and that, for me, was an important input into the stress test exercise to be carried out within the bank itself. I wanted the business units to get a full sense of ... the fullest possible sense as to what this stress involved. With the benefit of hindsight of what happened, it's quite clear that having the clearest and the most, you know, expansive version of a stress and what it would involve might have been useful.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Again, to try and simplify this down, I'm an early school leaver, I did my education as a mature student and there are people probably watching it this evening, saying, "What was the model?" The model wasn't somebody from some model agency, it was an economic structure that was put in place and it's a bit like The Hitchhiker's Guide to the Galaxy, where they design a model in that that took so long that, when the data came out, they forgot what the data they actually put into it actually was, so the answer was of no use. What I understand this meeting was about ... or maybe if you can answer what this meeting was about, was to further extend the model so to give a more comprehensive analysis as to what was actually happening. Would that be correct in saying that?

Mr. John Beggs:

Yes. First of all, we didn't have a model.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You didn't, okay.

Mr. John Beggs:

We were given a certain number of economic, base case, GDP, unemployment, house price changes and then a stress scenario and told, "Go away and-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. John Beggs:

----you know, do a stress based on that."

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. John Beggs:

For instance, one of the things that was absent from the information given to us was, well, what's the change in employment as a result of this, because when the economy shrinks, it is possible to get an increase in unemployment simply because the labour supply keeps rising and you lose no jobs. So, you had to understand what actually happened. The model would give you a consistency to this.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. John Beggs:

And that's the reason why it was there, for consistency and for more complete set of data. If you look at the ESRI's medium-term assessment, you will find it gives you quite a lot of information.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So, this would identify financial trends as to where the overall financial situation was going and people would make strategic plans as such and all the rest of it. But I suppose the one significant question that has to be asked here, did you go to that meeting with concerns, or was this just a modelling exercise?

Mr. John Beggs:

I ... no, I ... as I said, I was concerned that stress testing could become procedural. I wanted to, if you like, liven it up by giving them more of a scenario around it, so I had no concerns going. It was very exploratory, to see what could be done. John FitzGerald is a very practical minded economist and I think it was ... it was to see whether there was something that we could get out of it.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But did you have concerns, going to that meeting, as to ... that there were indicators out there that was not showing up in modelling data, or was this just to add bells and whistles to a model?

Mr. John Beggs:

That ... the latter.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The latter.

Mr. John Beggs:

Yes. I had no concerns about-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right.

Mr. John Beggs:

It was to do with the structure of the exercise and nothing else.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Can I bring you, Mr. Beggs, to core document BR1, C2b and it's pages ... it's a finfacts... a finfactsinterview, February 2008: "Irish economy will recover in 2009/2010" and Irish economy will recover in 2009, 2010 and downturn will not derail the economy, paragraph 1. This is ... did you have any authorship in this document, did you?

Mr. John Beggs:

I-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's an AIB ... "AIB bank says Irish economy will recover in 2009/2010; house prices need to fall to 2005 level." It's by the finfactsteam, 7 February 2008.

Mr. John Beggs:

Yes, I take responsibility for the document.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. You're the author of that document, are you?

Mr. John Beggs:

I may not have been the author of it-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But you claim-----

Mr. John Beggs:

-----but I certainly-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, I'll just deal with the first paragraph of it. It says:

AIB says that even if its forecasts prove overly optimistic, the downturn in activity is unlikely to derail the economy completely. The economy will still hold onto virtually all the gains in output, employment and living standards achieved since 1993. These are very impressive gains, with real GDP increasing by 167% and employment rising by over 75% in this period. As the chart shows, there has been a very strong growth in GDP per capita in Ireland relative to the UK and eurozone over the past decade.

What model was used to give us that information?

Mr. John Beggs:

Sorry, Mr. Chairman, this is the result of a short-term ... short-term forecast which is not ... it is not model-based.

They are, I suspect, as in line with most forecasters in Ireland, they are put together by reference to the availability of information, the availability of international forecasts about Ireland from international organisations. And they are, I suppose, informed opinions based on the information that we have at the time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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How would you reflect on that document now?

Mr. John Beggs:

Well, the first thing I will say to you is that thisfinfactssummary jumps in, as far as I can recall, some way down ... some way down the page of the original document.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, okay.

Mr. John Beggs:

And so what we are saying here is there's been quite a significant increase in living standards and employment over the years, and based on the information available in February 2008, the opinion was that most of these gains could be held, you know, as the economy slowed. Of course, we were only months away from a significant change in the global economic outlook, which, just to answer ... to add some information to what you're asking me: the volume of world trade declined by 20% in the 12 months from April 2008 to April 2009, and the world economy went into recession. So this is based on, as it says, "The fundamentals of the economy remain sound, though, so growth should pick up in 2009/2010 as the downturn in housing bottoms out and global growth improves". So a key assumption is that the global economy improves. That is not what happened. And as Irish GDP or changes in Irish GDP are extremely dependent on changes in exports, given that in 2008 exports were probably 90% of GDP, the trend in exports determines the trend in GDP.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I just need to move on to one more slide with regard to this question, Mr. Beggs, and that is the ... in the AIB document titled, The Irish Economy Sharp Adjustment to Continue in 2009, and it's a presentation by yourself to ... I presume it's ... who actually is the presentation to?

Mr. John Beggs:

Yes, Mr. Chairman, this was a presentation given to the ... I think it's called the LIA, they're a body that are involved in educational programmes within the financial services and it was delivered one wet winter's night in January 2009.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And I'll move on to slide two, and in comparison to the earlier document, which I said is dated February 2008, this now is dated January 2009:

Sharp downturn in the Irish property market; Global financial impact on subprime crisis; Global economic impact on credit crisis; Spill-over effects of property crash on [the] rest of Irish economy; Crisis in [the] Irish public finances; Rating downgrades; Loss of competitiveness and currency [improvement].

Would you think that's a significant change from the document of 12 months previous?

Mr. John Beggs:

Oh certainly, and it's the fact that we were in global recession-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Mr. John Beggs:

-----that gave rise to that rather pessimistic presentation, if I recall.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And you wouldn't ... there was no indication back in 2007, by your recollection, that this was ... or, what is it, 2008, that this was on the cards?

Mr. John Beggs:

No, we had, I think from around mid-2007, the start of the sub-prime crisis. In the second half of 2007, it was quite clear from a number of leading indicators, from sentiment indicators, that a much slower rate of growth was in train internationally but the change that occurred in 2008 was much more significant and it was very abrupt.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, and-----

Mr. John Beggs:

So that led to that more sober assessment in 2009.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Fine. Just ... so just, final question. Your earlier engagement in 2005 with Professor FitzGerald at that time didn't assist you in any of these regards? Or did it?

Mr. John Beggs:

No. But I think ... I think actually ... I reflected on the ... if I reflect on the very last slide in that presentation, where you can see the scale of the impact on the economy as a whole in terms of the public finances, what that meant in terms of the need for cutback in services, it shows you the benefit of a stress test exercise that is all-encompassing and gives you significantly more information than was used in regulatory stress tests back in 2005.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy Kieran O'Donnell. Deputy, you've 25 minutes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thanks. To Mr. McLaughlin, Mr. Beggs and Mr. McArdle: did ye consult with your former bank employers prior to coming before this committee? Mr. Begg?

Mr. John Beggs:

I asked one question in relation to a technical point in relation to stress testing so that I could assist the committee in answering their questions.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. McArdle?

Mr. Pat McArdle:

When I got the summons, I got on to them and I said I wanted to see ... I found that weeks or months earlier they'd supplied copious documentation to the committee. I said I wanted a copy of everything that mentioned me. And I got copious amounts of documentation from them, most of which I've read.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I just, for a point of clarification, Mr. Begg, and you've gone at pains ... great lengths to give a statement in respect of Professor John FitzGerald's appearance before us. Can I take it from your statement ... how did you regard ... did you regard the stress testing that was in place in '05 in AIB as adequate or inadequate?

Mr. John Beggs:

Oh, I think it was, it was adequate, in the sense that the ... the procedures were followed, you know, the stresses were provided. I was only looking to add more colour to the outputs around that stress test. I wasn't challenging the stress test, per se, and I should say that we were moving very soon thereafter into a different form of stress testing where banks would specify their own stress.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was the stress testing incomplete then? Would that be a fair summation?

Mr. John Beggs:

No, I had a few ... I had a few points about information and statistics that were provided. It was particularly around ... what initiated my contact with John FitzGerald was the business about calculating the changes in employment between falls in GDP and the rise in unemployment.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who was on this stress testing steering group? Who was a member of that group in the bank?

Mr. John Beggs:

I'm sorry, at this point in time, in relation to that period I couldn't ... I can't recall.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who was it, to who-----?

Mr. John Beggs:

Oh, it was made up of members of group risk ... it was a committee of people from group risk and-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who did they report to?

Mr. John Beggs:

Pardon?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who did it report to?

Mr. John Beggs:

It reported to the executive risk committee, and then after 2011, I understand it was the board, the board risk committee.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And can I ask, why didn't your unit or you follow up with John FitzGerald's offer of providing the data to enable you to enhance the stress testing?

Mr. John Beggs:

Well, we already had, we already had the report, the medium-term review. I mean, we already had and knew what was contained in, if you like, his written outputs.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did ye-----

Mr. John Beggs:

But what we wanted to do was to have a regular use of the model to run.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And did you factor those, that type of extra data about unemployment and housing, did you factor that into your stress testing thereafter?

Mr. John Beggs:

We did. And even at that time we produced our own figures for that. So ... but my point was that there was no consistency ... necessarily any consistency between what I was doing and what, say, Bank of Ireland were doing, or Ulster Bank were doing in relation to, if you like, embellishing or producing additional information.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And Mr. McLaughlin, very quick, and Mr. McArdle, do ye regard the stress testing in your individual banks in, we'll say, the period, we'll say, '05 to '08 was sufficient?

Dr. Dan McLaughlin:

At the time I think, you know, some of them were stressing 20%, 25% falls in house prices, which would have been ... which had never happened. You know, the thing about once you'd remembered to put it into context is: when stress tests are done, you're looking at past data. Ireland had had experienced, since 1975, one year in which nominal house prices had fallen, and they'd fallen by 1.7%. One year since 1970 that GDP had fallen on an annual basis. So to put in stresses of 2% or 3% falls in GDP, 20% falls in nominal house price would have been severe. If you're suggesting that they should have had a stress test with a 67% fall in commercial prices, a 50% fall in residential prices, and a 12.5% fall in GDP, obviously they didn't, but at the time I don't think that was unreasonable. Plus, the major problem for the Irish banks wasn't just Irish commercial property; US commercial property prices fell 40%, and UK commercial property prices fell 35%. So I don't think it would have been reasonable at that time to have put in, given historical experience, to put in those numbers.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. McArdle?

Mr. Pat McArdle:

The quick, the short answer to your question, Deputy, is yes. But let me expand.

First of all, listening to John Beggs there ... it's eerily similar to the process I went through ... except we took it maybe one step further-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The slight difference there was that ye employed the ESRI to actually-----

Mr. Pat McArdle:

Yes ... we did ... we did, yes-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Beggs you said that they wouldn't do the work. There's a bit of an inconsistency there.

Mr. John Beggs:

Well, I have to say ... I am again surprised by the fact of the ... of the way in which my meeting was ... was portrayed ... and then to find later on that stress testing was done for .. for other institutions.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay, Mr. McArdle-----

Mr. Pat McArdle:

Just to continue ... the early stress tests, '04 and '06, came from the Central Bank. So you were given a range of variables. I said in my witness statement I had limited involvement in it because you just got them. It was a fact and I ... didn't ... I passed them over to the risk people and said, "You worry about that", right. Yes, I would ... the only comment I would pass on them ... yes ... there were a limited range. I can't remember how many there were but there wasn't more than half a dozen, at a guess of variables in it. Whereas ... so ... so was I happy with them? I was happy that they met the demands of the regulator. They were not by any means the full whack ... in the sense that we were to go on and do later.

In 2007 we got our impetus from the Bank of England and the ... the regulatory authority over there. And it was a totally different approach and now, obviously, there must have been some co-ordination between the regulators because I gather this happened because Ulster Bank was ... was regulated by the ... or part of RBS which was regulated in the UK. But it also would ... UBIL which you're interested in, which was not an important distinction at the time for us ... UBIL was just a small part of the ... part of a big group. We didn't ... I never recall making that distinction at all because I just worked for the group. But ... we got the 2007 ones then under the new Basel II ICAAP process ... emanated from London or from Edinburgh actually. And I spent some time recently trying to-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I suppose in the limited time ... I suppose the question-----

Mr. Pat McArdle:

Yes-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The level of stress testing that each of the banks were doing ... was it greater than the requirement of the regulator at the time, do you believe? Yes or no, Mr. McArdle?

Mr. Pat McArdle:

No ... no, sorry, Deputy. I'm not going to say "Yes or "No". It was equal to what the regulator demanded-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Fine. And Mr. Beggs?

Mr. John Beggs:

Yes. We were simply carrying out the regulatory stress tests as required. As I said, when we got ... later on ... there were more ad hocstresses done.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And Mr. McLaughlin?

Dr. Dan McLaughlin:

I think, basically, to be clear, the Central Bank set stress tests initially, which I wasn't particularly involved in at all. But ... then later on as a requirement of the Basel changes, the banks themselves had to do stress tests. I think those at the time, in my view, were adequate for Bank of Ireland.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay-----

Mr. Pat McArdle:

Sorry, Chairman. Can I finish my point though? I just want to quickly, very briefly say the 2007 ... that's why we applied the model. We had tremendous difficulty in doing it ... we ended up with maybe 100 variables, not five or six. We got a result and I gave you the result today in my thing ... and I just want to draw your attention to it ... to show you the type of result we got. And we got a 36% fall in house prices, which was pretty good actually.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I just go back and ... Mr. McArdle, you made reference to groupthink. And ... in late 2006, Morgan Kelly wrote a piece in The Irish Timesthat there would be a 50% fall in house prices. Subsequent to that, right ... the AIB, Mr. Beggs around the same time, it's on page 49 of ore documents - Bank Economists. From the unit of which you were head of and you said: ''The Irish Housing Market - They think it's all over ... but it's not''. Mr. McArdle, on page 55 ... you wrote that ... Mr. ... it was from an Irish Timespiece and I quote:

Mr McArdle says he remained confident of a soft landing in the house market. He expects that the "modest fall" in house prices seen recently will continue for the rest of the year.

And Mr. McLaughlin, if I draw you very quickly to page 63, you gave a radio interview on 5 June 2007 ... Mr. McArdle, your piece was on 14 July 2007 ... Mr. McLaughlin, you basically stated that ... you said: ''Mr. McLaughlin said it was "completely ridiculous" to suggest that "suddenly in 2008 that the economy would fall off a cliff''. And you ... prior to that in January, you wrote a similar piece where you did ... it was in finfactsand you ... you basically ... more or less the same thing again, right. And there was one final thing then. On page 77 ... it's in January 2007 a extract from a transcript of a Bank of Ireland business banking debate. Interestingly, you said that:

Some things we're fairly sure are going to happen. United will still be dominant in [the] world football. Christiano Renaldo will be the number one player in the world. But other things are....

more than likely to happen. You said that in five year's time. Well, United are no longer the dominant in world soccer-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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... last night who's No. 1-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Right and ... how do you reconcile that when you had Morgan Kelly coming out saying there would be a 50% fall in price that ... prior to that, Mr. Beggs and a couple of months after, Mr. McArdle, Mr. McLaughlin and Mr. McArdle, you both stated that we would have a soft landing.

Dr. Dan McLaughlin:

I don't think I ever used the term ''soft landing'' but that's another issue-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You were saying in fairness in 5 June 200-----

Dr. Dan McLaughlin:

Sorry, I'm not debating the general point. I'm just saying I never liked that term-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well ... well, how do you reconcile it was completely ridiculous to suggest-----

Dr. Dan McLaughlin:

Sure, I'm not disputing your general point-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well, I'm reading it from the transcript-----

Dr. Dan McLaughlin:

That's fromfinfacts. I think they are two separate issues though. If you ... I-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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With due respect, Mr. McLaughlin-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Give him a chance.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I just want to put it in context -----

Dr. Dan McLoughlin:

Yes -----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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€20 billion of taxpayers money we'll say ... in terms of Bank of Ireland ... €5 billion gross went into ... of taxpayers money ended up going into Bank of Ireland-----

Dr. Dan McLaughlin:

And that's to do with those forecasts, is it?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No, it's to do with ... but saying that -----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy O'Donnell, I need to allow the witness to respond-----

Dr. Dan McLaughlin:

I was going to answer the question but there are two separate issues. You're asking me, No. 1, about an article by a UCD economist-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes -----

Dr. Dan McLaughlin:

Right. No. 2, you're asking me about our forecasts. To put it in context, obviously the forecasts were wrong. But the economy had grown by 5.7% in 2007 ... 5.7%. In the first quarter of 2008, the general consensus view ... that Central ... I produced a forecast saying 2008 the economy will grow at 3% in March. That was exactly the same as the Central Bank's view. Okay? The consensus ... the forecasts that the bank economists were coming out with weren't particularly different from the consensus, which ... you know I think-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was there groupthink?

Dr. Dan McLaughlin:

-----in time ... in time people portrayed that to be the ... not to be the case ... and that's complete nonsense. The facts are there. Obviously, I was wrong. I have no problem in admitting that, clearly, in retrospect, the economy did fall apart but not until the final three months of 2008. That's a fact. GDP fell 0.3% in Q1, 0.5% in Q2, it went up 1.2% in Q3. If you look back now at the data, you won't find those numbers because it's all been revised but at the time, which is the point I was making in my ... in my presentation ... we've got to be careful to be aware of what was said at the exact time. And the economy contracted 7.1% in the final three months of 2008 ... 7.1%. That's never happened in the history of the world. And it happened in the final months of 2008. That's why everybody got it wrong. You look at the OECD or the IMF or the ESRI's medium-term forecast in the summer of 2008, what were they saying? They weren't saying anything different. We all got it wrong. I got it wrong, absolutely. Your point about the UCD economist, it was a view at the time and-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Which proved to be correct-----

Dr. Dan McLaughlin:

Absolutely but there's ... how many forecasts are out on the Irish economy right at this moment? The consensus ... the consensus------

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. McLaughlin, was there groupthink? Was there groupthink amongst the banks? Because I don't see any great difference between what the economists have said here.

Dr. Dan McLaughlin:

People were looking at what was happening. You can only look at the data. If the economy grows at 5.7%, it would be kind of odd to come out and say, "Actually, it's going to grow at -5%", because that would require an absolute enormous change. Now as it happened, there was an enormous change. If you're ... the consensus view at the time was obviously wrong. I shared that ... clearly I am ... I was wrong ... and the consensus view was wrong.

The ... the other issue you are referring to ... Morgan Kelly-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes-----

Dr. Dan McLaughlin:

It was just another view at the time ... and obviously now people look back and say he said something ten years ago which has proven to be correct, but how many people wrote in 2007 that oil prices were going to go to $200? Nobody mentions them now. That was wrong ... how many people-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But, with due respect, Mr. McLaughlin, it was against the backdrop of nearly 90,000 units being built in 2006, With due respect was it not built in quicksand of the property structure in Ireland?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'll ask you to ask the question.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was it not built in quicksand? Your forecasts were built significantly around construction in Ireland.

Dr. Dan McLaughlin:

No, it wasn't. If you look at ... if you look at what I actually wrote - it's very clear I said in 2007 the housing market was slowing down. I forecast in early 2008 a significant fall in house price completions, which was actually correct. It dropped to 50,000. My mistake, in terms of the housing market, was to say that the correction would be in real house prices, not nominal house prices, because we hadn't had a fall ... a huge fall in nominal house prices. Morgan Kelly's prediction was actually in real house prices as well, and all the analysis that people refer to are real house prices, not nominal. So, in 2007, I and most other economists in Ireland could clearly see the housing market was slowing down. What we ... what I didn't see was the fact that it would collapse the way it did, but I would argue, and this is where people may differ, I would argue that the liquidity collapse that happened in ... at the end of 2008 was a significant factor. Now some other ... some people disagree with that but it seems to me very difficult to sustain the view-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In such limited time, I mean was there not a solvency issue as well, with due respect, Mr. McLaughlin, at the time in the banks?

Dr. Dan McLaughlin:

Well, why did Merrill Lynch, when it was asked by the authorities in a ... their analysis was published in a redacted form, why did they suggest that AIB and Bank of Ireland, or a combination of them, could take over some of the other banks? Obviously the view was at that time there wasn't a solvency issue and it's a moot point as to whether the solvency issue would have developed the way it did, had not the liquidity dried up completely.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Beggs and Mr. McArdle, in the limited time I have.

Mr. John Beggs:

Well, I would say in relation to the AIB research report that you're quoting here, "They think it's all over ... but it's not", I sort of knew I'd regret that title because really what we meant there was, this was about us. In April 2006, in another report that's referenced in these documents, we were saying there were lots of risks there, there were a lot of parts going wrong, things needed to slow down if we were going to have sustainability. Come October, the market continues to grow. Now there were some further deteriorations in affordability, which we note in the report, but, unfortunately, we were struggling with this market to understand what was happening. You referenced the 93,000 houses. Our analysis was all about why do you need so many houses? We tried to understand what the key drivers were-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In due respect, I've limited time. Why did you say there would be a soft landing?

Mr. John Beggs:

Because I believed at the time that it was possible that that could happen, but that was without knowing that we were going to have a global economic crisis in, in mid-2008. And by the way-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And very quickly, and your view on Morgan Kelly's piece?

Mr. John Beggs:

Morgan Kelly, as Mr. McLaughlin has said, Morgan Kelly said Irish house prices could fall by 50%. It was a view.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Which turned out to be correct. Mr. McArdle, can you give me your view? Why did you, on the 14 July '07, on page 55 of the document here, say that there would be ... remain confident of a soft landing next year?

Mr. Pat McArdle:

Because I believed it is the short answer. Many questions you asked there was the-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why did you believe it?

Mr. Pat McArdle:

Because it was the sensible, obvious thing to believe.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why?

Mr. Pat McArdle:

Well, first of all, I would agree with you there was groupthink; 99% of the people in the world believed in a soft landing. So you had one, maybe two, people saying differently. They were the odd ones out, not us, right? Of course, it looks different now with ... in retrospect because it happened -----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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We all go over the ... sorry go on.

Mr. Pat McArdle:

What happened ... they turned out we had a major crash for the reasons Dan McLaughlin outlined to you earlier, which are multiplicative and I won't go into them again. But I would say to you, we ... I predicted in '04, as I said earlier today, a 20% fall in house prices nominal, which is about 35% real a couple of years earlier. I told you earlier also what my definition of a "soft landing" was. It's a phrase I've grown to dislike as well by the way, but I used it a lot, unlike some of the others-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I'm not surprised, yes.

Mr. Pat McArdle:

It wasn't ... it wasn't that comfortable a thing. So a soft landing was not what a lot of people seemed to think it was, everything would go smoothly ever after. And the final thing I'd say to you is: we stress tested for a 56% fall in real ... prices, which was more than even Morgan Kelly said. So, although I disagreed with him, we actually stress tested for it. The problem was not house prices. The warnings were in the wrong space.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I ... final question for the three of you. What was your assessment on the night of the guarantee - and just following up from Mr. McLaughlin's - on the solvency ... the liquidity and the solvency situation for your individual banks? And what would have been your interaction with top management in your own institutions? Mr. McLaughlin.

Dr. Dan McLaughlin:

I wasn't involved at all in the ... anything to do with the night of the guarantee. I had an office in the dealing room and it was pretty clear in the months running up to September that liquidity was becoming an issue for everybody, but that particular week after Lehman's, you know, the sky fell in. If you were sitting in a ... if you were sitting in a dealing room, there was ... there was ... you know ... you know, people probably don't have the experience of this, but if you're sitting in a dealing room where ... there was rumours flying around all the time that, you know, Bear Stearns had gone under ... not just ... rumours about all the major international banks because, obviously, all the banks would be dealing with each other. So there would be a rumour that such and such a bank had a liquidity issue, and it becomes self-fulfilling. So it was in that context at that time ... it was a very, very difficult time for markets and they were completely seizing up. So the first I knew of the guarantee was actually the next morning. I was actually on my way up to Dundalk to do a presentation and I heard it on the car radio. At the-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well, I suppose, in the limited time, what was your view in terms of liquidity and solvency of Bank ... of Bank of Ireland?

Dr. Dan McLaughlin:

I would have thought ... no, I didn't think there was any issue with the solvency at the time, no.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Liquidity, obviously?

Dr. Dan McLaughlin:

Not to the ... well, I wasn't too closely involved in it, but I never got the impression that it was a pressing issue at that specific time. Obviously, the bank had sought to turn out its funding, so I didn't think there was a ... liquidity was stressed in the market but I didn't think it was a specific issue for Bank of Ireland at that time.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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AIB, Mr. Beggs? Both liquidity and solvency?

Mr. John Beggs:

Well, I had ... I had no interaction with the ... with the people involved on the night of the guarantee. I woke up to it the next morning. I would agree with what other AIB people have said, who know more than I do about the bank's position, that it was solvent. Obviously, the liquidity issue had become a bigger problem in the run-up to the guarantee. The nervousness in the market-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You had no issue with solvency with AIB?

Mr. John Beggs:

Well, I've no information to agree or disagree, but I take ... I accept what others have said about our solvency on the night of the guarantee.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. McArdle?

Mr. Pat McArdle:

I heard about it on the radio too. I had no interaction with the management in Ulster Bank about it. For my view on it, I would have agreed with ... I would have taken the view that if I were Government, I ask the experts what the situation is. There's no point in me giving an opinion on that. But, for what it's worth, the regulator told an Oireachtas committee on 14 October that all banks were solvent, so I would probably have believed that at that stage.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, finally, the modelling that ye had in terms of forecasting, where were they deficient and what would you have done differently if you were back there again, Mr. McLaughlin, just very quickly?

Dr. Dan McLaughlin:

I would have taken on board a little bit more, in early '08, the funding stresses that were beginning to appear. I didn't think, obviously, it would lead to the essential collapse of the credit markets for about nine months. In terms of the medium-term forecast, the bank used the ESRI forecast, so my forecasts were just for a year or 18 months. I didn't envisage that the global credit markets would collapse the way they did. I regret now, obviously, that my forecast didn't reflect ... I think, if you look at some of the stuff I wrote, I was flagging some downside risk but I didn't think it would be as bad as it was.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Beggs?

Mr. John Beggs:

I'm not sure that things would be very different. I think, obviously, the funding ... the funding requirement of banks is an issue that probably should have been given more attention. I'm of the opinion that that funding would not have been available to the Irish financial sector unless external analysts and economists actually had a positive view about Ireland.

They weren't just taking their cue from what Irish banks were saying. And I think we need to be a lot more critical and sceptical about ... about trends, particularly when there is a trend in place as to how this is going to work itself out. And that is true of the soft landing issue. We never envisaged soft landing to be soft, there was a certain amount of friction going to happen in a soft landing and the soft landing we are talking about was only house prices. We had no information or very little information about what was happening in commercial property. We've done a lot of talking and analysis around housing because we had monthly statistics, we had population. When it came to the commercial side, we didn't have that information. So we were acting in a very, almost naive way in that we didn't have full information. So more information around the sector as a whole and property as a whole, not just mortgages, would make a big difference in the future.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Now, Mr. McArdle. Chairman, I want Mr. McArdle to-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, very briefly please because you are way over time, Deputy, and we're still missing some questions.

Mr. Pat McArdle:

Deputy, you used the term "model"-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I was waiting, Chairman.

Mr. Pat McArdle:

-----you used the term "model". I need to distinguish ... we also used the ESRI, which is the ... has the only model in Ireland, as far as I am aware, and for the record, as you were told by Professor FitzGerald, it's been revamped now or updated or whatever. So that is the answer on that side, as far as I am concerned. For the short term, you use what is in your head or, perhaps more appropriately, your gut. You really forecast with your gut, and what I would bring to the party now that I ... that I hadn't before is experience ... experience of where things can go wrong.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, gentlemen and Chair, what I'd like to do is to present two quotes that take a little time, but then give as much time as necessary to the witnesses. So the first quote, gentlemen, I don't expect you to be familiar with this, but the Oxford University Press published an extended article in 1999 by a Peter Englund from the Stockholm School of Economics. The article is called "The Swedish Banking Crisis: Roots and Consequences". And he relied extensively on a paper that was done for the IMF the year before by two analysts. One is a director of research at the World Bank, for the record, Asli Demirgüç-Kunt and Enrica Detragiache. And Professor Englund sums up what they found, and I want to read what he says and just ... you'll be able to take note in your head, it's not very complicated. So to quote:

[This paper] identifies 30 major banking crises from the early 1980s and onwards. Most of these are in developing countries, the main exceptions being three of the Nordic countries (Norway, Finland, and Sweden) in the late 1980s and early 1990s. The majority of these crises appear to have followed a common pattern. They have (i) been initiated by deregulatory measures, which have (ii) led to overly rapid credit expansion. This has in turn been followed by (iii) a sustained increase in asset prices, apparently unwarranted by fundamentals (a ‘bubble’). At some point (iv) the bubble has burst, with a dramatic fall in prices and disruption of asset markets (in particular for real estate) and widespread bankruptcies. This has been accompanied by (v) non-performing loans, credit losses, and an acute banking crisis, in many cases intertwined with (vi) a currency crisis. Finally, (vii), a weakened banking sector has inflicted a credit crunch on the private sector, the severity of which has depended on (viii) the government measures taken to salvage the ailing banks.

The point I will put to you, and ask for your comment in a minute gentlemen, after the next quote is, apart from the currency crisis, if those eight factors-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sorry there is a phone interruption there ... on top of your ... it might be coming quite close by to you. Continue, please.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----if those eerily prefigure the Irish crisis that we have come through.

My second quote is from a witness before this inquiry, gentlemen, a former bank economist and commentator, David McWilliams. I noticed none of you mentioned Mr. McWilliams in your introductory remarks, you did mention Professor Kelly. Let me quote from the evidence David McWilliams gave to this inquiry. He said:

I just want to make some opening remarks about the period in question, starting with 2000 and going up to 2008 and beyond. [I'll just skip a little bit and then continue] In fact, I probably spent the best part of a decade trying to warn as many people as possible on as many platforms as possible that our property market was going to crash and that when it did, our banking system would be in a situation where money would fly out of the system and lead to a banking crisis. [...] I made documentaries about this. I had [my own] TV show [on TV3]. [...] I warned people at every juncture that our housing market was a credit bubble and credit bubbles bust and it is not a matter of if they bust but when they bust. [...] When I hear the view that nobody saw this coming or that this was in some way a shock or we were taken by surprise, I do not believe that is the case. I think the Irish property crash and the banking crash were both incredibly predictable and absolutely preventable.

And Mr. McWilliams then refers to a "Prime Time" interview he did in October of 2003 which he says was watched by 400,000 people. And in that he said, and I quote:

The Irish housing market is a scam. It is an enormous financial swindle that could potentially confine an entire generation of young Irish workers to years of bad debt. Far from being a reflection of economic vitality and fundamental demand the housing bubble is, in the main, a vacuous financial confidence trick that has been foisted upon us by an alliance of banks and the landowners.

Today, in Ireland, the price of the average house is close to ten times the average wage. This represents an economic failure on a monumental scale. Behind this nonsense is excessive and irresponsible lending from our financial institutions. The situation would be laughable if it were not so serious.

Gentlemen, could I ask you to reflect on the two quotes, one from 1998 and then one from Mr. McWilliams some time ago and to give me your reaction? Why did you not understand these basics, that these other economists did?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. McLaughlin.

Dr. Dan McLaughlin:

I'm not familiar with that paper but the fact that there were previous banking or property crises, of course I was familiar with those. Most of the crises occurred in high inflation periods where the price falls were significant falls in real house prices not in normal prices. I would argue, and I said in my opening statement, that I think you can explain a lot of what happened in the Irish residential property market up to around 2005 in fundamental terms. There's not many economies in the western world that have an 18% rise in their population in ten years, so obviously there was a massive increase in demand for housing. There's not many economies that grew by 9% per annum between 1994 and 2000. There's not many economies that grew 5.5% between 2000 and 2007. So we're talking at a time when employment was rising very rapidly, population was growing very strongly so I think ... and they other thing I think which one should bare in mind which is ... I think pretty obvious, but most people don't seem to think it has any relevance, is that Ireland joined the euro. And we went from a relatively high interest rate economy to a very low interest rate economy. Sweden didn't do that or any of those other countries didn't do that so anyone who looked at any economic analysis or any theory of finance would suggest that if you ... if your average interest rate is 7% or 8% and it becomes 3%, asset prices will rise. So all of those factors should be taken into account.

I think if you look at the Central Bank's quarterly survey of credit standards, which is done by the ECB all through Europe but the Irish Central Bank publishes the Irish one. It's only in 2005 that you get credit standards loosening, I think. Then I think it becomes much more credit driven. So the last ... '05, '06, particularly '07, I think were not driven by fundamentals. I think there was more of a credit driven element to it. This committee, over the last few days, has been discussing for example the introduction of 100% mortgages for first-time buyers which, if I recall, I think it was in 2005. So I think it is only over the last two or three years of the boom that we can say there was a bubble element came in. But also, in 2007, most people, including myself, were saying the housing market would slow down. Okay we weren't saying it was going to crash, but we were saying it was going to slow down. You look at all the forecasts that were produced, everyone thought that house completions would fall. By the way, is there a shortage of housing now?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Sorry, was that a question to me?

Dr. Dan McLaughlin:

It was rhetorical. So people say there were far too many houses built, but can there be a shortage now if that were the case? So that's basically what I would like to say.

Mr. John Beggs:

Well, first of all, in relation to Sweden, clearly this was a relatively recent event that had occurred in Sweden. If I am not wrong, the factor that led to that bubble bursting was German unification and the impact of the currency markets and what that meant for Sweden's fixed exchange rate. There is always some factor that eventually leads to these. In the case of the Irish crisis, it was a global crisis. The European Commission produced some report in 2009 that said, and it actually referenced local shocks and problems, banking crises and mentioned Sweden, but it said this time it is different. This is a much more significant crisis. That only sort of explains why the Irish one is a much more significant crisis than maybe one that was managed in Sweden.

I reference in my written statement under the issue of the role of advisors in analysing the crisis and I said:

Against the backdrop of so much data and analysis, it would be difficult to argue that there was not a build up of interrelated risks and uncertainties in the Irish economy and banking system. After all, notwithstanding the belief in our economic fundamentals going back to the 1990s, the build up to the Irish banking crisis had previously occurred in varying degrees and circumstances in other advanced countries.

So I would say we had ample warning through the period. I referenced OECD reports, IMF reports, that the Irish property market was overvalued. Econometric studies that were saying we were 70% overvalued and then of course they were then pared back by other studies that said no we're not, which led Morgan Kelly to say "By the way, all those previous studies didn't take a long enough view of the timeframe for these analyses", and he came to the conclusion that we were 50%, 60% overvalued, and we would potentially have a fall of that magnitude.

So warning signs were there about what had happened in other countries. I would agree that in the period from probably 2004, I would say, or 2005 to 2007, lending policies ... lending was too rapid. It seems from what I have heard from other witnesses before this committee that maintaining market share, growing market share, seemed to be a more important driver of why credit was growing than there being, if you like, underlying sound reasons for the expansion. I agree with you that house prices were too high.

They were too high from a very, very early stage in this recovery, making it more difficult for people to buy houses. In our reports we have ... I referenced this ... showing the impact of rising house prices, rising interest rates on affordability. By 2006, affordability had deteriorated to its worst levels in ten years and that was only after financial institutions had provided 100% mortgages, 35 to 40-year loans, you know, trackers, whatever ... all the means they could to make it affordable for people to still buy houses. And at the same time they were providing finance for property developers where there was, obviously, rampant inflation going on, on that side. So, we were building up a problem, and the question is ... absenting the global economic crisis from mid-2008, how would we have managed that? That's the, if you like, the counterfactual that can't be ... well, we could think about it, but we haven't really figured out or thought about what might have happened to the Irish property market in the absence of that global shock. But it did happen and we are in this situation now. So, I think the warnings ... warnings are there, even in our own research, we had sufficient warnings, that people in, you know, risk management, credit management, should've been saying, "Yes, okay, I hear you still think there's going to be a soft landing, but, you know, I'm going to be more sceptical than that about it."

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. McArdle?

Mr. Pat McArdle:

We will always have contrarians, first of all. There always have been, there always will. Nobody's listening to the contrarians now, as I pointed out earlier, to the IFAC people, for example. Nobody listened, by the way, to Morgan Kelly's other six warnings which turned out to be wrong and ... very aesthetic and condemned them very strongly, if I remember correctly. So that's the first point, you'll always have contrarians. I quote you then in my witness statement at page 8, where I quote Professor Honohan to a Dáil committee in June 2010, where he said, "regulators should always pay attention to [contrarians] with coherent but not necessarily right views". He went on to say "Contrarians are nearly always wrong but it is the "nearly" that matters". So, here you're operating on a very small probability - it's the nearly that matters - and more attention was not paid to those two studies, you say, because warnings like that are nearly always wrong, in the words of Professor Honohan. I accept that it looks different now when you look back, but I would suggest to you, Deputy, that you got to put yourself in the mindframe that existed at the time.

The other thing I'd say, as regards your quote from the IMF, when it counted and where it mattered, the IMF said there'd be soft landing here. There's a rake of papers from the IMF every second week. They're not actually ... they're by individuals ... under the signatures of individual ... not the IMF imprimatur. So when it mattered here, the IMF and the OECD and the Central Bank said, "There will be a soft landing". They discounted that paper that you referred to. And I could quote you other examples, by the way, from other studies that came to different conclusions. There were, you know ... there were quite a number of other studies there too, given the ... and, indeed, I also say in my witness statement, the Central Bank reran Professor Kelly's analysis and data and they came to a totally different conclusion. So who are we to believe the Central Bank, with all their expertise and resources, or this one guy who had never been in this field and suddenly moved into it?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. Mr. McLaughlin, I should say to you in relation to your question, rhetorical or not, that as a member of the inquiry, I'm not allowed to pronounce on my critique of the shortcomings or otherwise of the capitalist economy and the production of ... the necessities of life for our people. But-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That, Joe, is confined to the membership of the committee when we go to the final proceedings. Thank you very much.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But ... gentlemen, rather than put contrarians into a box, as you've just done now, Mr. McArdle, I would suggest perhaps ... that's what I take from what you said ... that we look at the substance of what was being said. And, could I put it to you, you know, learned gentlemen and experienced economists, but a child socialist with a very basic knowledge of some of the fundamentals of Marxism, would know that prices cannot defy the economic law of gravity, especially if they are driven into the stratosphere by endless credit and other factors.

And could I ask you in relation to, Mr. Morgan Kelly came, I think one of you suggested perhaps, late, but in an article of great perspicacity, it was almost 40 housing booms he had analysed, and could I just put it back to you, that really economists, bankers and everybody else, should have known, and again-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I must push you now, Deputy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, okay. One person you couldn't have failed to see, or hear, during the ten years of the bubble, was Mr. McWilliams. None of you commented on that. The substance of the quotes I gave, is that or is that not very accurate assessment of what actually happened?

Mr. John Beggs:

You made reference to Mr. McWilliams talking about the high price of housing, or he may have described it in other terms, but essentially I agreed with the point that house prices were extremely high, had become and were increasingly becoming unaffordable for a growing number of people, which is where this housing market in late, in 2006, was headed. I mean I do reference this in my statement, that we were running out of road when it comes to housing, that the affordability issue was reaching critical points whereby when you stress test people's incomes and their ability to afford to buy a house, that we were running at a point where fewer and fewer people would actually be able to meet those criteria, and that, may I say, was against a backdrop where, of extremely expensive average houses. I mean, I take the view and my comment, my written statement, I dismiss econometric evidence around house prices as being, you know, just that. But I base my view about the housing market on my own personal experience of my own children in the housing market in 2004, 2005 and 2006, and the extremely high prices that they had to pay for average properties. And, I'm thinking to myself, you know, how is this going to continue? What way are we going to manage a business, a sustainable business, if house prices are of this level? It's all right, you know, offering more and more better terms so that people can afford to buy it, but at the end of the day they are being pushed out to 40-year mortgages with, you know, interest-only or whatever. This was, actually, running out of steam long before Morgan Kelly pronounced, in my opinion, and our reports, notwithstanding some of the titles we put on some of our reports, and our view that "we hope for an equilibrium", or "we hope for a soft landing". The evidence is in the reports, and I did actually supply the committee with the full text of our April '06 report, because they've only given a finfactssummary of it here, but it does contain, as I said, the evidence that things were becoming untenable.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Gentlemen, briefly, did any of the other two gentlemen, did any of you take any serious notice of what David McWilliams was writing about from 2000 onwards?

Dr. Dan McLaughlin:

It was just another view. I mean, as I said before, to go back and pick out papers that were written ten or 15 years ago, you can pick out papers that were written ten or 15 years ago that were wrong all the time, so it's just another view. I'm looking at something, I ... the notion that nobody thought that, everybody thought the housing market would go on forever, is completely wrong. It's absolutely, completely wrong. Of course, not many people thought it would collapse the way it did but in January 2007, I'm even looking at something I wrote myself, "the most likely outturn for the market is therefore a period of flat or only modest price growth ... until affordability is restored" - that's January 2007. So the notion that everyone was saying it was going to go up 10% per annum is just not true. The other thing I would point out is the major losses for the Irish banks were not in residential property, they were in commercial property ... in commercial property. Not many people, if I recall, wrote anything about commercial property, and that was what caused the damage for Irish banks' profitability and caused them to require significant capital inflow ... injection from the State, not residential property.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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We've had substantial evidence here in relation to that, Mr. McLaughlin, which bears out what you're saying. All the evidence that was given is the commercial lending and so on was huge. Just a last question to you three gentlemen. You covered property and construction in a number of your reviews. Was the level of risk concentration apparent to you at the time, as it occurred, or did you recommend any action or have any discussion internally in relation to the concentration of risk?

Mr. John Beggs:

I ... I wasn't aware of the concentration of risk until I ... until evidence was either provided before this committee or set out in whatever presentations the bank would make in relation to its annual results, but obviously they didn't ... there were concentrations in terms of the ... the property buckets and the type of investments they were making, whether it was residential investment, commercial development. AIB, and I can only speak about AIB, and what they said about that, that they considered that to be a well-diversified portfolio. In that regard I would say that what all property has in common, whether you segment it into all sorts of ... whether you do residential or commercial or whatever, it has expectations of confidence as a ... as a cornerstone of it all, so if that falters at a national level, all of these components or this diversification, just folds into one ... one bucket of ... of risk.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. McArdle?

Mr. Pat McArdle:

Sorry, my job in Ulster Bank was to do short-term forecasts, these high-frequency ones we discussed earlier and go out and have a high media profile. I was never aware of the Ulster Bank risk concentrations. I never made any recommendations about them and I don't think anyone ever discussed them with me either.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Thank you. Mr. McLaughlin?

Dr. Dan McLaughlin:

I don't ... nobody ever discussed risk concentration with me. I would just make one point about ... or two points, briefly. One, Bank of Ireland had 45% to 50% of its loans in residential mortgages, of which about half were in the UK, so ... and a lot of other lending was in the UK as well, so I think there was a view that that offered diversification. I think what happened for all of the banks, in 2008, 2009, was that having commercial property in different jurisdictions didn't prove a very good risk diversification strategy, because in a crisis, unfortunately the correlations collapsed to one. In other words, they all collapsed together, and that is a rare phenomenon but that's what happened.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you very much, and I now propose that we break until 5.25 p.m., to resume then. Before I do that, however, though, I wish to advise the witnesses, and to remind them that once they begin giving evidence, their evidence, they should not confer with any person other than their legal team in relation to evidence or matters that have been discussed before this committee. With that in mind I now suspend the meeting until 5.25 p.m. and remind the witnesses that they are still under oath. Is that agreed? Agreed. Thank you.

Sitting suspended at 5.08 p.m. and resumed at 5.29 p.m.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, so can I propose that we go back into public sessions, is that agreed? Agreed. Okay, just one item there ... and can I address this to Mr. Beggs before we continue. Just to clear up some matter on the earlier document that I asked to be displayed there. It's that presentation we discussed earlier this afternoon, Mr. Beggs. It refers to you as John Beggs, chief economist, AIB Group. Could you just clarify that, because you were saying that you were in the treasury group and so forth?

Mr. John Beggs:

Yes. There are many occasions in my career when I've been described as the chief economist of AIB and people putting together slides do this, and, to be honest with you, sometimes I just didn't pick up on them, but my role - and where I could I always clarified it because it was important to the bank that I was only pursuing the role that I had and not assuming another role that the bank hadn't assigned to me. So that's ... that's an error.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You didn't write that slide so?

Mr. John Beggs:

I can't say that I did or didn't, but it's an error.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, thank you. Deputy Michael McGrath, you've ten minutes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you, Chair, you're very welcome. gentlemen. If I can start by maybe just trying to get a ... a thorough understanding of how your respective positions sat within the organisation, and we have some details from the statements that each of you made in advance. Mr. Beggs, first of all, so you were chief economist at global treasury in AIB. You headed up the economic research unit?

Mr. John Beggs:

I did.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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How many people would that have had, typically?

Mr. John Beggs:

There were three other economists working with me in the unit, so it was a unit of four people.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Three other economists, okay. And you reported to the head of?

Mr. John Beggs:

I reported to the head of wholesale treasury, who reported to the head of treasury, because treasury had wholesale and corporate and commercial treasury.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And then the head of treasury reported to?

Mr. John Beggs:

The head of capital markets.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The head of capital markets. Okay. And, Mr. McLaughlin, who did you report to?

Dr. Dan McLaughlin:

Well, I was based in what was originally called the treasury and international banking bit of global market ... sorry Bank of Ireland, which became known as global markets. I reported to the head of global markets.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And who did the head of global markets report to?

Dr. Dan McLaughlin:

He reported to the head of the wholesale bank.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, and then you were in charge of, again, the bank's economic research unit. How many economists, how many staff typically were in that unit?

Dr. Dan McLaughlin:

There was two other people with me.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Two other people, okay. And Mr. McArdle ... it's not ... I don't see ... who did you report to and what unit?

Mr. Pat McArdle:

Yes, similar. By the end there was four, a unit of four. For much of the earlier time there was only two, I think, right. So we beefed it up towards the last few years in the knowledge that I would be leaving. Who did I report to? Maybe, rather than give you a misleading ... I can answer that technically and you might get a misleading impression from it. Economists ... as far as I'm concerned the economists in Ulster Bank were in a bubble, which was ... like, out there, right. So who we reported to didn't really matter much ... it was ... the work we were doing was ... diverged from the rest of the bank, and it was used as a utility player and I told you I was external in my focus with some internal demands that had to be satisfied. I initially reported to the chief executive of markets, to his successor, then there was an interregnum period of a year and I reported direct to Cormac McCarthy, the CEO, for a year, then to Robert Gallagher briefly and then to one of Robert Gallagher's reports who ... I have forgotten his exact title.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, and when you say your unit, was that an economic research unit as well?

Mr. Pat McArdle:

Yes, by the end, I had an economic research unit - one senior economist in Northern Ireland covering the Northern Ireland economy; one senior economist in treasury doing what the treasury people do, which Mr. Beggs referred to; and myself and a junior in the centre, looking mostly at the Irish economy.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, and would it be fair to characterise the work that each of you did as focusing on the backdrop within which the bank was operating, so looking at the economic assumptions, within the external environment? You weren't involved in the bank's strategy or the bank's business model, that it was looking at the broader economic picture within which the bank was operating. Is that ... is that essentially what the work involved, rather than looking at, you know, the bank's strategy?

Mr. Pat McArdle:

I'll take this since I have the mic. Yes, that probably is a correct categorisation in the sense that my job was external so about 70% of my time was spent doing things outside of the bank altogether. To the extent that I interacted in the bank, I provided for the ... you know ... copious briefings of various ... organise ... various committees and even the board, and occasional inputs into some medium-term planning, for which I used mainly the ESRI forecasts, right. So, I wasn't involved in determining the bank's strategy. I wasn't at that level, and I ... you know, it wouldn't really have ... seen it as my function.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes, I suppose in terms of perception, you know, each of you would have been, in many respects, the public face of the bank ... would have had a higher profile than the bank's CEO. But from what I am hearing today, and from your statements, you didn't really have any input into the running of the bank in the sense of strategic decisions the bank was making, its business model, its strategy, which was set by the board, presumably.

Mr. Pat McArdle:

I think I said in my witness statement that I did not have a decision-making role. Maybe that's the best way to put it to you.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes, yes, okay. And a number of you said already that you weren't asked your opinion on the concentration of risk, the dependence on, you know, the property and construction sector. Is that a fair statement, that you were never involved in those type of discussions, that, you know, the bank were putting a lot of eggs in one basket here, "As an economist I see a risk"? Would you have had a forum to do that or was that really outside of your mandate? And, feel free, anyone, to take that.

Mr. John Beggs:

Well, I can say in relation to property concentration, I was never consulted about the way in which AIB divided up its property concentration between investment and development, and I'm not ... I'm not sure as to what, in fact, I could have added to it, because most of the research we were doing was based on official, published figures. I mean, our research never utilised AIB banking statistics in any of the reports that we published. They were all official CSO or either Central Bank data. So it wasn't an area that we ever really went into. Most of my time-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. John Beggs:

-----similar with Mr. McArdle, it was spent, effectively, on the road talking to the corporate and commercial customers of the bank. I'd say 75% of my time was engaged in interest rate or exchange rate forecasting or talking about specific issues for individual customers.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. John Beggs:

The internal bank involvement was, I said, when they asked for it or there was a regular ... some things were regular, like stress testing was a regular thing that I did. But everything else was just simply on demand and I didn't determine what it was. I didn't have any customer base. So we produced, you know, comments or maybe presentations. We did plenty of presentations to the retail bank at their request. The information was taken from us and then they made use of it or-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. John Beggs:

-----otherwise, as they saw fit.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I think, I suppose, Mr. Beggs, staying with you, it would surprise a lot of people to hear that you, as somebody who was very prominent, certainly in the public eye, and the most senior economist within the bank, in the course of 20 years, made two presentations to the board, two to the executive committee and none to the management committee for Republic of Ireland. I think it's important that the inquiry understands your role, all of you, because there certainly would be a perception that the economists would have been looking at the ... you know, the risks that the banks were facing and perhaps giving guidance and advice to the banks on strategy. That's not what I'm getting from listening to you today or listening to your statements.

Mr. Pat McArdle:

Well, there's two roles that a bank economist can have, I call it internal or external.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Pat McArdle:

In RBS, which is our parent, for example, they had a group of economists in Edinburgh, much more resources than we had, and they had an internal role and it did precisely what you're thinking about. They had about 20 sectors, which they graded red, amber or green. So they were clearly integrated into the business unit. Now, it was decided in Ulster Bank that I should be external, and we did not have the resources to do both.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The bank guarantee ... and I fully understand none of you were involved in any shape or form, but presumably you have an opinion. With the information that was available at the time, have you a quick comment, each of you, on the decision to guarantee all six banks?

Dr. Dan McLaughlin:

It seems clear to me that from the available information on the public record that most people thought it was a liquidity issue. I can't add any ... I wasn't involved-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Dr. Dan McLaughlin:

-----in it other than that. I do think, probably, the ... what was included in the guarantee is probably a little bit puzzling because, you know, in general, most people would be aware that subordinated debt would be seen as, you know, higher risk, and obviously has a much higher interest rate to compensate, so the fact that that was included is probably surprising in retrospect, but that's my only comment.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Mr. Beggs?

Mr. John Beggs:

Well, my initial reaction when I heard of the guarantee the following morning was a positive one, so I have to go with what my initial view was. I mean, I've listened to the testimony around this and what's been said about it and, really, I'm not in a position to judge whether it should have been four or six. But certainly, from the point of view of the way the markets had been behaving and how they were after that, it seemed at the time to be the right decision at that time.

Mr. Pat McArdle:

I suppose I broadly agree with that. Thinking back to the time, as I said earlier, I thought it was solvent. I believed what I heard. I believed that the regulator should know, I mean, they're the ultimate authority with the information ... the only authority, I think, who would have had it. So I certainly believed that, I was sceptical about Anglo from the previous St. Patrick's Day for reasons that are well known. And I remember thinking, what would happen if they had nationalised Anglo that night and thinking "my God it will be chaotic, there will be queues outside the other banks." This was what I thought at the time and I suppose afterwards, I'm not so sure about that any longer. Or it could have been nationalised, as Professor Honohan has spoken about at length here. But the one thing that I would just mention is that Ashoka Mody, who was part of the IMF team that came over here, and I think I have got the right man, when Anglo was eventually nationalised the following January, in the middle of January if I recall correctly, he wrote an article that said that all of the trouble in Europe started with that decision. So, you know, it was never going to be an easy decision is the point I am making. If you ... and if you had raised the flag... the flag about Irish banks on the night in question or even the following week, there would have been fallout. We'll never know what it would have been. But all things considered, I probably agree with Professor Honohan's first conclusion on this, which is the one in his report, which said that a substantial guarantee on the night was necessary.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Mr. McLaughlin, sorry.

Dr. Dan McLaughlin:

If I could just add a point?

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure.

Dr. Dan McLaughlin:

In other jurisdictions, there is a clear lender of last resort. So in the United States, it's the Federal Reserve. In the UK, it's the Bank of England. One of the issues probably which I think is not covered sufficiently is it was not clear, and it is still to some degree not clear, is the ECB the lender of last resort in the eurozone? And I think, had there been much clearer lender of last resort, and now of course we have, in theory we have one ... well the ECB is the regulator of the Irish banks ... the main Irish banks. We also have a resolution process in existence, none of that existed, but I do think had there been a much clearer idea of who was the lender of last resort, it might have been slightly different. But, you know, that's hindsight.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you, Chair.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. The next questioner is Senator ... Deputy John Paul Phelan. Deputy, ten minutes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you. Gentlemen, good afternoon ... or evening I suppose now. There is only ten minutes, so I'd ask you to be as brief as you possibly can.

First of all, Mr. Beggs, just from your opening statement, and I want to put a quote to you. On page 1 you spoke and I quote "From my perspective, there were limitations on Group-wide participation and decision-making in AIB arising from the divisional structure and the hierarchical nature of the organisation." Can I ask you briefly to give examples, maybe, of that? Did you raise those concerns within the organisation at the time, or were you ... did you have discussions with other managers or management level people within AIB at the time about those hierarchical structures within the nature of AIB?

Mr. John Beggs:

No, when I joined AIB in 1992, I joined ... I thought I was joining AIB, I joined the capital markets division and it took some time for me to realise that I was in a division and not in a ... in one bank, which of course is what has happened to AIB in recent years, with a unified banking model put in place. I discovered this in relation really ... the relationship between the retail bank and capital markets division, that people from treasury were, you know, that they were utilised by the retail bank but the retail bank made its own decisions. I mean Nyberg refers to this about the siloed nature of AIB in particular in relation to the issue of transferring loans from the ... from the sectoral teams in retail ... the retail division to elsewhere, to be managed in a different way. I think that was a limitation, you know, I have to say we produced the research in treasury. A bit like the way in which Mr. McArdle's research was produced, we were a bubble, if I can use that phrase, a unit that had a great deal of independence. The research went to the retail bank, but it sort of ... it was accepted by them but having a role in terms of pursuing an issue that you had really wasn't, you know, really wasn't possible. They ... I'm not saying they didn't listen, but I am just saying that you didn't have any management role in relation to the decisions.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And were there any discussions with your ... well, managers about those concerns?

Mr. John Beggs:

I would think ... I would think it was ... a lot of people were just simply doing their work within ... they were, within the division and they were ... in my case they were dealers in the treasury and that's it, you know. On the corporate side, of course they had relationships with corporate banking and retail banking because the customers were ... were really owned, if you like, by the retail or the corporate bank. The treasury service were provided with a treasury to those ... to those customers.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, thank you. Mr McLaughlin, I want to ask you about ... in the period in question up until the crisis, Bank of Ireland - and perhaps other institutions - held a number of roadshows or briefing meetings ... seminars for customers across the country. I remember them happening in my own part of the country at the time. I believe that you were frequently a speaker at those types of events. If you could briefly summarise the nature of the format of what happened. Were sales people from Bank of Ireland present at those events and what really was the purpose, ultimately, of those ... of those seminars?

Dr. Dan McLaughlin:

Sure. As I said, I worked in what's it called global markets. And what global markets did was ... primarily it responsible for executing the funding strategy of the bank but also we provided an interest rate and foreign exchange service to the customer base, which was a mixture of corporate banks, sorry, corporate customers and retail customers. So, in general ... and this ... this started when I joined the bank in 2001, we used to do roadshows which would be organised around the country by, usually, somebody from global markets who was in charge of that region. So we would usually have a breakfast, say, and they would invite our corporate customers in the area or perhaps people that didn't bank with Bank of Ireland that were interested ... that they thought might be interested. So I would do a presentation, much as ... you examples of what I wrote ... the economic outlook, I'd would do a PowerPoint presentation, usually, about the economic backdrop, talking about Ireland, the global thing. I used to spend ... emphasise, a fair amount, the foreign exchange rates because obviously that was the main ... one of the main things that the global market sold to the customer base ... facility to do foreign exchange-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Were they used as a vehicle for sales is really a part of the question or not? I don't want to lead.

Dr. Dan McLaughlin:

Sales in the ... well, you were trying to get customers but these were corporate customers for global markets in general.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, okay. I've only four minutes left so I want to turn to Mr. McArdle, I have more questions for you. Actually firstly, I want to turn to turn to your conclusions in your opening statements where you spoke about groupthink and you gave a very long quotation from Bill White and you spoke about a tale of seduction. Do you believe that you were seduced yourself and do you believe that you were a participant in the groupthink that you spoke about.

Mr. Pat McArdle:

Absolutely.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I ask you specifically then in relation to page 2 of your statement you say that "I was given freedom of speech by Ulster Bank even if some of the things I said made them uncomfortable on occasion." Did you view this as an important, I suppose, attribute to have in your role as the head economist in the bank at the time?

Mr. Pat McArdle:

I'm independent by nature so in my job ... in all my jobs I've been like that. I guess they knew that before they took me on. So it was never was something that ... I don't ever recall having a discussion about the degree of freedom I had or anything like that. It was something that evolved, shall we say, and it was never really an issue.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I then turn ... in relation to Professor Kelly, who has been referenced already in the discussion. Why then in 2009 did you, at that famous meeting in Kenmare, suggest to the organisers that an invitation should not have been extended to Professor Kelly for his freedom of speech on that particular occasion?

Mr. Pat McArdle:

I suppose a lot of bankers here are apologising and saying they made mistakes. That was a big mistake by me in that I played the man, not the ball, right. That's the first thing and I apologised for it fairly quickly afterwards. But I would like to come, if I may, to the substantive point of that which is, you know, I took exception to what he was saying ... severe exception and I ... I thought he was off the wall, frankly. And I still take exception to what he said there and I think history has shown that I was right.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Well, we'll leave that to history. We're just examining what happened at the time because I want to put a quote. I'm a frequent watcher of political programmes and you are quoted yourself on "The Week in Politics" at that particular time with a famous quote and I am going to put it to you: "Freedom of speech is fine and we're all in favour of it but there are some times when you have to temper things in the greater interest." What did you mean by that?

Mr. Pat McArdle:

I'll tell you what I meant. I suppose, maybe, I spent a lot of ... 20 years in the Department of Finance, so I sort of take a national or nationalistic view of things. And I remember in ... I'm not sure what year you are quoting from now.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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2009.

Mr. Pat McArdle:

Okay. Round about 2009, '10, I was very uncomfortable with the way things were done here, in that you had ... an awful lot of people were talking down the Irish market. This included a range of people who were trying to make money out of it such as hedge funds, and they had advisers here in Ireland as well. And, for example, there was one character in theFinancial Times, he was a former economist of the IMF, Simon something, and another ... there were two of them writing articles on Ireland, very, very negative articles. I remember reading one of these and looking up the name of the second guy and I discovered he was a hedge fund manager. I sent a note to the Irish ... to theFinancial Times, so it was the Financial Times, to say, "Do you realise this guy is a hedge fund manager? He's probably talking his book in the parlance and was making money out of this", and he never appeared again. So, if I said that on "Prime Time. It would be the same with the Joe Duffy show, for example, which Brian Lenihan rang up Joe Duffy to complain about, when he was advising people to take their money out.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I specifically want to ask you about this term "the greater interest" because I've heard of the national interest, I've heard of the common interest, I've never heard of the greater interest ... is ... and I wanted to really ask you, you know, did you ever temper your own comments in your time in Ulster Bank in light of the greater interest?

Mr. Pat McArdle:

I think it probably should be obvious to you. Deputy, from the quotes that you've just attributed to me that I seldom, perhaps unfortunately, I would say, and to my detriment on occasion, that I seldom, if ever, tempered my comments.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Are you equating the greater interest ... are you saying it's the same as the common interest, national interest-----

Mr. Pat McArdle:

All three are the same as far as I'm concerned.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Senator O'Keeffe, ten minutes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Thanks, Chairman. Mr. McArdle, can you just confirm to me the evidence that Mr. McCarthy gave here that said stress testing tests were supplemented by macroeconomics stress testing, involving input from Ulster Bank Group economics, and John FitzGerald of the ESRI. Is that correct?

Mr. Pat McArdle:

That's correct.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And he also went on just to say later we had stress testing from the ESRI. So that's...

Mr. Pat McArdle:

The same thing.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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You accept that. Okay. So Mr. Beggs, I am just puzzled here because Mr. FitzGerald-the ESRI did do stress testing for the Ulster Bank. And I think you said that one of the reasons that there was some problem with funding or that the ESRI couldn't take on a private job, so in relation to your own remark.

Mr. John Beggs:

Yes, my recollection of the reasons for the difficulties of him doing stress testing for us ... one of the things was that he wasn't prepared to undertake private, private unpublished work because the ESRI published all of their research. There was also the issue, which he referred to himself, about the fact that they didn't have a very detailed financial sector in the report. And this meeting took place in late 2005. I'm not sure when the Ulster Bank stress test was done, it was some time later. So clearly there is a-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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When was it, Mr. McArdle?

Mr. Pat McArdle:

April '07.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. Did you realise that had happened?

Mr. John Beggs:

No, because, to be honest, as I said, I had the meeting with him. He was an ex-colleague of mine. Nothing was going to come of it so I let it drop.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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But you were talking about it in a private capacity. Mr. McArdle, can you clarify whether it was the ESRI you hired or Professor FitzGerald?

Mr. Pat McArdle:

To be honest with you, I don't think there is any difference between the two. I realise this came up before when Dr. FitzGerald was here and he was asked a question and I think he gave a similar-type answer. We paid the money to the ESRI if I remember correctly.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Mr. McArdle, on page 3 of your own statement you said: "We didn't stress-----

Mr. Pat McArdle:

Which of my statements?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Of your own statement this morning ... this afternoon, your opening statement, I'm sorry. You said: "We didn't stress test for real estate." Why was that?

Mr. Pat McArdle:

The ... sorry, we did test it. Let me correct that. Did I say that?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Maybe. "The problem was not house prices, per se, but ... real estate lending and we did not spot it or stress test for it."

Mr. Pat McArdle:

Well ... sorry, that's ... let me slightly correct that.

Mr. Pat McArdle:

They would've stress tested for everything. I ... real estate did not figure in the work I did in the sense that, as Mr. Beggs has said earlier, it was sort of hidden, and there wasn't as much information on it as there was on housing where you had completions and starts and the devil knows what. So when I ... we got ... what we did, let me perhaps explain it ... if I may take a minute-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Should we ask somebody else from Ulster Bank to come ... if it wasn't you did, in fairness to you, Mr. McArdle?

Mr. Pat McArdle:

Well if you'll just let me explain it, then you can decide whether you ask somebody or not. In this 2007 stress test, which is the one where we involved the ESRI, we produced the ESRI with hundreds of streams of information, right. And they ran their model and they gave us back equal amount. So it was very different from what Mr. Beggs was talking about. And then I passed that to the stress testing people, who were the risk people, and they would've stress tested for ... and I'm fairly sure they did it for everything, you know what I mean, it wasn't that we didn't stress test for real estate ... they stress tested for housing, they would've done it for commercial ... because I remember them coming to me looking for bank liquidations ... company liquidations to get some idea of how a bad time could affect companies. So, I was not involved so I have no specific knowledge of what they did, but I ... from the information I have, they were fairly extensive. Everything under Basel II and the ICAAP was ridiculously extensive and expensive in terms of time, money, resources, and in the end, didn't make much difference.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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On page 4, again of your own statement, Mr. McArdle, you say, "... the alarm bells should've been ringing in Dame Street for the best part of a decade." You were talking about the whole idea of "An annual growth rate of 20 per cent real is often taken as the trigger ... Anglo Irish Bank, crossed in eight of nine years." Now and you were referring to Professor Honohan there. Surely everybody knew. It wouldn't just have been Dame Street where the bell would've been ringing, you would've known what was going on. I'm not saying that you were responsible, by the way, I know what your ... but, did you know and were you not sitting scratching your head going, "Oh, this is a bit serious."

Mr. Pat McArdle:

Actually it didn't. I've been thinking about this-----

Mr. Pat McArdle:

I didn't know, no.

Mr. Pat McArdle:

Because, again, we got to go back to Deputy McGrath's question in trying to understand the role of the economist group. You see, there's a view out there that these economists were omniscient and they knew everything and they were into everything. That was not the case. I was not a financial analyst, so I wasn't looking at things. The only financial economist in Ireland was Professor Honohan actually, as far as I'm aware. There was no one else looking at that area, right.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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But in fairness everybody knew that Anglo's growth rate was extraordinary, that they were-----

Mr. Pat McArdle:

Yes, they did.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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-----doing really well-----

Mr. Pat McArdle:

They did. They did.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So would that not have rung an alarm bell in your head or indeed any of your fellow economists' heads?

Mr. Pat McArdle:

Well, it rang an alarm bell in the sense that I was listening to regular complaints about Anglo who were, you know, taking market share from all the other banks, so I was conscious of that, right. But I didn't know the percentage increase in their balance sheet, because I would never have had a need to look at it. I was doing ... after all, don't forget my job is short-term forecasting, it wasn't analysing the competition.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. You also say in page 3 of your statement, you say, I would've been treated as a contrarian if I had, you know, carried on in that vein. Are you suggesting that your own bank, your own employer, would've treated you as a contrarian?

Mr. Pat McArdle:

Yes, I guess everyone would have-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, no, I'm not interested in everyone. I'm interested in your employer.

Mr. Pat McArdle:

I think they would. I think they would be ... they'd probably ... and I can see where your next question is coming from. But they probably would've been quite unhappy if I had been out there leading the charge, in a way, saying, "You should be pulling back from lending for this, that and the other."

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So, therefore, an economist employed by a bank was there to uphold the status quo?

Mr. Pat McArdle:

I ... sorry, could you repeat the question?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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An economist, employed by a bank, is there to uphold the status quoof the bank?

Mr. Pat McArdle:

I don't think that's what I said at all. An economist in a bank, as I was-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Well, you've just said you couldn't run away and be ... and have a contrarian view.

Mr. Pat McArdle:

No, no. I didn't say I couldn't do it. I didn't do it, which is a different thing.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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I think you said they might frown upon it.

Mr. Pat McArdle:

I said ... no, you ... it was a hypothetical question. You asked me, "Would I have been treated as a contrarian?" I said, "In all probability, I would-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, you said you would've been treated as a contrarian-----

Mr. Pat McArdle:

I said, "In all probability, I would've been-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Don't repeat past notes.

Mr. Pat McArdle:

But, sorry ... sorry, if you allow me to finish the answer. I didn't do it, so it never arose, right.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, in fairness, Mr. McArdle, you did suggest that you would've been treated as a contrarian had you done so. That's the point that I'm making. It was not an appropriate thing to do.

Mr. Pat McArdle:

No, that's ... sorry, that's a different question-----

Mr. Pat McArdle:

That ... there's no ... there's nothing wrong with contrarians. In fact, they're flavour of the month at the moment. So I didn't say it wasn't appropriate-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Although you did say earlier that they're normally-----

Mr. Pat McArdle:

It's a mere statement of-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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-----nearly always wrong, but anyway.

Mr. Pat McArdle:

-----fact.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Mr. McLaughlin, Exhibit B3, which was presented to us by Mr. Boucher, you may not have seen it, in fairness, it's not in the green book, and I'm not ... if you don't know the answer it's fine. It was financial market development and scenarios, strategic implications, September 2008. I'm just wondering whether it was a document in which you may have had a hand, act or part in the preparation of? No, that's fine.

You, Mr. McLaughlin, appeared to write extensively for The Irish Times, in your time as an economist at Bank of Ireland, is that correct? You has a column, I think, pretty much. I have any number of them printed out.

Dr. Dan McLaughlin:

It was kind of more in the first half of the noughties ... when I stopped writing it. But yes, I used to write-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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2004, 2005, I have some of them.

Dr. Dan McLaughlin:

Yes, yes, absolutely.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Yes. How important for the bank was that, that you, if you like, had a public platform, that you were able to, you know, proclaim your views as an economist for the Bank of Ireland in the media?

Dr. Dan McLaughlin:

Nobody ever said anything to me about that. I actually started it when I was with my previous, I seem to recall, with my previous employer, so I'm not quite sure, your question is.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Well, was it important to the bank that they had their chief economist writing in The Irish Times? Was it a good thing?

Dr. Dan McLaughlin:

It probably was, I don't know, nobody ever said anything to me about it, to be honest.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. Mr. Beggs, can I ask you, you make a reference in your statement to the OECD, and you had a substantial quote from their report, Ireland's Housing Boom: What Has Driven It and Have Prices Overshot?

Mr. John Beggs:

Yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And I just wanted to draw your attention to two other quotes in that same report. It says in it, it talks about soft landings and that whole notion and it actually says: "If a soft landing is defined as something that is both mild and gradual, there has not been a single case out of the 49 boom-bust cycles." That's a fairly serious remark to make, and clearly you would have been familiar with that article, that report, at the time.

Mr. John Beggs:

Yes, all of these references to reports at that date, we had them available, and they were discussed-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So would that have informed your-----

Mr. John Beggs:

----- and, you know, the information was shared with others. The idea that a soft landing, if you defined it as something that was mild and gradual, it never happened. When we are talking about soft landings, we were talking about it in relation to the housing market, I'm really referring there to a soft landing on prices. When you are at 93,000 units in 2006, it's very unlikely that we are going to have a soft landing, unless we have such a gradual deceleration in the rate of house building over four or five years, the likelihood was, I think it was referred to by other witnesses here today, that the output drop from 93,000 units to something more sustainable, which in our view was somewhere around 50,000, if it happened in one, two years, was going to have a big impact on the economy. So the soft landing really referred only to house prices, that house prices could stop rising, so I would agree with that and that was never ... our definition of soft landing was never quite as soft as generally supposed. In fact, in our report, we make the point that we did not rule out prices falling over several months and at the higher end of the market, where you couldn't justify what people were paying for houses at the top end, that we weren't ruling out significant price declines there, but our concept was, that for the average house price, that that would not decline.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Can I just finish? Again, in that same report, and I'm sure all of you saw it, the OECD said, Ireland, it is more exposed to a negative shock, sorry:

However, it is more exposed to a negative shock that reduces residential and commercial property prices simultaneously as more than half of the banking sector’s loan book relates to property. Hence, it would be worthwhile for banks to err on the side of caution.

Now, is that a contrarian view or is that an important organisation giving a very strong opinion in 2006 or how did your bank view it at the time?

Mr. John Beggs:

Well, I don't regard that as a contrarian view, there were plenty of views of that nature published over that period, which is what I referred to earlier on. And I think, because it wasn't so striking, I suppose, it tended to be, not ignored, but not really assessed for the message that was contained in it.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So even though it was an important organisation-----

Mr. John Beggs:

Yes, and I made a point that, you know, I think it was in the report on strengthening the capability of the Department of Finance, there were references to reports by the OECD and the IMF on the Irish economy, and they tended to say everything was okay.

There were a few issues that maybe ... you know, risks there, and I make the point that those reports were ... there was a lot of influence brought to bear on those reports before the publication by the Irish side. I mean, we all met the IMF and the OECD when their missions came to Ireland, so maybe some of their issues ... their concerns would have been challenged here or answered here before they went away to draft those reports.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Were you ever asked to feed into it?

Mr. John Beggs:

Yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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All of ... all of the banks?

Mr. John Beggs:

Well, I certainly did, and in my days in the Department of Finance we would have had major input into an OECD or an IMF report.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So you could have shaped it a bit?

Mr. John Beggs:

This is the nature of these country reports from the IMF and the OECD, but these housing market reports from the research department were more independent and had a series of really ... challenges and concerns that I argue, in my written statement, should have been looked at by the regulator, the supervisory authorities, and brought to the attention to the banks and have that ... have them challenged over these views.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So some of those positive remarks were made by those reports were in fact our own bankers talking to our ... us, through another guise.

Mr. John Beggs:

Could I just make one point in reference to that. These ... all this information was there, but banks, AIB being no different, had, really, a very strong belief in its own customer base, the information that it had about its own customer base, and how sustainable their own customer base was. So they ... sure they heard these messages and listened to them, but nevertheless their microdata about their customers trumped the macro scenarios ... or the macro information that was coming.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Mr. Beggs. Senator D'Arcy. Senator, you have ten minutes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Thank you, Chairman. Mr. McLaughlin, Brian Goggin in evidence previously stated that he met with the ... met ... on Dame Street, in the Central Bank building, with representatives from the Financial Regulator's office in the Central Bank, and he was requested would he consider taking over INBS. Were you contacted by Mr. Goggin or were you in the loop in relation to that conversation at any stage?

Dr. Dan McLaughlin:

No.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. Mr. Beggs, in terms of the Anglo ... representatives from Anglo Irish Bank, on the same day, arrived at AIB buildings and requested would they consider being taken over. Were you in that loop in relation to that conversation?

Mr. John Beggs:

No.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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No. Okay. Can I ask Mr. McLaughlin, in terms of the discount of the Bank of Ireland loans that were transferred to NAMA, your reaction when you heard of the 43% discount?

Dr. Dan McLaughlin:

I don't remember exactly at the time. It's a matter of record now as the lowest, which somebody-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I could comment but I would be-----

Dr. Dan McLaughlin:

If somebody said that Bank of Ireland was the least bad bank in Ireland I don't think that was something to be proud of, but it was the lowest. In general I think I made a point in my opening statement that there are pros and cons of NAMA and I'm sure you've heard a lot of the pros. But one of the main problems with setting up such an institution at the time was that you are marking to market in a market that doesn't exist, and it's in ... you know, nobody ... virtually nobody ... I don't think anyone else ... Spain set up kind of a bad bank but about three years later. So there was advantages of doing it, but the disadvantage is it crystalises, in this case, €42 billion of capital losses.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Same question for Mr. Beggs, about AIB's discount.

Mr. John Beggs:

Well all I can say about it is that I was surprised and disappointed by the extent of it and I still ... I have never done any analysis as to why it was that large, but it's certainly from the point of view of, you know, AIB, and what had happened in AIB, all the business that it tried to do in the economy, that this was the bottom line discount, I just found that to be extremely disappointing.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And same question for both of you, was the establishment of NAMA with the mark to market at the lowest point, was it a mistake?

Dr. Dan McLaughlin:

I don't think it turned out to be quite the lowest point of the cycle but, in my view, it possibly was a mistake. I mean, the alternatives that were put forward was a type of insurance, which was basically adopted in the UK. So, as I said earlier, you know, there are advantages and disadvantages but I think it is interesting to note that it wasn't a model generally followed elsewhere.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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That's contrary to what representatives of NAMA have said, that they are a model.

Dr. Dan McLaughlin:

Not on the same scale, I mean, Spain did one a few years later, but you are, you know ... let's be clear, there was no credit, the global credit system had collapsed. AAA corporate entities that would normally issue short-term paper for a month to pay bills or to buy imports ... none of that existed. So, to try and get a price for commercial property or land in that environment ... anyone's guess and so, I think NAMA then said that subsequently, it had further mark-to-markets downgrades, I'm sure it did, but you're just crystallising losses at a stress point of the cycle and if you do that with any bank, you know, it's going to be problematical.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. McArdle, I'd hate to leave you out over there. Ulster Bank didn't participate with NAMA Were you surprised at the quantity of funds required from RBS for Ulster Bank?

Mr. Pat McArdle:

Yes, I was more than surprised, I was shocked, number one. Number two, I was thinking about, while the others are answering the question there, I was thinking about the ... Ulster Bank didn't go to NAMA but it had obviously had some process by which it marked its book to market too and so, we would have had ... suffered from the same factors. My view ... this leads me into my view of NAMA ... I'm on record on saying NAMA at the time ... when I was writing for The Irish Times, was the least worst option. A lot of people disagreed with that, vehemently actually at the time in 2009, I still have that view. In fact, I think it has turned out better than could have been expected. What I would say, though, is that the process by which NAMA was set up, it took almost two years from the Bacon report to the transfer of loans was unfortunate. That timeline was far too long. Now, I don't think there was anything anyone in Ireland could have done about it because it was dictated by DG Competition in Brussels but it allowed time for the value of those assets to be marked down for a whole variety of reasons, some of which we touched on here earlier, the national interest, and that was unfortunate. And the final thing I'd say now is that it's obvious now that NAMA underpaid the banks for the loans they took.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. McArdle, on page 3 of your statement, point 4, "I want to make the following points ... The Regulator's management and board bear most responsibility for the collapse, here as elsewhere". More responsibility that the banks, who over-lent?

Mr. Pat McArdle:

Yes, I think so. I think it's ... sorry I'm not going to argue about this. I toss it out because I was surprised when I saw it in the Honohan report and this is the first opportunity I've had to comment on it since then. I think it's self ... as I said in my thing ... it's self-evident, really, when you think about it, at least that's the way it appears to me that the watchdog, you know, has a sort of a higher moral responsibility, a higher actual degree of responsibility, higher even than the banks I would argue, although the banks obviously and politicians who ran the budget are up there with them, right. But, I think when you look at the order of things ... otherwise why have we got a regulator ... like ... why do we have a regulator at all? I'll leave it at that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Can I maybe just ask you one question, Mr. McArdle, is ... I think ... it was Mr. Sheehy, when he was here before us there from AIB recently, used the analogy of describing the regulator like a referee in a very competitive environment and the referee would needed to engage to maybe modify behaviour but if there is a riot taking place on the football pitch, who is engaged in the riot, the referee or the footballers?

Mr. Pat McArdle:

Sorry, Chairman, let me answer a question with a question. Whose responsibility is it to stop the riot?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Indeed, indeed. And I put it back to you, was there a riot on the pitch?

Mr. Pat McArdle:

Sorry, Chairman, I was in my bubble, right. So, yes there was a riot on the pitch, I would say, yes. I mean, looking back, there was a frenzy of competition. I mean, we had ... in my view, anyway, we had excessive competition in Ireland. Too much of anything is bad for you and we had probably ... arguably, excessive competition. When you look at all that transpired, when you look at the competition that came from Anglo, when you look at the foreign banks, when you look at the attitude of the regulator who encouraged it, had a whole division in the ... IFSRA ... the regulator, you know, really, effectively sponsoring competition. So, I think we went wrong there and there was too much freedom to the banks, the model didn't work and the only ... well, sorry, to come back to the question, I can see your scepticism, but the only one who could have stopped it was the regulator.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But, may I burst all our bubble this evening? In different sports ... sports codes, there's different behaviours.

Mr. Pat McArdle:

Sorry, Chairman?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In different sports codes-----

Mr. Pat McArdle:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----there's different behaviours towards the referee and in rugby it's probably the captain deals explicitly with the referee, that seems to be the mannerism of that. And in soccer, it's ... it can be the whole team, you know, going nose-to-nose and I've a certain member of ... or footballer, famous footballer from my own city that was quite famous for going nose-to-nose with referees. Surely, whether it is rugby or whether it is soccer, at some stage or other do the players not to go to the referee and say, "There's a problem here on the pitch"?

Mr. Pat McArdle:

We don't know did they or not. I ... we don't know if they did or not and you'll have the regulator in, I see, shortly, so I suggest you ask him that question.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. Pat McArdle:

I don't know the answer to that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But to your knowledge, in your bank, the players never went to the referee, did they?

Mr. Pat McArdle:

Well, I think I explained earlier-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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To your knowledge?

Mr. Pat McArdle:

-----to Deputy McGrath, I think I outlined my role, so I wouldn't know really if they had or not.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Right. Yes, sorry, I'll bring you in, Senator.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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In golf, there's an etiquette that you don't break the rules.

Mr. Pat McArdle:

And .. do you expect me to answer that?

Mr. Pat McArdle:

If the rules were broken, people deserve whatever penalties is coming to them, but I'm operating on the basis that, with some possible exceptions that I'm not allowed speak about, I'm operating on the basis that the rules were not broken.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Day-to-day banking is what we're talking about here.

Mr. Pat McArdle:

I don't think ... yes ... I mean, I would be very surprised if the rules were broken, first of all. And, secondly, if they were broken, someone should have done something about it.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Senator Sean Barrett. The Senator, ten minutes.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Chairman, and welcome to our three visitors this afternoon. We're trying to shed light on the €64 billion, that's the terms of reference of this committee, and I take it none of you anticipated that we'd be here discussing the €64 billion. Even though you were senior people in banks, there were no signals, no alarm bells, nobody talking about it in the canteen, or in corridors or locker rooms?

Mr. Pat McArdle:

Well, let me ... the answer to that, Deputy, is no. I said earlier, on the morning after the guarantee, it was a surprise. We all know what happened after that, when the €64 billion effectively materialised over the following two-and-a-half years and I would think ... first of all, nobody there on the night at the guarantee envisaged it, I would say, No. 1, and certainly, as far as I'm concerned, for me, I certainly did not envisage it. I had no idea that the commercial book for the banks was in such a state.

Photo of Sean BarrettSean Barrett (Independent)
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And Mr. Beggs?

Mr. John Beggs:

Yes, likewise. I had no knowledge, or even any inkling, that we could be in that degree of ... that degree of trouble and, you know, even, you know, talking to analysts outside of Ireland - bank analysts, credit analysts - they remained, you know, very, I suppose, positive about Ireland and the state of the Irish banking system. I can't put a date as to when that might have changed, but, you know, in comparison with, say, looking internally, at how people felt internally about it, the external view ... and they were very good analysts, I have to say. I had a high regard for their expertise and what they were doing, but this was still a very positive view and we had no ... I had certainly no inkling of it.

Photo of Sean BarrettSean Barrett (Independent)
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Dr. McLaughlin?

Dr. Dan McLaughlin:

It's a shocking figure and ... but I think, first of all, over €50 billion of it was to two banks, Anglo and AIB. And, secondly, that figure materialised over a number of years, it didn't appear overnight, and it largely appeared when ... it appeared for different banks at different times.

But, you know, the Government injected preference shares into the two, what are called now the two pillar banks, initially. Again under the assumption that the fall in asset prices which ... any fall in asset prices would not be as large as subsequently appeared. But the stress tests in ... the PCAR stress tests in 2011, which the Central Bank did, they deemed that the Irish banks needed €24 billion in capital at that time. And so ... because €64 billion appeared over a period of time, and secondly, two banks accounted for over €50 billion of it.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. And, you know, the people looking in will identify our three visitors this afternoon as the public faces of banks which cost them €64 billion. They're extremely annoyed. You know, is there any regret here from the three of you, that you were in organisations which, you know, have imposed such a burden on Irish economy and the Irish society?

Mr. John Beggs:

Well absolutely, yes, definitely.

Mr. Pat McArdle:

Yes also, for the record. But let me add that it's not €64 billion any longer, of course. You're aware of the figures from the Governor and others, it's either €40 billion or €30 billion.

Photo of Sean BarrettSean Barrett (Independent)
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€40 billion, that's the one he gave us. It still is an incredible burden on the people outside. And you, you were ... were you ever ... did you ever feel used to promote the share price of Irish banks?

Mr. Pat McArdle:

Never.

Mr. John Beggs:

No, never.

Photo of Sean BarrettSean Barrett (Independent)
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Because you were the spokesmen for an industry which has cost us so dearly.

Mr. Pat McArdle:

We may have been spokesmen, but we weren't talking about things like that. We were talking about short-term economic forecasts and ancillary things. So I never had the feeling ... well, first of all, Ulster Bank didn't have a share price here, so it couldn't ... it couldn't arise in my case, so perhaps I'll shut up.

Photo of Sean BarrettSean Barrett (Independent)
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Did we have ... did you ever discuss with your senior management the loan-to-deposit ratio?

Mr. John Beggs:

No.

Dr. Dan McLaughlin:

Can I just say the ... I didn't, but I would just like to make a comment about loan-to-deposit ratio, because it's instructive that under the new Basel regulations it isn't a requirement, and I think people may not understand that you could have two banks, one with a loan-to-deposit ratio much higher than the other, but all the deposits could be corporate deposits that are one week notice. Whereas another bank could have far less deposit, but far more wholesale funding, that they've issued five and ten-year bonds. So a loan-to-deposit ratio can be quite a misleading statistic, and under the Basel requirements, under Basel III requirements, it is not a requirement to have a loan-to-deposit ratio of a given figure, because it's not a very reliable figure. What is required is now liquidity coverage ratios, stable funding ratios, which take account of the different types of funding you have, and the maturity of those fundings. It's a much more reliable metric than loan-to-deposits.

Photo of Sean BarrettSean Barrett (Independent)
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Even reliable by people who imposed such debt on the rest of society. I have to say, we do have evidence that the banks resented attempts to regulate them under a number of headings, and we'll be talking about that with the regulator. Could I draw the attention of our visitors to UBI - B2, on page 16, and pages 24 plus, where Ulster Bank in this case, late August 2007, doubled a sectoral limit from 250% to 500%.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy, it's-----

Photo of Sean BarrettSean Barrett (Independent)
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B2, and it's on page 16. But a massive increase-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Can I just give it a moment 'til it comes up there, Senator?

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just to give them the context of this. It may not have been in the economists' book, but it may have been a book that ... this was a book that was ... dealt with the Ulster Bank banking officials' centre, is it?

Photo of Sean BarrettSean Barrett (Independent)
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Yes, that's correct, that's correct, Chairman, thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, yes, that wouldn't have been shared with the witnesses, so I just need to get it up on the screen here. Okay, sorry, it-----

Photo of Sean BarrettSean Barrett (Independent)
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Well-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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This is to come up at a future hearing, is it?

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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No, no, it came up.

Photo of Sean BarrettSean Barrett (Independent)
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It was, I think, discussed.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The sectoral limits.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, I'm sorry, this isn't pre-loaded up on the system now, because we'd have needed some forewarning on that, Senator.