Oireachtas Joint and Select Committees
Thursday, 14 May 2015
Committee of Inquiry into the Banking Crisis
Nexus Phase
Ciarán Lynch (Cork South Central, Labour)
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I now call the meeting into public session. Is that agreed? And as we've a quorum, the Committee of Inquiry into the Banking Crisis is now in public session, and can I remind members, and those in the public gallery, to ensure that their mobile devices are switched off? We begin today with session one, public hearing, discussion with Mr. Laurence Crowley, former governor, Bank of Ireland, and Mr. Richard Burrows, former governor, Bank of Ireland.
I would like to welcome everyone to the 26th public hearing of the Joint Committee of Inquiry into the Banking Crisis. Today we continue our hearings with senior bank executives who had roles during and before the crisis. This morning we will hear from witnesses from Bank of Ireland, both governor ... both former governor, Mr. Laurence Crowley, and Mr. Richard Burrows. Dr. Laurence Crowley was governor, i.e. chairman, of the Bank of Ireland from 2002 to 2005, having previously been deputy governor from 1995 to 1997, and a non-executive director from 1990 to 2000. Previously he was a partner in KPMG Stokes Kennedy Crowley, chartered accountants, where he specialised in corporate structuring and insolvency. Richard Burrows was governor of Bank of Ireland from 2006 to 2009 and a non-executive director from 2000 to 2005. He has held senior positions within the drinks industry, including chief ... or co-chief executive of Pernod Ricard and CEO of Irish Distillers Group. Mr. Burrows is currently the chairman of British American Tobacco, a role he has held since 2009. Dr. Crowley, Mr. Burrows, you're very welcome before the inquiry this morning.
Before I engage with the witnesses, 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're directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you're 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 a 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 screen to your left and right. Members of the public and journalists are reminded that these documents are confidential and should not publish any of the documents so displayed. The witnesses have been directed to attend these meetings of the Joint Committee of Inquiry into the Banking Crisis, you have been furnished with booklets of core documents. These are before the committee, will be relied in the questioning and will form part of the evidence of the inquiry. I will now ask the clerk to administer the oath.
Ciarán Lynch (Cork South Central, Labour)
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Thank you again, Mr. Burrows and Mr. Crowley, and if I can invite, in whichever order you choose, the first of you to speak. Thank you, Mr. Crowley.
Ciarán Lynch (Cork South Central, Labour)
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We'll take it from the chair, you can sit down.
Dr. Laurence Crowley:
Okay, thank you. Mr. Chairman, I have provided a written statement to the inquiry on the topics you raised with me and I would like this morning to make a few general points.
The first, and to me the most important point, I would ask the inquiry to bear in mind that my role as non-executive governor or chairman of Bank of Ireland ended in July 2005, just under ten years ago and I have absolutely no involvement with the bank in the intervening decade. Whilst I am anxious to assist the inquiry as much as I can and do not wish to appear in any way unhelpful, the truth is my recollection of events, of meetings and correspondence is significantly impaired by the passage of time. It happens to all of us and I trust the inquiry will understand and accept this. I note that a lot of the documents you have sent me relate to periods after I left the bank and I hope you will appreciate that I am not in a position to comment in any way on these documents.
The second point I would like to make concerns the standards of governance and oversight in the bank during my time there. Most of the board, including myself, were non-executive and therefore part-time. It is not the job of non-executives to run the bank nor are they or can they be expected to know everything that is going on in the bank. Their role is an oversight one, to approve strategy and general direction and to be satisfied that there are proper governance structures in place. In looking at historical practices, whether in banking or anywhere else, I believe that these practices should be judged against the standards of best practice which existed at that time. There is no doubt that corporate governance has evolved significantly over the last decade, both generally for public companies and specifically for financial institutions in the light of the financial crisis but in my view, a fair assessment of practice in the past requires them to be judged in the context of standards of best practice at the time concerned.
I believe that the structure which was in place in Bank of Ireland during my time there reflected best practice and I have summarised the main control processes which existed in my written statement. I had no cause for concern about the adequacy or appropriateness of the reporting and the accountability structures which we benchmarked against practice at the time, with the help in particular of our internal auditors and our external auditors.
In relation to the strategy of the bank approved by the board in 2002, it is clear that this was an ambitious growth strategy.
It must be viewed, however, in the context of the economy at the time which was growing rapidly and with all indications pointing to a long period of sustained growth. What is also important to note is that the strategy was not reliant on property lending. My recall is that the growth in the balance sheet was to be achieved through a combination of acquisitions, particularly in life and pensions businesses, and through managing the capital of the bank through share buy-backs and other mechanisms. We were particularly focused on growing the business outside Ireland and that was largely why we recruited a CEO who had been working abroad. My understanding from reading the materials you have sent to me is that, in fact, property lending did not grow in a disproportionate fashion compared to other lending in Bank of Ireland and this would be what I would have expected from my experience there.
In my written statement in relation to the subject of property lending, I say that I do not recall any issue of imprudent lending being brought to the board. I understand that this statement by me has been put to one of the other witnesses. I was not intending to suggest that executives were aware at the time of imprudent property lending and chose not to bring it to the board. I'm completely satisfied that this is not the case. There was always open dialogue between the board and the executives and I have no doubt that if there was a material issue relating to property lending, the board would have been informed. Of course, the board were aware that the bank, like all banks, had bad debts and I recall that the bank was conservative in making provisions for bad debts. While some of the bad debts may well have related to property lending, I have no reason to believe that this was a result of imprudent or reckless lending.
Finally, in relation to property lending, I've seen references to the establishment of a specialist property group in the bank in late 2004, the implication being that this is evidence of a decision to place a particular emphasis on property lending. I don't believe that the reason for the decision was to significantly increase the level of property lending. It was part of a move towards specialisation, where individual lenders would focus on particular areas, rather than have someone who might be lending to a property developer in the morning and a grocer in the afternoon and I believe that this was a sensible approach.
Can I conclude by coming back to what is the role of a director? For as long as I've been involved in business, it has always been the case that the primary duty of a director is to act in good faith in what he or she honestly believes is in the best interests of the company involved. I understand that this principle has now been enshrined in legislation in the new Companies Act, recently passed by you and your colleagues in the Oireachtas. I genuinely believe that everything I and other directors of Bank of Ireland did during my time was done in good faith in what we believed was the bank's best interests. I believe we discharged our responsibilities to the best of our ability. When, as I was leaving ... when I was leaving the bank in 2005, it was operating in a very strong economic environment and there were no signs that the bank would do anything but go from strength to strength. If, with the benefit of hindsight, decisions taken during my time later contributed to the problems facing the bank, then this is clearly something I regret. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Crowley. Mr. Burrows?
Mr. Richard Burrows:
Mr. Chairman and members of the joint committee, I welcome this opportunity to meet with you and to assist you with your inquiry into the banking crisis. As requested by you, I submitted a written statement on a number of specific topics identified by you. I do not propose today to repeat all of the points made in my written statement, but I do want to highlight a number of points which I believe are of particular relevance to the business of the inquiry. Looking at events from a number of years ago, it's important to try and recall and to understand the context in which actions were taken or decisions were made.
This is particularly so in circumstances where the banking world has changed so dramatically in the intervening period. Before touching on some of the points made in my written statement, let me make a few brief words about the backdrop against which Bank of Ireland and other banks operated during my time on the board.
Peter Nyberg's evidence to the inquiry described that the global consensus back in the noughties was that financial markets were stable and efficient, a view to which Irish private and public sector decision makers adhered. A number of previous witnesses before the inquiry have referred to the general economic backdrop to the early 2000s, including the strong growth in employment, the extraordinary growth in the Irish population and the consequent huge increase in demand for new housing.
The report by Regling and Watson, which forms part of the evidence presented to the inquiry, notes that Ireland's strong and extended expansion during the previous decade fostered expectations of a continued rise in living standards and in asset values. Regling and Watson also note that in this macroeconomic setting, bank governance and financial supervision faced major challenges and, looking back, I would agree with this observation. They described banks operating in a setting of greatly increased wholesale funding opportunities following the adoption of the euro and banks from abroad beginning to compete strongly in retail mortgage lending. Another factor highlighted by Regling and Watson was that when modern Ireland ... was that modern Ireland had never experienced a property crash. As the chief economist of Bank of Ireland set out in his written statement to the inquiry, the fall in house prices in the first half of 2008 was modest and the full effect of the unprecedented collapse of the global credit markets which followed the Lehman bankruptcy in September 2008 was not felt until 2009. So the 2008 crisis was not primarily caused by the property devaluation but by other factors, later exacerbated by the collapse of property values.
I was asked to discuss the quality of the business model setting process in Bank of Ireland, which I took to mean the quality and setting of the strategic plans. In my view, a key point to bear in mind when making judgments on a strategy setting process is the backdrop against which the strategy is developed. Bank of Ireland's strategy was informed by the consensus view on likely economic developments in the countries in which the bank was most exposed to credit risk. While I believe that the process for setting the bank's strategy was extensive and robust, in hindsight the bank's strategy, in common with other financial institutions in Ireland and internationally, which assumed continued economic growth in the bank's main markets, reflecting the consensus view, led the bank to expand in a manner which, as I said at the extraordinary general meeting of the bank in March 2009, was regrettable. The bank's funding of that growth assumed the continued normal functioning of wholesale interbank markets, which did not happen, and the risk of this funding not being available was not, in light of our perception of future events at that time, fully appreciated.
While prudent strategic decisions were made to focus on the bank's core business, and not to enter into certain business segments, which meant that Bank of Ireland's position, when compared against many of its peer companies, was less severe overall, this was of little consolation to the bank's shareholders, who suffered a very serious decline in the value of their shares and through the cancellation of dividends.
At the extraordinary general meeting in March 2009, I also acknowledged that the bank's change of strategy, to a much more defensive position, was not commenced early enough in the cycle of the economic decline. Reports commissioned by the bank in the period following the crisis have noted that while the bank could not have escaped the unusually severe economic downturn, the effects could have been mitigated if corrective action had been taken earlier.
As I said at the time and at the AGM in July 2009, I accept responsibility and accountability as governor for the situation in which Bank of Ireland found itself in 2008. I also placed clearly on the record then, my appreciation of the Government actions in 2008 and 2009, which ensured the survival of Bank of Ireland.
I’m referring to the guarantee, which stabilised the situation in September of 2008, the capital infusion into Bank of Ireland, since, thankfully, fully repaid and the creation of NAMA and its acquisition of the banks property loans, which allowed Bank of Ireland to become an investable institution and thus allowed new, third-party shareholders to come aboard. This package of support was comprehensive and determined the continued viability of the bank. I have outlined in my written statement, the structures which were in place in Bank of Ireland in relation to risk monitoring. A key issue in my view, is that despite these structures, we the board and management did not fully appreciate nor factor in the risk inherent in the rate of growth of the bank's core businesses and in particular, while property lending grew broadly in line with other lending, the risks arising from the absolute amount of property lending and from the group's reliance on wholesale funding.
In hindsight, risk should have been a more fundamental driver of the setting of strategy. This would have resulted in a set of constraints around strategy development reflecting the risk appetite being set down by the board. I do not believe that the appetite for property lending in Bank of Ireland was any greater than for lending into other sectors. In particular, Bank of Ireland had a relatively lower appetite for, and by extension, lower relative exposure to, landbank lending than other banks in the Irish market. So, while the growth in property lending was not disproportionate, the amount of the bank's property and construction book was significant and thus the bank was heavily exposed to the significant downturn in the Irish and UK property markets.
I have seen from the previous evidence sought by the inquiry that the members have a strong interest in analysing the decision to introduce the bank guarantee on the night of 29 September 2008. You have asked for my opinion on the appropriateness of that guarantee and in response, I would say that there is no doubt that the Government at the time found itself in an extraordinarily difficult situation, particularly on that night of 29 September, when it became clear that a liquidity default risk facing Anglo Irish Bank could have serious implications for the entire banking system. I am not aware of the range of options considered by the Government at the end of September 2008 and I am not, therefore, in a position to comment on the appropriateness of the guarantee as against those other options. I would say that in my view, the immediate funding requirements of Anglo Irish Bank could have been addressed by guaranteed financial support, which Bank of Ireland and AIB were prepared to make available in the short term to Anglo Irish Bank.
Such a decision may have given the Government more time to consider its options. However, the Government chose to go further and to guarantee all financial institutions, which certainly avoided the collapse of Anglo Irish Bank that week.
Let me conclude these remarks by repeating that it was a source of great regret to the board of Bank of Ireland, which had served its stakeholders so well for over two centuries, that we required substantial support from the Irish taxpayer and from the State. As I've said earlier, that support was comprehensive and ensured the continuing viability of the bank, and for that I remain very grateful. I'll do my best to answer any questions which you may wish to raise, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Burrows, and thank you very much for your earlier comments, Mr. Crowley. Our speakers will commence this morning with Senator Sean Barrett. Senator, you have 25 minutes.
Sean Barrett (Independent)
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Thank you very much, Chairman, and I echo your welcome to our two ex-governors this morning. Mr. Burrows, let me start with you. Mr. Crowley in his statement said "In particular, I do not recall any issues of imprudent lending being brought to a Board by the Executives of the Bank, the internal auditors or the external auditors." Did that happen in your term as governor or would you make the same statement as your colleague?
Mr. Richard Burrows:
Yes I would make broadly the same statement. I'd add to it by saying that within Bank of Ireland we had a pretty robust system of control in place which meant that in relation to any lending we relied on the three lines of defence which I think you've heard about before. And those three lines of defence were of course the very front office - the person engaged in the lending contact - the credit committee to whom that was referred and then an oversight by the internal audit as to the appropriateness of whether the procedures were being followed properly or not. So, therefore ... and that was monitored carefully by the court. So there was a robust system in place, of course there were always debates, I think, but at the same time there wasn't a situation where a particular case was brought to the attention of the court in my time.
Sean Barrett (Independent)
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And then the difficulties, if I may refer to ... BOI - B1, page 17.
Ciarán Lynch (Cork South Central, Labour)
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I'll put it up there, Senator.
Sean Barrett (Independent)
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Thank you, Chairman. It should come up on the screen in time. Yes, at paragraph 126 there.
Sean Barrett (Independent)
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You have the advantage, mine hasn't appeared yet, never mind. "BOI's issues have revolved around:-
[1] the absolute quantum of property lending on its balance sheet;
[2] the greater dependence on wholesale markets rather than deposit gathering;
[3] the structural defects in financing of mortgage markets leading to greater reliance on securitisation;
[4] ... [is] ... entering ... some business lines [where it didn't have expertise];
[and then the fifth one] increased dependence on funds based income.
Did you see, in your terms as governor, these problems developing which the bank is now trying to correct?
Mr. Richard Burrows:
I think in my opening statement, Senator, I specifically referred to the problems ... the absolute quantum of property lending and the reason for it, the greater dependence on wholesale markets. And, as we look back, that undoubtedly was one of the major issues. And I think the other points I would certainly concur with, but I have no further comment on them.
Sean Barrett (Independent)
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But were there not alarm bells in the bank that ... as you said in the introduction, that a bank which had been around since 1783 got into these difficulties against all its traditions of ... of conservative banking?
Mr. Richard Burrows:
Well there were alarm bells of course and those alarm bells started to go off really in 2008.
In the process of strategy formulation, when I became governor in 2005, one of the things which we set about as a court with management was to review strategy very considerably, and that was done through 2005-06 by bringing in quite a number of external advisers to talk us through these issues. And it's certainly fair to say that some of these matters were brought to our attention. At the time, we were still working within the assumption that I mentioned in my opening statement as, I think, in common with most commentators, that whilst there could well be a slowdown, that we were not looking into the kind of catastrophic decline in values which subsequently emerged.
Sean Barrett (Independent)
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Was the strategy a cause of the subsequent problems? And I have in mind what was perceived as the undermining of the local bank manager who knew his customers, who knew the society, and who had a strong record of solvency, being replaced by the next generation, which brought the bank to Government Buildings and needing a rescue, as you said.
Mr. Richard Burrows:
I don't believe so, Senator. I think ... I can't speak for the earlier period that you're referring to but ... because all the time that I was there the structure on credit control and on lending approval was as I've stated it - a very robust structure within the bank with very clear limits being set at each level of authority, and any question of any of those limits being exceeded then meant that that particular matter had to be referred to a higher level of credit committee for resolution. So I think there was a very robust system in place.
Sean Barrett (Independent)
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And, you know, did that perceived change lead to the problems later?
Sean Barrett (Independent)
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Thank you. I might put one question to Mr. Crowley. And this is core document B2, pages 37-47, Mr. Crowley, and they'll come up in a while. This was a board decision to allow ... to move the earnings multiplier allowing customers to borrow up to 4.5 times their annual income and also to increase the loan-to-value threshold and was made in 2002. Why did the board do that, Mr. Crowley?
Sean Barrett (Independent)
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Then the next one, if I may, the same volume, pages 63-67, where it states that residential investment property, RIP, lending doubled within Bank of Ireland over 15 months from 2003 to September 2004, and over the next few years there was a relaxation of terms and conditions. Was the risk in doing that understood by the board at the time, given what we said about ... that the first reason there, the point to Mr. Burrows, was that the absolute quantum of property lending was the major issue, the first one listed as why Bank of Ireland subsequently got into trouble?
Sean Barrett (Independent)
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You ... residential investment property lending doubled in a 15-month period and property is, in the previous quotation, the first reason why Bank of Ireland got into trouble. So did the board understand the risk when it doubled residential investment property lending in such a short period?
Sean Barrett (Independent)
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Would there be nervousness ... as some of the expert witnesses have said here, if anything grows really quickly in banking by huge percentages - 100% in this case - in a short period, there should be alarm bells? It's a bad sign for a bank if it makes these explosive decisions.
Sean Barrett (Independent)
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Were you ever worried if an item grew by 100% in 15 months?
Sean Barrett (Independent)
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Was there an option of a lower rate of increase than 100%, considering at that time-----
Sean Barrett (Independent)
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Are the ... this is to both, are you aware of any loans or terms offered to borrowers which might be considered outside the normal commercial terms made during your tenure and-----
Sean Barrett (Independent)
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Outside normal commercial terms.
Sean Barrett (Independent)
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And Mr. Burrows?
Sean Barrett (Independent)
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Okay then. Now the ... Vol. 2, page 12, on page ... Vol. 2, sorry, page 67. In this one, when it appears, the regulator wrote drawing attention to the high level of exceptions to standard criteria, 24% exceptions in loans. How was that happening, and were there concerns about that?
Sean Barrett (Independent)
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It's a letter of 31 July, 2013 and I think it's on page 67 of that volume. Mine hasn't appeared so I can't be of help to you. Sorry about that, Mr. Crowley.
Ciarán Lynch (Cork South Central, Labour)
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Did you say 71, is it? Is this to do with the response of the Financial Regulator on review of sectoral concentration framework, yes?
Sean Barrett (Independent)
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It is the highlighting of exceptions to standard criteria at 24%. Did that concern you or the other governors or why ... how did it happen?
Ciarán Lynch (Cork South Central, Labour)
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He's probably looking at the wrong page number.
Sean Barrett (Independent)
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Was the board concerned about exceptions, or would 24% be considered normal?
Sean Barrett (Independent)
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And on your watch, Mr. Burrows? Was there a high level of exceptions?
Mr. Richard Burrows:
I can't actually tell you the level of exceptions, but I do know that there would have been quite a lot of exceptions. And the reason for that is that when you establish policies in relation to credit and lending, you're going to draw the terms of those policies very tightly. And so, therefore, in complex lending situations, it is quite likely that you will find in any particular transaction an exception. An exception doesn't mean that the policy is being infringed, it just means that it has to be referred to a higher level of credit committee within the bank, within the institution in order to resolve whether it is a genuine exception, as in a deal breaker, or whether it is something that arises because of the tightness of the way that the policy has been drawn.
Sean Barrett (Independent)
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Can I bring you to the concentration ratios. Were they discussed in either of your terms of office?
Sean Barrett (Independent)
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And was there concern about them?
Sean Barrett (Independent)
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Because there's a letter on, from the Financial Regulator it's in B2, page 71.
Sean Barrett (Independent)
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Book 2, page 71.
Ciarán Lynch (Cork South Central, Labour)
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BOI - B2, pages 71 to 86 and the reference there is BOI101640.
Sean Barrett (Independent)
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If the regulator writes that she is concerned that you don't risk assets to more than 200% of own funds and the reply says, "Bank of Ireland remains comfortable with the exposure", to the outsider that's a strange attitude to the regulator, you know, if the referee draws my attention to fouling somebody and I say, "well I'm quite comfortable with that". Yes well, the referee's job was to tell you and you say you're quite comfortable with breaching the 200% in one sector.
Ciarán Lynch (Cork South Central, Labour)
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Would you care to comment on that Mr. Burrows and elaborate?
Ciarán Lynch (Cork South Central, Labour)
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And in terms of the appropriate level of reporting to the board on concentration risks and other risks, would this have been on your radar?
Ciarán Lynch (Cork South Central, Labour)
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Yes, and the broader issue related to it.
Ciarán Lynch (Cork South Central, Labour)
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Which is that the regulator had been expressing concerns with regard to a particular behaviour by the bank.
Ciarán Lynch (Cork South Central, Labour)
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And I'll return to the question again, does this reflect an appropriate level of reporting to the board or not?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Senator Barrett.
Sean Barrett (Independent)
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Thank you Chairman. The loan-to-deposit ratio rising very rapidly, now you said in your presentation in 2009 you attempted to get back a higher rate of deposits. But when it rose very rapidly, 159% instead of the recommended 120% in September 2008, were there alarm bells at that time about the high level of reliance on wholesale funding?
Sean Barrett (Independent)
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And going .... your relationship with the regulator in other aspects. He wrote to the Bank of Ireland on 31 July 2013 about the maintenance of lending standards, ongoing monitoring, the management and control of risk in relation to residential mortgages and that correspondence was still in operation the following December. Was there a very slow rate of response and interaction between the regulator and the bank?
Sean Barrett (Independent)
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In your time, what would you expect to have been the appropriate time to respond to concerns expressed by the regulator?
Sean Barrett (Independent)
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Because again, he reports no evidence of where the balance of funding source was, the purchase price, stress testing not carried out, loan files not containing sufficient information to demonstrate the rationale for the lending decision, valuations of property not completed. And we had a affidavit yesterday, a document submitted from the Construction Industry Federation, requiring NAMA to honour verbal agreements with banks on business that was transferred. So was banking professional enough in its lending practices in the run-up to this crisis?
Mr. Richard Burrows:
I believe Bank of Ireland was professional in its lending practices, and I think that the evidence for that is that in the transfer of loans which occurred to NAMA in 2009, the number of instances where insufficient or incorrect documentation arose was actually a very, very small percentage of the total, which implied that the vast bulk of all loans were properly documented and properly proceeded with within the bank.
Sean Barrett (Independent)
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But there was still a 43% discount on what was transferred to NAMA.
Sean Barrett (Independent)
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The 100% mortgages in 2005, July 2005... Were there any concerns at board about the launch of that product?
Mr. Richard Burrows:
There was discussion at board about the 100% mortgage, which was a response to competitive market activity by other banks in the market. I think the fact is, with the benefit of hindsight, one would not do 100% mortgages today but I'd make two points about that. Firstly, the collapse in property values that occurred in 2008, 2009 and 2010 was of the order of 50% so whether it was a 100% mortgage or a 90% mortgage or an 80% mortgage, it wouldn't have made any difference. The second thing is that 100% mortgages within Bank of Ireland, even at their peak, were a very low percentage of the total mortgage book, less than 5% of the total mortgage book so I don't think it was a major factor.
Sean Barrett (Independent)
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But the Governor has brought that back to 80% maximum mortgage now as part of a macroprudential measure so I think, in retrospect, isn't it quite plausible that 100% mortgages did cause a lot of the subsequent problems?
Sean Barrett (Independent)
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Did banks have an approach to where people had borrowed from multiple banks? Did you know the extent of that practice taking place?
Sean Barrett (Independent)
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Was risk regarded as almost mathematical modelling by the banks, rather than looking in what was actually happening in markets, particularly in property?
Mr. Richard Burrows:
Well, if I talk about the period that I was there, Senator, I think one of the features of the staff of Bank of Ireland was that there was a very strong level of practical common-sense applied to lending. It wasn't just doing it by the numbers; it was, in fact, assessing the risk in a more holistic manner and I would stand over that.
Sean Barrett (Independent)
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Did the auditors, internal or external, draw your attention to any of the problems which were on their way?
Sean Barrett (Independent)
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Did the bank discuss the Morgan Kelly articles when they were published?
Sean Barrett (Independent)
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And what was the reaction?
Sean Barrett (Independent)
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In the reforms of the bank that have taken place in the recent past, what are the ... could you tell us the items that have been changed compared to the period when the bank got into trouble?
Ciarán Lynch (Cork South Central, Labour)
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Both yourself, Mr. Burrows and Mr. Crowley, if I could invite you a bit closer to the microphone, Mr. Crowley, as I have a little bit of difficulty hearing you myself, both of you were, served on the board and, in that role, both of you would actually have served as directors with the responsibility of directors. Am I correct?
Ciarán Lynch (Cork South Central, Labour)
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Could you explain to me what the responsibility of a director is?
Ciarán Lynch (Cork South Central, Labour)
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Bring maybe your notes. Mr. Burrows, you served as director as well. Maybe you can shed some light to the inquiry as to what the responsibility of a director is?
Mr. Richard Burrows:
Well the responsibility of a director is very clearly laid out in law. In addition to that, I would say that a director has collective and individual responsibility with the other directors for the oversight of the business and for making sure that everything is done always in the best interest of the stakeholders of the business. Directors have a responsibility to set strategy, to appoint management, to do a list of prescribed things which have to be done by directors, subject always to the control of shareholders to whom directors report annually.
Ciarán Lynch (Cork South Central, Labour)
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Is it a part-time or full-time position?
Ciarán Lynch (Cork South Central, Labour)
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What's the remuneration for it?
Ciarán Lynch (Cork South Central, Labour)
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Okay, for Bank of Ireland, what was the remuneration for a director?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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For a non-executive and both of you served as non-executive directors. I would've imagined and or maybe not, that there would be significant time commitments to the bank per annum with that job, even if it were part time.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And part of that role is that you get an information flow from management, yes?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Were you satisfied with the information that was flowing from management to you?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Okay, right through on ... and to the inevitable point where we had a guarantee and we needed to see significant capitalisation going into Bank of Ireland. Going back right through your time with Bank of Ireland, right back to your time as a non-executive director, you were quite happy with the information flow that was coming through to you?
Mr. Richard Burrows:
Yes, I think, Chairman, it's a two-way street. Non-executive directors have the right to receive the information from management as you described. But they also have the responsibility to look for information from management, either individually or collectively, and that happens at board meetings where non-executive directors have a responsibility to challenge management. This happens particularly in the area of strategy or, indeed, tactics from time to time, but also can require management to produce specific reports on situations which arise or to cause external advisers to be brought in if that's necessary. So it's a two-way street.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And Mr. Crowley, would you concur with Mr. Burrows's analysis of the role of a director and how it functioned in Bank of Ireland at that time? And would you have been surprised at the information, or would you have been satisfied with the information you would have been receiving as a non-executive director?
Dr. Laurence Crowley:
Yes, I am satisfied with the information that was given. One of the problems at boards is that you can suffer an overload of information that the executives can, in a sense, drown you in information and give you hundreds of pages to read and that is not effective. That does not contribute to efficiency in operating as a director.
In my opening remarks, I said two things. I re-say that about the role of a director, for as long as I've been involved in business, there's always been the case that the primary duty of a director is to act in good faith in what he or she honestly believes is the best interest of the company involved. I stated:
It is not the job of non-executives to run the bank nor are they or can they be expected to know everything that is going on in the bank. Their role is an oversight one, to approve strategy and general direction and to be satisfied that there are proper governance structures in place.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Right thank you, just one final question before I move on to Deputy Murphy in that regards, so, is: the loans that went to NAMA were put in place during your tenure, Mr. Burrows. Were you not surprised at the level of discount that came afterwards?
Mr. Richard Burrows:
As I said earlier, Chairman, I wasn't involved in the negotiation of that transfer to NAMA.
Ciarán Lynch (Cork South Central, Labour)
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I'm aware of that, Mr. Burrows, but the loans initially were put in place during your tenure - the result of those loans was what happened in NAMA, but the establishment and genesis of those loans was during your period.
Mr. Richard Burrows:
I also said in my opening remarks, Chairman, that I felt the creation of NAMA by the Government was a very important element in the package of measures designed to make sure that the banking system survived. It was inevitable that there was going to be a discount on the loans to be transferred and frankly, I think the power of negotiation lay more with NAMA than with the banks from which the loans were transferred.
Ciarán Lynch (Cork South Central, Labour)
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And I'll repeat the question again, were you surprised or not surprised by the level of the discount, Mr. Burrows?
Ciarán Lynch (Cork South Central, Labour)
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Why not?
Ciarán Lynch (Cork South Central, Labour)
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Why can't you give us a comment?
Ciarán Lynch (Cork South Central, Labour)
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Yes, but I'm asking, you were there at the establishment of the loans, there was quite a significant discount at the end of it. Do you have a view, were they overly discounted, were they not discounted enough, were you surprised by the level of discount?
Mr. Richard Burrows:
I think, Chairman, we're going to have to wait until we see how NAMA plays out in relation to the on-sale of these loans, or the redemption of the loans, before we can make that judgment.
Ciarán Lynch (Cork South Central, Labour)
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So are you saying or not this morning, that the transference of the cost of these loans to NAMA is not really an issue, we need to look a couple of years down the road and see how this pans out?
Mr. Richard Burrows:
What I'm saying this morning is that the creation of NAMA was a very important element in the package of measures. It was necessary for Bank of Ireland to get property loans, which had a questionable value, off its balance sheet to NAMA, if it was to become an investable proposition in order to gain third-party capital and so that was done. In terms of how the value of the loans was measured at the time, as I say, that can only be I think reviewed when those loans are either paid back or sold on to somebody else.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Deputy Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you both, you're very welcome. Mr. Burrows, I'd like to, before we talk about your time on the board, and Mr. Crowley, I'd like to just go quickly to the night of the guarantee, to get a few things on the record, if I may. Mr. FitzPatrick and Mr. Drumm came to see you on the afternoon of 29 September 2008, looking for help for Anglo Irish Bank, is that correct?
Eoghan Murphy (Dublin South East, Fine Gael)
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How long did that meeting last?
Eoghan Murphy (Dublin South East, Fine Gael)
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In refusing to give assistance to Anglo, did you or Mr. Goggin say that the Bank of Ireland had its own problems and that the bank might also run out of money if things continued as they were?
Mr. Richard Burrows:
No, we didn't. We listened to the case that the executives from Anglo had to make, their plea for help. They asked us if we would consider taking over Anglo, if we would consider buying any part of Anglo, they were looking for any kind of assistance at all that we could offer in a situation which was clearly of the utmost severity in terms of that default which they were likely to have the following morning.
Eoghan Murphy (Dublin South East, Fine Gael)
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So you didn't give them any information as to your views of your own bank's own position at the time?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you; and then you initiated the meeting with the Government, is that correct?
Eoghan Murphy (Dublin South East, Fine Gael)
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And did you do that at Anglo Irish Bank's request?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. How did you initiate that meeting?
Mr. Richard Burrows:
Well, if I take you through the subsequent events, we met with Anglo, I had a pre-scheduled meeting with the Governor of the Central Bank to talk about other matters which had to do primarily with wholesale funding and collateral for funding and I took that opportunity, that afternoon, of explaining to Mr. Hurley the visit that I'd had from Anglo and explaining my concern at the very difficult situation which could result from this default the following morning and I asked if there was any plan in place in the Central Bank to deal with this situation. I was somewhat surprised to find out that there was not and it was Mr. Hurley's guidance to me that if I wanted to take matters further, that I should make an approach to Government.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And did you make that approach then through him to Government-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----or did you make that approach separately?
Mr. Richard Burrows:
No, I didn't. I went back to Bank of Ireland, I discussed the situation with my chief executive, and we resolved that the right thing to do was to make sure that Government was fully aware of the severity of the situation facing Anglo. We also felt, and there had been a lot of discussion over prior weeks and weekends in the Central Bank, involving both Allied Irish Banks' executives and our own executives, in relation to other issues in the marketplace and we felt that it could well be that AIB would feel similarly about the severity of the situation and that it therefore might be better if we made a joint approach, rather than an approach on our own. And so I rang Dermot Gleeson, chairman of AIB, and explained the situation as I saw it, explained that we were going to contact Government and invited him to join us in that approach, which he readily agreed to.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And then you went about setting up the meeting-----
Eoghan Murphy (Dublin South East, Fine Gael)
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And was that by making a phone call to the Minister, to the Taoiseach, to the Secretary General?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. You say in your written opening statement that the immediate funding problems of Anglo could have been dealt with at the time with a guarantee from the Government of the €10 billion in financial support that both you and AIB were willing to give. That was your view at the time.
Mr. Richard Burrows:
That's right. If I just go back to the sequence of events that evening, the four of us went to Government Buildings and we were eventually shown in to meet with the Taoiseach, the Minister for Finance and quite a number of other people were there, I can't remember all the names. And I led on behalf of the four of us, to explain to the Taoiseach and the other members who were present, the reason for seeking the meeting, which was to make sure that they were fully aware of the severity of the situation that could unfold the following morning, and the impact that that could have on the banking situation at large. And then my other colleagues on that visit made their own interventions with Government, at which point we were then invited to go into an ante-room, whilst the Taoiseach and Minister and the others present conferred, and eventually we were brought back in to meet with the Taoiseach, and at that point Mr. Hurley, who was present, asked if Anglo Irish's default could be covered by Bank of Ireland and AIB providing liquidity in the form of €10 million, €10 billion, the following morning. Our response to that, and I think it was Brian Goggin who articulated this, was to say that we would be prepared to go away and consider that, but that, given the severity of the situation, given the difficulties which we were all facing, we would need to be guaranteed by Government on that particular loan - not just guaranteed about the loan, but guaranteed that we would actually get the cash back too, after a specific period of time.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. At this point in time, then, was the discussion around a possible four-bank guarantee?
Eoghan Murphy (Dublin South East, Fine Gael)
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We hadn't reached that yet-----
Mr. Richard Burrows:
-----it just had to do with Anglo, and resolving the situation with Anglo, and so after that discussion we went back to the ante-room, Brian Goggin contacted his colleagues in Bank of Ireland, I imagine Eugene did the same thing. It's a complex matter to raise that kind of liquidity in the middle of the night but nonetheless, after some time, they managed to do it and at that point we were called back in to the meeting with Government and we said that, subject to that condition about the loan being guaranteed, we could in fact - and I'm talking for Bank of Ireland - come up with €5 billion, not the following morning but the morning after, is the best of my recollection.
At that point and AIB confirmed their participation to the same extent ... at that point we were informed by the Taoiseach that the Government had decided to introduce a guarantee of all deposits for all the Irish banks, and there wasn't any question about six or four or anything else, it was for all the Irish banks, and at that point we left.
Eoghan Murphy (Dublin South East, Fine Gael)
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Can I just clarify on that point then, Mr. Burrows, there was never any discussion of a four-bank guarantee, with Anglo and Nationwide being taken down, to use Mr. Gleeson's phrase? That was never considered while you were there on the night?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Can I take you, if I may, just to one of the evidence documents, it's BOI - C3b, pages 9 to 11, and it is a note from that night of the meeting? At the beginning of that note is a list of attendance, and then there's bullet points, comments attributed to you, Mr. Burrows. I don't know if you have this note in front of you?
Eoghan Murphy (Dublin South East, Fine Gael)
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You've seen the note. There are ten bulleted points attributed to you, but Mr. Gleeson, when he was before us, said that he believed that only the top two lines were comments that you made, and the other eight were his comments. Can you confirm if that's the case?
Mr. Richard Burrows:
I can certainly confirm that I talked about the first point, the second point and I talked about Anglo. I'm really not sure about the other points, and I am pretty certain, in fact I'm absolutely certain, that I didn't, myself, get into any discussion about INBS or any question about any guarantee.
Eoghan Murphy (Dublin South East, Fine Gael)
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So that bullet point 7 where it says "Reminded action: 2 elements (a) guarantee for surviving (b) troubled patients to be taken out", you think that was Mr. Gleeson?
Eoghan Murphy (Dublin South East, Fine Gael)
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It's wasn't you. Okay. But at that point in the conversation, from your recollection, we were still talking about only a guarantee of the €10 billion that AIB and BOI would provide?
Mr. Richard Burrows:
Well, I really am not sure who made that note, or at what point. If I go back to the sequence of events as I described it to you, in the first meeting which we had we described the general situation, the international and domestic situation, we described the particular threat resulting from Anglo's precarious position, and there wasn't any discussion, at that point, about the remedial action to be taken. That happened at a second intervention.
Eoghan Murphy (Dublin South East, Fine Gael)
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And can you recall any draft document or piece of paper in the possession of Mr. Goggin, with a possible draft of a guarantee, or a list of institutions that a guarantee might cover, in the meeting?
Mr. Richard Burrows:
No, I can't. We didn't go in with a solution to propose to Government. We went in to make Government aware of the concerns which we had, and it wasn't for us to propose anything. It was for us to make Government aware of the seriousness of the situation and then try and respond as best we could.
Eoghan Murphy (Dublin South East, Fine Gael)
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Do you recall AIB having any such document or piece of paper?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And did you know that a guarantee of your institution might be on the cards, prior to your arrival at Government Buildings that night?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Did you know that a system-wide guarantee might be on the cards?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Well, if we could just go to page 20 of the same document. There was a meeting earlier that day in the bank at which Mr. Goggin informed a small committee, of which Mr. Boucher was a member, about the possibility of a Government guarantee being provided for all borrowings by Irish institutions. So Mr. Goggin, according to these minutes, would appear to have been aware that it was a possibility that the Bank of Ireland could become part of a guarantee before he went to Government Buildings. Did he discuss this with you?
Mr. Richard Burrows:
I saw this paper in the documents that you provided, and I made my own inquiries, and I ... first of all, to your question, I was not aware ... not made aware by Brian Goggin, that there was any pre-discussion about a guarantee and subsequently, when I saw this memo, or minute, I inquired, and I've established, to my own satisfaction, that that is an incorrect minute, it did not happen.
Eoghan Murphy (Dublin South East, Fine Gael)
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The minute is incorrect in its entirety, or-----?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. But the knowledge as to the possibility of a Government guarantee being provided for all borrowings by Irish institutions, that ... was that discussed in that meeting? I know you weren't present, but-----
Eoghan Murphy (Dublin South East, Fine Gael)
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But Mr. Goggin never said anything to you along those lines?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Thank you. When you were in Government Buildings that night did you know the bank's borrowings at this point in time, customer deposits, interbank borrowings or debt securities issued, did you have an idea of the exposures?
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Eoghan Murphy (Dublin South East, Fine Gael)
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You did. And Mr. Goggin?
Eoghan Murphy (Dublin South East, Fine Gael)
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And just to clarify then, when did you become aware of this systemic guarantee? It was a second meeting, or a-----?
Mr. Richard Burrows:
My recollection is that it ... when we came back to report to the meeting that we had with AIB, being successful in putting together the €10 billion to resolve the situation with Anglo, it was at that point that we were informed that a guarantee was going to be put in place. I think the Government made reference to the fact that they were going to have to call some kind of a Cabinet meeting in the middle of the night to authorise this, but that it was planned that the creation of the guarantee would be announced first thing the following morning.
Eoghan Murphy (Dublin South East, Fine Gael)
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And the guarantee for all the six institutions, as it happened?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. My last question, in relation to this area, Mr. Burrows, if you could turn to page 5 of that same document, BOI - C3b, and it's board minutes from 3 October 2008, and it's where the events of that night are recounted to the board.
Eoghan Murphy (Dublin South East, Fine Gael)
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And it says, "When the decision was conveyed that AIB and BoI were prepared to provide €10bn collectively, the mood of the meeting lifted considerably and the Government side began to focus on the draft Press Release to announce the blanket guarantee with immediate effect." By "blanket" in that instance, you understand a guarantee of the six institutions?
Eoghan Murphy (Dublin South East, Fine Gael)
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Because in the following paragraph it says, "In the event, market developments triggered the Guarantee earlier than expected. In these circumstances, the political judgement was that it had to apply to all banks." So, is there a change there, between what was agreed, or what you understand to be agreed when you said you could provide the €10 billion, and a blanket guarantee? Could that blanket guarantee refer to the four banks? That's my question.
Eoghan Murphy (Dublin South East, Fine Gael)
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But, the following paragraph then, "In the event, market developments triggered the guarantee earlier than expected. In these circumstances [which would seem to indicate different circumstances] the political judgement was that it had to apply to all banks." There seems to be an inference there that there was a change in the scope of the guarantee.
Mr. Richard Burrows:
I honestly can't get into the actual writing of that minute as to ... but I do know that we had the board and we, Brian Goggin and I, reported very carefully on what had transpired. I guess the fact of the announcement of the guarantee on the morning, which is a matter of record, means that the guarantee was triggered that night. It was not something which we had asked for. This was a Government decision.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay and just finally then, can you recall any conversation around the inclusion of subordinated liabilities as part of the guarantee?
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Eoghan Murphy (Dublin South East, Fine Gael)
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You cannot?
Eoghan Murphy (Dublin South East, Fine Gael)
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No discussion. Okay. Thank you.
I might return then, if I may, to board oversight of risk policies? Mr. Crowley, the group risk policy committee was set up to assist the board with its risk oversight and governance responsibilities. Did this committee assist with, or assume, the risk oversight and governance responsibilities?
Eoghan Murphy (Dublin South East, Fine Gael)
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Did it assist with, or assume, the group risk-----?
Eoghan Murphy (Dublin South East, Fine Gael)
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Sorry, the group risk policy committee.
Eoghan Murphy (Dublin South East, Fine Gael)
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Which was set up to assist the board with it's risk oversight and governance responsibilities, did it assist with, or assume, these responsibilities?
Eoghan Murphy (Dublin South East, Fine Gael)
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Or assume, these responsibilities?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. So it was a ... these responsibilities were delegated to the committee?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. When Mr. Boucher was before us he was asked if there was insufficient oversight on the part of the board in relation to this committee, and he replied, "Yes I think so." Can you-----
Eoghan Murphy (Dublin South East, Fine Gael)
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This committee - oversight of the group risk policy committee.
Eoghan Murphy (Dublin South East, Fine Gael)
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So, you wouldn't agree that there was insufficient oversight of this committee, by the board?
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Burrows?
Mr. Richard Burrows:
Hindsight is a great thing in this situation and I would say with hindsight, as I have acknowledged, we would certainly do things differently. At the time, my belief is that there was probably the correct amount of oversight, the correct amount of control, the correct amount of reporting but, certainly in the circumstances that unfolded, a far more rigorous approach would have been justified.
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Burrows, do you think you placed too much trust in senior executives on the board, who were also on these credit and risk committees?
Mr. Richard Burrows:
No, I don't think so. I think it's ... it's a fact that to run any business, a bank included, a board has to delegate its responsibilities to management. That's the way the business gets done and so, therefore, I don't think that there was any question of any overestimation of the capabilities of the management.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. In July 2003, the Financial Regulator said that "The examination raises questions about the maintenance of lending standards in your institution and about your on-going monitoring management and control of risk in relation to residential mortgage credit." That's in BOI - B1, page 67. Do you recall that criticism from the Financial Regulator at the time in relation-----
Eoghan Murphy (Dublin South East, Fine Gael)
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You don't. Mr. Crowley, do you?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Can we bring that up, please? Do you recall concerns being expressed actually by the group risk policy committee itself in 2004? Thank you. It's there at the bottom, if you like, on your screen, this is from the Financial Regulator, and the quoted paragraph at the bottom "The examination raises questions about the maintenance of lending standards in your institution and about your on-going monitoring management and control of risk in relation to residential mortgage credit." You don't recall this letter from your time on the board?
Eoghan Murphy (Dublin South East, Fine Gael)
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There is a reply, addressing that concern.
Eoghan Murphy (Dublin South East, Fine Gael)
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Addressing that particular concern that's expressed. In your reply, you address that concern.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Do you remember the actual discussions around this letter at the time on the board?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Thank you. I'll move on then, if I may. Mr. Crowley, did you ever feel like the bank was under pressure to change its model or its business, given the apparently rapid success of other banks like Anglo Irish Bank?
Dr. Laurence Crowley:
I don't think that by 2005 there was pressure to change the model. 2005 was the fifth year of continuous profit growth and everything looked extremely good. It also was the year in which I ... I retired as governor. So I think we believed we were in very good shape at that point.
Eoghan Murphy (Dublin South East, Fine Gael)
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And then after you retired, do you believe that the culture in the bank or the activities of the bank changed?
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Burrows, did you see ... in relation to property lending in the bank, did you see your chairmanship as continuing the practices that were already at the bank and at board level or did you break with the past in some way?
Mr. Richard Burrows:
No, I didn't break with the past. Bear in mind, I had been part of the board up to that point - it wasn't as if that I arrived new on the scene in 2005. But I think, as I said earlier, in looking at the strategy of the bank with Brian Goggin, who was then a new CEO in position, we did question very thoroughly the strategy which had been put in place by his predecessor and, in doing that, we brought in quite a number of different external advisers to examine all aspects of the bank's business to make sure that our strategy was robust going forward. So there was ... there was a period of intense questioning during this period of growth of the business of the bank.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Was there confusion in the bank in 2004 about property lending, as Mr. Boucher stated in his appearance before us?
Eoghan Murphy (Dublin South East, Fine Gael)
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So, if we could talk about this ... this specialised property financing unit that was set up in 2001, the purpose was to write high risk, higher return property transactions and it also had the following objective - to allow business banking to compete more effectively, in particular with Anglo Irish Bank. Is this an example of Bank of Ireland changing its business practice to compete with Anglo, Mr. Burrows?
Mr. Richard Burrows:
I think the answer to that has been given by my colleague, Laurence Crowley, in that it was necessary, in a more competitive environment, to bring the skills and capabilities of management on property lending in particular into one place rather than have generalists dealing with all forms of lending. So the creation of that was a response to that. It was also in the context, bear in mind, of ... of the strong growth that I referred to in my own opening remarks in the economy generally and particularly in the housing and property sector.
Eoghan Murphy (Dublin South East, Fine Gael)
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But do you think there was, you know, a particular focus on Anglo Irish Bank and its activities?
Mr. Richard Burrows:
No, I don't think there was a particular focus on Anglo Irish Bank but we were and are a publicly quoted company and so, therefore, we have to have regard to what our institutional shareholders and personal shareholders are saying about us and the fact of the matter was that in a very fast growing market, Bank of Ireland was underperforming the other Irish institutions in terms of growth, and so that always led to a discussion of whether or not we were taking the right measures in the promotion of the business of the bank.
Eoghan Murphy (Dublin South East, Fine Gael)
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Did you increase your risk appetite then for property lending because of what your competitors were doing?
Eoghan Murphy (Dublin South East, Fine Gael)
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Even though the rationale for setting up the specialised property finance unit was to facilitate in writing higher risk, higher return property transactions?
Eoghan Murphy (Dublin South East, Fine Gael)
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2001.
Eoghan Murphy (Dublin South East, Fine Gael)
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And then in 2004 it led to the creation of a dedicated property unit-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----and that was set up ... responsible for managing relationships with a total group exposure in excess of €30 million and the rationale for that was that, "In the past 5 years we have under performed in this top end market, which has been dominated by Banks with specialist property units, most notably Anglo Irish Bank." So is the move to a dedicated property unit in 2004, is this an example of-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, one moment.
Eoghan Murphy (Dublin South East, Fine Gael)
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-----of Bank of Ireland changing its business practice to compete with Anglo?
Mr. Richard Burrows:
I think to compete in the marketplace rather than specifically with Anglo, Anglo were certainly the bank that was the most high profile in that area, so it's natural to make reference to that but it wasn't just Anglo, there were lots of other banks competing for the same business as well.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes, and yet you cite Anglo twice in your minutes over that period of time specifically and ... this is in relation to the restructuring of the bank and the establishment of a dedicated property unit ... that you do cite Anglo.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you. Thank you, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Murphy, I'll bring you back again as we conclude proceedings today. Mr. Burrows, if you maybe could just clarify up one matter or maybe just add a bit of detail before we go for a break in around 11 a.m. Earlier when you were speaking to Deputy Murphy in regard to the guarantee, you were talking ... you mentioned the requirement of a consideration for short-term funding for Anglo and that Bank of Ireland were discussing this arrangement with Government. Am I correct in saying that?
Ciarán Lynch (Cork South Central, Labour)
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You were saying that in around the period of the guarantee, there was a consideration for short-term funding for Anglo that would ... as being the immediate requirement-----
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Was that short-term funding, by your understanding or by your interpretation, to put Anglo indefinitely into the future and look at it again or was it to get it to the weekend and at the weekend either nationalise it or wind it down?
What was the purpose of that short-term funding?
Ciarán Lynch (Cork South Central, Labour)
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And, at that weekend, was there any indication as to what would be the future of Anglo when it got to the weekend?
Ciarán Lynch (Cork South Central, Labour)
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Okay, and was there any indication to you that Anglo would be wound down, or would be nationalised, or liquidated, or anything else by the weekend?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. So, with that said, I now propose that we take a break until 11.15 a. m. The witnesses are reminded that, once they begin giving evidence, they should not confer with any person other than their legal team in relation to their evidence or matters that are being discussed before the committee. With that in mind, I now suspend that the meeting ... will be suspended until 11.15 a.m. and remind the witnesses that they are still under oath when we resume. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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We're all back and present and all mobile devices are in appropriate mode, I assume. So with that said, I now bring the committee back into public session and in doing so I'll be inviting Deputy Doherty. Deputy Doherty you have ten minutes.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Go raibh maith agat, a Chathaoirligh, agus fáilte roimh an bheirt agaibh chuig an coiste.
Just ... you've mentioned to the Chairperson that you were satisfied with all of the relevant information that you were getting from ... in relation to risks and exposures. So that being the case, how would you explain the issues highlighted in the report ... in the Boston Consulting Group report and it's available in BOI 102-106 and its on ... there's an exhibit on page 10 ... Exhibit 8 on page 10, which gives a summation of the concerns that were raised in relation to some of the risks that the bank were taking. It's BOI - B1, page 10. Page 9 also ... if you're waiting it to come up ... also talks about ... "There were four areas where there were gaps between BOI credit risk capabilities and peer [practice review]" and they identified risk appetite framework, court risk committee, risk function organisation structure and credit MI.
Pearse Doherty (Donegal South West, Sinn Fein)
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But did it review the period that you were ... as governor of the bank?
Pearse Doherty (Donegal South West, Sinn Fein)
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So you were familiar with all of the risks that ... that you were taking. So how do you stand over the fact that a report identified that there were these areas, these gaps?
Mr. Richard Burrows:
But in my opening remarks I ... I identified the areas where I felt we had made mistakes. And in one of them was the ... the amount of lending which we engaged in. The ... the absolute amount of lending in relation to property was one of our weaknesses, there is no doubt ... when ... when the property crash occurred. That was ... that was a fact.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Can I ask you, Mr. Burrows, how much time was allocated in the agenda of the board ... the board ... the court to the strategy and developing the business model and its ongoing monitoring and reviewing?
Mr. Richard Burrows:
I will. If I go back to a kind of normal period, in other words ... years before 2008, I would say that we devoted quite an amount of time, probably of the order of ... of 20% or one fifth of our board time would have been devoted to strategy and strategy matters and reviewing how we were doing against strategy. Of course, in 2008 and after that the agenda changed very much to ... to a survival mode and so, therefore, it wasn't so much about strategy as it was about day-to-day issues.
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Crowley, in 2002 the court approved the proposal to take over Abbey National. You were quoted in The Irish Timeson 26 October 2002 saying that it was, "A once in a lifetime deal''. Why was Bank of Ireland interested in taking over Abbey National at the time?
Dr. Laurence Crowley:
Well, because it seemed to the bank as a very good fit. It was in a market that we understood and had a large presence in already. It was part of our expansion plan to grow and to grow sensibly and safely in an environment in which ... we understood and already were doing a huge amount of business. So it ticked all these boxes.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. And, Mr. Burrows, in 2005, in your opening statement you say when ... on your appointment as chairperson in 2005 ... the bank developed a new strategy and you go on to say that its "correct geographical footprint for Bank of Ireland was Ireland and the UK and these should be the areas of focus for growth and we also recognised that Bank of Ireland did not have a rating that would allow us to undertake mergers or acquisitions and therefore, we would have to rely on organic growth in existing markets which [we were also] ... were also expanding markets." What does that mean for the bank in 2005 ... that it didn't have the rating to undertake mergers and acquisitions?
Mr. Richard Burrows:
What it meant was that by ... by virtue of the slower rate of growth which Bank of Ireland was experiencing and reporting compared to other banks, our price earnings ratio was at a lower level than the other banks. And that meant that our firepower in terms of ... of being able to make realistic approaches to any overseas bank that might have been attractive to us from an acquisition point of view, just wasn't there. And so, therefore, we had to rely on ... on organic growth. In other words, growing the business which we were already in.
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, and that was, as you say, in 2005. Was commercial property, landbank and residential property seen as, or not seen as, a way of compensating in terms of growth for the lack of opportunities in mergers and acquisitions?
Mr. Richard Burrows:
Well ... I ... the statement stands on its own, I think, and that is we ... we looked to organic growth in all of the businesses which we were in as a means of ... of growing the business of the bank overall. And ... and, therefore, we had to ... we had to rely on organic growth being realistic about the lack of opportunity that there would be for us to grow by acquisition. That would have included property.
Pearse Doherty (Donegal South West, Sinn Fein)
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Property. Mr. Burrows, were you concerned at the time of the guarantee at the end of September 2008, of the issue of bad debts, future bad debts and the issue of capital within your bank?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Can I ask you ... and I'm just going to refer to Bank of Ireland C3b and it's on page 30 and it goes on for a number of pages. And this is a telephone conversation that was recorded in the trading room of Bank of Ireland and a transcript of it has been provided to the committee. It's between a Mr. Tilson and a "Mick'' and it was on the morning of 30 September 2008 at quarter past nine. Can you inform the committee who Mr. Tilson is ... in ... in Bank of Ireland?
Pearse Doherty (Donegal South West, Sinn Fein)
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The head of global markets at the time would have been?
Pearse Doherty (Donegal South West, Sinn Fein)
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But ... sorry, who was the head of global markets at the time?
Pearse Doherty (Donegal South West, Sinn Fein)
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Right. Okay. Okay, can I just say ...say to you ... so this is the response ... this is the conversation that taking place within the bank at the time between Mr. Tilson and Mick and it says:
MR. TILSON: Good morning Mick.
MICK [replies]: Well it's all over.
MR. TILSON: Absolutely.
MICK: Its all sorted.
Mr. TILSON: All done. Magic wand.
MICK: I mean, Jesus I would nearly feel like issuing a bit of capital myself. Everybody bar the equity holder has been sorted [out].
Is that your view at the time of-----
Mr. Richard Burrows:
Most certainly not. That morning all that had happened was the announcement of the guarantee, which certainly had the desired effect of stabilising things - albeit on a short-term basis. And in my opening remarks I ... I made the point and I ... I just reinforce it, that the guarantee on its own was not a magic wand. Given the severity of the situation which was unfolding, it was necessary for recapitalisation and NAMA as component parts.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, I'll ask you now just because ... this was immediately, as I said, on the morning of the guarantee.
Mr. Tilson goes on to say:
Never mind anything with a Government guarantee.
MICK: Yes, but [even if you were to] ... even if you get the -- let us say you get out and you take billions.
MR. TILSON: Yes.
MICK: Right, and it's ... it is Government guaranteed etc., etc., like all that is doing is essentially shoring up an overly geared balance sheet.
MR. TILSON: Absolutely.
MICK: So it is giving you money, wholesale money for two and three years, issuing capital, whatever?
MR. TILSON: Yes.
[MICK]: But you are still left with a balancesheet and we know with bad debts.
MR. TILSON: Right.
MICK: That are going to come against us.
MR. TILSON: Yes, absolutely.
MICK: Like, that is kind of almost like a zombie bank.
MR. TILSON: Yes, no absolutely.
MICK: And it is not dealing with the real issue, as he said, which is capital and bad debts.
MR. TILSON: Yes.
MICK: [And they are both ... ] And they are both inextricably linked?
MR. TILSON: They are.
How come that senior people in Bank of Ireland, on the morning of the guarantee, were talking about the issue that this wasn't dealing with the real issue, which is capital and bad debts within the bank, but you as governor, as you mentioned earlier on, were not concerned about those two areas at that time?
Mr. Richard Burrows:
If I've given you the impression that we weren't concerned about those issues, then I have, I have misled you. I refer to the fact that in July of that year, for example, the board took the decision that we should pass on our interim dividend and that was a very tangible expression of the fact that we were concerned about capital, we were concerned about worsening bad debts, but not at that point, to anything like the degree that subsequently transpired.
Pearse Doherty (Donegal South West, Sinn Fein)
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Finally Mr. Burrows, on the night of the guarantee it has been suggested in the evidence here, through a note that Mr. Sheehy, I believe, dictated, but it's been suggested in evidence here that there was a draft statement prepared by Government which had an attestation from the Financial Regulator that all the financial institutions were solvent and the system was solvent, and that was deleted as a result of an intervention by AIB at that point in time. Were you familiar with that conversation? Can you recount to the committee your knowledge of issues around a statement in a draft guarantee of the financial institutions being solvent, and how it was led to be deleted?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes. A draft statement that was going to contain a formula of words attesting to the solvency of the financial system and the financial institutions which was ... which AIB had raised concerns about.
Mr. Richard Burrows:
Well, I can't comment on the particular draft press release because I don't have a recollection of it. And I can only speak from the point of view of Bank of Ireland. On the night of the guarantee, as far as we were concerned, we were an entirely solvent institution. Now we would admit that we had great concerns about liquidity for the reasons that I mentioned to you - the closing of the wholesale funding markets. But on the night of the guarantee, we had some 60 days at least of visibility in relation to our funding position, but at no time at that point were we concerned about solvency.
Pearse Doherty (Donegal South West, Sinn Fein)
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Sorry, that was ... I appreciate that but that wasn't the question. The question I have for you is: were you party to any discussions in relation to a statement that Government were suggesting that would include a statement saying that the financial ... all the financial institutions were solvent and that AIB raised issues with this, and the statement was deleted?
Pearse Doherty (Donegal South West, Sinn Fein)
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And did you only give ... did you only give a view in relation to the solvency of Bank of Ireland or did you offer a view in relation to the solvency of other financial institutions on that night?
Mr. Richard Burrows:
The meeting was called because of the liquidity concerns that we had with respect to Anglo, and, as far I was concerned, that was the particular issue that triggered that meeting. It wasn't a question about the solvency of Anglo, although we may well have had our concerns about that, but that wasn't on the agenda nor was the question of solvency in relation to any other institution on our agenda that night.
Pearse Doherty (Donegal South West, Sinn Fein)
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Is that a "No"? Just can I clarify if that was a "No"?
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Pearse Doherty (Donegal South West, Sinn Fein)
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So, is that a "No" to the question I asked, that you did not offer an opinion on the solvency of any other financial institution on the night?
Pearse Doherty (Donegal South West, Sinn Fein)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy. Just on a related matter before I bring in Senator D'Arcy, Mr. Burrows. Earlier you stated that you were aware of the bank's position going into the meeting with the Government, i.e. Bank of Ireland's position, and you kind of made reference to it as well in your discussions there with Deputy Doherty. Could you please clarify this, as Mr. Goggin informed the committee that he was not aware of maturing borrowings, etc., within the bank in his earlier testimony to us? And ... we would hope that in your role as part-time chair, you're now indicating that you knew the position of the bank. How would the CEO maybe not have known about it? How do you reconcile that?
Mr. Richard Burrows:
I can't reconcile it, Mr. Chairman, because the information that I had would have come directly from the CEO. This was something on which I was briefed by the CEO on a very regular basis as you can imagine in the circumstances that pertained in those days. So, therefore, I was .. I was very well aware, as was he, of the maturity of wholesale funding, of our difficulty in terms of rolling over of wholesale funding, of the runway, as I referred to it earlier, that we had at any particular time so it was something which was absolutely necessary to know and I am mystified by his evidence. I can't explain it.
Ciarán Lynch (Cork South Central, Labour)
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And the call on subordinated debt and other matters. So you would have ... would there have been ... let's ... to kind of add a bit of imagery to it ... would there have been a desk or a table in Bank of Ireland that night where all these figures would have been there, or would there have been somebody in front of a computer running all these figures that would have had you informed going over to Government Buildings that night, as to what the extent of liability, exposure and so forth, that Bank of Ireland would be cognisant of in their engagement with Government that night?
Ciarán Lynch (Cork South Central, Labour)
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And just to be on the record, are you saying there is an incongruence between what you are saying today and what Mr. Goggin said to us?
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator D'Arcy.
Michael D'Arcy (Fine Gael)
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Thank you, Chairman. Mr. Crowley, in the opening statement from Mr. Burrows, on page 2, strategy '01 to '06, strategy '02 to '07, strategy '03 to '08 - were they taken in your time as chairman of the board of directors?
Michael D'Arcy (Fine Gael)
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Page 2 of the opening statement.
Michael D'Arcy (Fine Gael)
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No, it's Mr. Burrows opening statement. That is your opening statement.
Michael D'Arcy (Fine Gael)
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The full written copy.
Michael D'Arcy (Fine Gael)
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Strategy '01 to '06 presented by Maurice Keane in October '01, strategy '0-----
Michael D'Arcy (Fine Gael)
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Strategy '02 to '07, as presented by Michael Soden, October '02. And then '03 to '08 strategy presented October '03. Were you chairman of Bank of Ireland or governor of the board at that stage?
Michael D'Arcy (Fine Gael)
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October '01, October '02 and October '03.
Michael D'Arcy (Fine Gael)
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So is it the case that you were the governor during these periods when these strategies were formalised?
Michael D'Arcy (Fine Gael)
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These strategies.
Michael D'Arcy (Fine Gael)
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Yes, there was the CEOs made a presentation to the board in October '01, October '02-----
Michael D'Arcy (Fine Gael)
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Yes. Were you the governor of the board?
Michael D'Arcy (Fine Gael)
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During those three strategies.
Michael D'Arcy (Fine Gael)
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You were. And does the board take ownership of those strategies?
Michael D'Arcy (Fine Gael)
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And Mr. Burrows, you were deputy governor?
Michael D'Arcy (Fine Gael)
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And does the board take ownership of those strategies?
Michael D'Arcy (Fine Gael)
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And the growth, the level of growth from '01 to '08 was, for Bank of Ireland, 30% of the balance sheet. Do you take ownership of those ... of that also?
Michael D'Arcy (Fine Gael)
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The rate of growth - did that rate of growth ultimately lead to the downfall of Bank of Ireland?
Mr. Richard Burrows:
You're asking the question to me. I don't believe so. I think the rate of growth was occasioned by the very fast economic growth in the markets in which we were participating, namely, in Ireland and in the UK. Where we got it wrong, of course, was that we were fuelling the growth of the balance sheet by over-reliance on wholesale funding and that was something that I referred to in my opening remarks.
Michael D'Arcy (Fine Gael)
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Yes. Did your strategy not move away from a previous strategy in terms of deposit ratios versus lending, which were much more stable than the wholesale ... the dependence on the wholesale markets? And that was the strategy of the board?
Mr. Richard Burrows:
Yes, it did. The strategy changed. As we referred to it earlier, the strategy presented by Mr. Soden when ... after he had been recruited, was for much more ambitious growth than had been the case before and so therefore there was a step change, and that was in response to a feeling that Bank of Ireland was underperforming in terms of the expectations of our shareholders and that's why that strategy was developed and pursued.
Michael D'Arcy (Fine Gael)
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Have you read Simon Carswell's book, Anglo Republic?
Michael D'Arcy (Fine Gael)
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You haven't. Mr. Carswell was here previously. He gave evidence. And part of that evidence that I put to him was a quotation attributed to Mr. Soden that ... it was page 55, that if a liquidity crisis occurs, that Anglo were gone. So Mr. Soden certainly must have known something about liquidity. And could you comment on the fact that Mr. Soden commented upon liquidity for Anglo and you continued down the path of wholesale equip ... or wholesale bank lending?
Ciarán Lynch (Cork South Central, Labour)
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Could you just give us an indication of the timeline you're referring to there?
Michael D'Arcy (Fine Gael)
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Well, Mr. Soden left Bank of Ireland in May 2004, so it was during Mr. Crowley's period as governor and yourself, Mr. Burrows, as deputy governor. Did Mr. Soden ever mention anything about liquidity to the board, Mr. Burrows, during your time on the board, that liquidity could be ... potentially become a problem if there was a liquidity crisis?
Mr. Richard Burrows:
My recollection is that he did not draw our specific attention to a risk on liquidity. Of course, liquidity was something which he would, as chief executive, have been continuously reporting on to the board. So it would have been a natural topic at probably every board meeting, which we would have discussed but I can't recall any warning in the way that you're phrasing it.
Michael D'Arcy (Fine Gael)
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And in terms of the '01 to '05 period ... and the reason I'm questioning you in relation to this period is because Mr. Buckley, CEO of AIB, when he gave evidence, also was satisfied ... and I'm going read the quotation to you, Mr. Burrows, that ... I questioned Mr. Sheehy and I said to him, "Mr. Sheehy, you made the point that the bank took too much risk [in that '01 to '05 period.]" And Mr. Sheehy said, "I did yes." I put the same question to Mr. Buckley: "Did the bank take too much risk in your time [the '01 to '05 period]?" And Mr. Buckley's answer was, "No. In my view." Can I ask you, Mr. Burrows, did the bank take too much risk in the '01 to '05 period?
Michael D'Arcy (Fine Gael)
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I'm asking about the '01 to '05 period.
Mr. Richard Burrows:
Yes, I'm going to get to that in a moment. In relation to the property lending, that was the big factor that caused us enormous difficulty within Bank of Ireland, which required the Government intervention that we did get. The fact is that that lending, not all of it would have been put in place in 2008 or anything like that. It would have been something that would have been built up over the period of time, probably from 2001, because the nature of this lending is that it's going to be there for some time. So there would have been a build-up of lending through the period that you're referring to and the progression would have continued beyond 2005. So I don't know whether that answers your question or not but-----
Michael D'Arcy (Fine Gael)
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Not really. Senator Barrett made the point about a substantial increase in residential investment property risk doubling ... or investment doubling over a 15-month period. Mr. Burrows, you said that risk should have been the fundamental driver of strategy, this morning.
Michael D'Arcy (Fine Gael)
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At what stage did you ... at what stage did you realise that that should have been in place prior to your leaving the bank, or did you?
Michael D'Arcy (Fine Gael)
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Can I ask Mr. Burrows also-----
Ciarán Lynch (Cork South Central, Labour)
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Ask the question now, Senator.
Michael D'Arcy (Fine Gael)
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Well ... can I ask Mr. Burrows, in terms of the ... there's seems to be a conflict of evidence between yourself and Mr. Goggin. Mr. Goggin also stated to the committee that it was ... he met with the Central Bank on the morning, the Monday morning, the 29th, and he was asked would he consider ... would Bank of Ireland consider taking over IL&P. Were you aware of that request by the Central Bank on that morning, during that day?
Michael D'Arcy (Fine Gael)
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You were. Okay. In terms of your conversation subsequently with Governor Hurley ... and the term that Mr. Goggin used was "virtually certain" that Anglo would default the next day.
Michael D'Arcy (Fine Gael)
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"Virtually certain".
Michael D'Arcy (Fine Gael)
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That was the term that he used, yes.
Ciarán Lynch (Cork South Central, Labour)
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In his testimony before this inquiry.
Michael D'Arcy (Fine Gael)
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On the day of Monday, the 29th.
Michael D'Arcy (Fine Gael)
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That the next morning ... the next day it was virtually certain that Anglo Irish Bank would default.
Michael D'Arcy (Fine Gael)
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Were you aware that Anglo Irish Bank were also virtually certain to default or was that term used with you by Mr. Goggin?
Mr. Richard Burrows:
I was completely aware, because I refer to the fact that we had a visit from the chairman and chief executive of Anglo, who had their hands in the air - they were in serious trouble. And it was perfectly obvious from what they were saying that they were in imminent danger of collapse the following morning.
Michael D'Arcy (Fine Gael)
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And my final question to you, Mr. Burrows: there was a meeting between AIB and Bank of Ireland organised - who instigated that meeting?
Michael D'Arcy (Fine Gael)
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When you went to Government Buildings.
Michael D'Arcy (Fine Gael)
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And you understood, from what you've given evidence this morning, that there would be a six-bank guarantee. Did you speak with AIB officials? There was only four of you between both sides. Did you speak with them? Did you discuss the matter of the six-bank guarantee or the four-bank guarantee, because also, in previous evidence, AIB officials told us they understood it was a four-bank guarantee?
Michael D'Arcy (Fine Gael)
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Subsequent to the meeting, after your being informed that it would be a six-bank guarantee, did you have a conversation with AIB after you were informed by Government officials that it was a six-bank guarantee?
Michael D'Arcy (Fine Gael)
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Yes. But I'm asking did you discuss that with AIB afterwards?
Ciarán Lynch (Cork South Central, Labour)
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You're over time now, Senator.
Michael D'Arcy (Fine Gael)
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You didn't discuss it at all?
Michael D'Arcy (Fine Gael)
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And finally-----
Michael D'Arcy (Fine Gael)
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Okay. And finally, can you understand how people who were at the same meeting as you took a different view? I think it's a fair question, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Can you just clarify now the situation, Mr. Burrows - over the course of the whole evening in Government Buildings, were AIB and yourselves in the same room or in separate rooms?
Ciarán Lynch (Cork South Central, Labour)
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You were in the same room all evening?
Ciarán Lynch (Cork South Central, Labour)
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And ... with the Government joining you at different stages during the evening?
Ciarán Lynch (Cork South Central, Labour)
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Yes, I-----
Ciarán Lynch (Cork South Central, Labour)
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Okay so you were collectively together and then you left at the end of that?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Joe Higgins. Ten minutes.
Joe Higgins (Dublin West, Socialist Party)
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Yes, thank you. Mr. Burrows it is long considered that a prudent loan-to-deposit ratio for banks should be of the order of 120% or lower. Why was this target so severely breached in the ... up to 2008, when it reached 176%?
Mr. Richard Burrows:
My answer to that is that it was the availability of wholesale funding which largely replaced the reliance on deposits which had been there before. And this was not a situation which was peculiar to Bank of Ireland, this was something which was happening, not just in Ireland but right across the euro-land as banks were availing of wholesale funding in order to engage in their business of lending.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Burrows, witnesses from Bank of Ireland have fairly consistently, some people might feel, have tried to diminish the extent of the losses or the mistakes by reference to competitors who fared much worse in the crash. Is that what you have just done now again?
Joe Higgins (Dublin West, Socialist Party)
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And was that a factor generally that led to so much crisis around the world?
Mr. Richard Burrows:
Undoubtedly. As I said in my opening statement, one of the big factors was the drying up of wholesale markets in light of the collapse of Lehman Brothers, but there were many other financial institutions which came down in that period. And that led to a closing of the wholesale markets which meant that that liquidity which had been available, was no longer available. And that was what happened to us and I guess by extension it happened to quite a lot of others too.
Joe Higgins (Dublin West, Socialist Party)
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But does that beg the question Mr. Burrows whether ... was it appropriate to have reached that huge level of 176%? Was that appropriate?
Joe Higgins (Dublin West, Socialist Party)
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But the bank ... can you explain why the bank and, apparently from the documentation we have, your advisers at the time didn't see the danger that was looming here? Can you explain why that was the case?
Mr. Richard Burrows:
No, I can't explain. I'm not sure which advisers you are referring to, but I can't explain why somebody didn't see the problem. We didn't see the problem, I take my share of responsibility for that. We had over-reliance on wholesale funding, as evidenced by the numbers which we have been quoting and we make no bones about that.
Joe Higgins (Dublin West, Socialist Party)
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The Governor of the Central Bank, Patrick Honohan, said in an article, summer 2009, in The Economic and Social Review:
A very simple warning sign used by most regulators to identify a bank exposed to increased risk is rapid balance sheet growth. An annual real growth rate of 20% is often taken as the trigger.
And that growth rate and greater would have been appropriate or what Bank of Ireland recorded 2004, 2005, 2006. Were you not aware of the danger of growth levels of that magnitude?
Mr. Richard Burrows:
We weren't. We weren't paying attention to the risk that attached to those growth levels, and bear in mind, what I said in my opening remarks which was that we were operating in an economy which was itself growing very quickly. We were operating in a situation of rising employment, rising population and a huge demand for housing. That was what was occasioning the opportunity to grow the size of the balance sheet.
Joe Higgins (Dublin West, Socialist Party)
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Yes, but the economy wasn't growing by anything like 20%, Mr. Burrows.
Joe Higgins (Dublin West, Socialist Party)
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A former US regulator, Bill Black, gave evidence to the inquiry, are you familiar with Mr. Black?
Joe Higgins (Dublin West, Socialist Party)
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Okay. Mr. Black, who was a regulator and has a huge amount of experience in regulation and in dealing with bank crashes from the late 1980s and 1990s on, but he said a number of ingredients could be guaranteed in a banking system to cause catastrophic loses. Among those is grow like crazy, make terrible quality loans and employ extreme leverage. He said that these ingredients would inevitably lead to record profits. He further said, "Under modern executive compensation the senior leadership [of the banks, that is] will promptly be made wealthy", and then it will result in catastrophic losses. Do you recognise Bank of Ireland in that scenario which Mr. Black outlines?
Joe Higgins (Dublin West, Socialist Party)
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But Mr. Black and others would have been warning about this for even decades previous to what happened in Ireland. How come, Bank of Ireland, with the huge resources, research capacity, etc., wouldn't be aware of the dangers of this excessive drive for growth?
Mr. Richard Burrows:
Well, I can only go back Deputy to the process we engaged in in 2005-06 where in questioning the sense of our own strategy we brought in quite a number of different advisers to talk to us about these very things. And, I have to tell you, and I haven't got the full list of people that we brought in, but we had a very eminent range of advisers coming to talk to us and they did not point to the particular point that you are now talking about, and we didn't have Mr. Black either.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Burrows, Mr. Black's implication is that a drive, a greed for profit has led many banks to perdition and also huge remuneration for bank leadership like chairpeople and CEOs. Was greed for profit a factor in the huge drive for growth and in the downfall then of Bank of Ireland?
Mr. Richard Burrows:
If I go back to the strategy which we talked about earlier, identified by Mr. Soden, that was, as we have described it, an aggressive strategy to grow the business of Bank of Ireland. That was something which our shareholders were expecting us to do. In fact, as I mentioned to you earlier, the rate of growth within Bank of Ireland was causing us to be rated less by the market than our peer group, which was cutting off certain options from us. So there was built into what we were doing, a need for us to grow the business. And by growing the business that meant, in banking terms of course, growing the balance sheet and thereby growing the profit and loss account.
Joe Higgins (Dublin West, Socialist Party)
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Yes but-----
Joe Higgins (Dublin West, Socialist Party)
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The peer group that you were trying to emulate, Mr. Burrows-----
Ciarán Lynch (Cork South Central, Labour)
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Time.
Joe Higgins (Dublin West, Socialist Party)
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-----as we know, finished in disaster many of them. Therefore, is it a defence of any kind by Bank of Ireland to say, "We had to emulate these in a rush for profit"?
Mr. Richard Burrows:
Deputy, I'm not offering any of these remarks as a defence, I think I have been as open as I can be about the mistakes which we made and the pitfalls which we overcame. So I am not offering it as a defence, I am simply offering it as, to the best of my recollection, the explanation of what happened.
Joe Higgins (Dublin West, Socialist Party)
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A witness to the inquiry Mr. Burrows, David McWilliams, in a "Prime Time" interview in October 2003 said the following-----
Ciarán Lynch (Cork South Central, Labour)
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Final question now, Deputy.
Joe Higgins (Dublin West, Socialist Party)
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-----said the following:
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 on us by an alliance of banks and landowners.
Today, in Ireland, the price of the average house is close to ten times the average wage. This represents an economic failure on the 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.In 2003, a full four or five years before the bubble finally burst, did Mr. McWilliams get it absolutely right, and should Bank of Ireland and other banks not have seen the same factors?
Ciarán Lynch (Cork South Central, Labour)
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Final question now, that's it, Deputy, thank you. Mr. Burrows.
Joe Higgins (Dublin West, Socialist Party)
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Just the very last question. It's noted in the core documents BOI - B1 - you don't need to go there, Mr. Burrows - page 73 to 93, just a general observation that the quality of management information reports and data available to board members may not have been as strong as they should have been. Do you think the directors were aware of this and do they accept deficiencies in management information systems?
Mr. Richard Burrows:
I think with the benefit of hindsight again, it is pretty obvious that in the run-up to 2008 there could have been better reporting to the board. However, I have to tell you that, as a board, we were entirely satisfied with what we were getting. At times there were calls from the board to management for additional information, for reports on various things, but there was not a level of dissatisfaction at all at that time. Now subsequently, of course ... the reporting has been moderated or modified. I haven't been involved since 2009 so I can't comment on it today. But that's what I would expect, that after the horse has bolted you slam the stable door and ... and you improve the processes that you have. But at the time, as far as the board was concerned, I felt that we were getting the information that we required.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy Higgins. Mr. Crowley, if I can just return to yourself for a moment and ask if it was Mr. Michael Soden who was the external CEO you referred to earlier as moving the bank away from what had been considered the traditional banking model.
Ciarán Lynch (Cork South Central, Labour)
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Yes. Can I just get clarity on that? Was that what you indicated and said to the inquiry earlier?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Can I ask you ... and maybe put the question so to you to get clarity ... can I confirm that Michael Soden was an external CEO to the bank?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And, as has been mentioned a couple of times this morning, Bank of Ireland is a bank that has been in existence for almost two centuries. Did you imply to the inquiry or give evidence to the inquiry that ... you are saying that Mr. Soden reshaped the banking model that was being used by Bank of Ireland and moved it away from the traditional approach that it had?
Dr. Laurence Crowley:
I don't think, Chairman, that anybody in the 260 odd years has reshaped the model of the Bank of Ireland. It is what it is. It's ... of course changes are brought in, moving with the times in corporate governance and other areas, but the model ... and of course the market and technology bring in changes. But, otherwise, nobody has made fundamental changes.
Ciarán Lynch (Cork South Central, Labour)
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That would then bring me onto my next question, Mr. Crowley. As ... between 2001 and 2005 it would appear that the business model of the bank moved towards a more sales-orientated approach to its historical model. Would I be correct or incorrect in assuming that?
Ciarán Lynch (Cork South Central, Labour)
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A more sales-orientated approach.
Ciarán Lynch (Cork South Central, Labour)
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Is it a change in practice?
Ciarán Lynch (Cork South Central, Labour)
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What's the difference?
Ciarán Lynch (Cork South Central, Labour)
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What's the difference?
Ciarán Lynch (Cork South Central, Labour)
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On the balance sheet, what's the difference?
Ciarán Lynch (Cork South Central, Labour)
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Okay, but does the culture not ... is the balance sheet not influencing the culture?
Ciarán Lynch (Cork South Central, Labour)
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Not influencing the culture of the bank?
Ciarán Lynch (Cork South Central, Labour)
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Well, let me give you one example of that so Mr. Crowley.
Ciarán Lynch (Cork South Central, Labour)
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Whether you felt it was ambitious ... or whether you felt the ambitious profit before tax and earnings per share growth levels targeted by Bank of Ireland in this period ... do you consider that was a mistake or not and did you feel it would continue to go well into the future and that there was no such risk in such a strategy?
Ciarán Lynch (Cork South Central, Labour)
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Okay. I don't ... I have you in the inquiry this morning, Mr. Crowley ... we can talk about experts and we've had plenty of them in before us. I'm asking you, did you see a risk in such a strategy?
Ciarán Lynch (Cork South Central, Labour)
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You did not see such a risk in such a strategy?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Deputy Kieran O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thank you, Chairman. Mr. Burrows and Mr. Crowley, welcome. Can I go to document Bank of Ireland - Vol. 1, B2, and the page I'm looking at is page 89. It's effectively to do with stress testing. It's dated 3 April 2006, addressed to Mr. Liam Barron, who was with the Central Bank. And the question I suppose I want to ask is that your sensitivity analysis appears to have very much revolved around mortgages versus non-mortgages. Did ye look at different type of stress testing ... the correlation between property being ... the type of property, whether it was commercial development land, speculative landbanks, and how it was being financed? And when you're dealing with that, Mr. Burrows, could you also address that on page 90 you speak about the projected ... when you're looking at the general ... that your sensitivity analysis ... the projections assume capital raising in the years '06-'07, '07-'08 and '08-'09 of the order of about €4.3 billion. And you said ... if the funding was not raised with "Shock 1 Scenario" that you basically would just be meeting your minimum regulatory capital requirements. Did ye raise any of that money by way of capital? And, just the sensitivity analysis ... it doesn't appear to have gone into any great depth. And what type of reduction in falling property values did ye factor into your sensitivity analysis, in worst case scenario?
Mr. Richard Burrows:
First of all, during that period we were heavily engaged in the implementation of the Basel II regulations, which were the new regulations that required us to have a different approach to assessing the amount of capital required to be appropriately capitalised for the business which we were doing. And in that ... in that calculation, the mortgage loans were actually the least risky under the Basel II methodology, whereas other loans carried various rates. So that would have been the background to a lot of the work which was being done in assessing the comparative risk of different elements of the balance sheet.
If I ... if I go to the second part of your question, we didn't raise fresh capital during the period but of course we were generating capital through the ordinary profit and loss of the ... of the business. That's the way businesses generally do generate capital where your ... you're earning profits after tax, you're paying part of that as dividend to your shareholders and the remainder you're adding to your capital base within the business. So when the profitability of the bank improves, so also does your flow of fresh capital.
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose reading the document, Mr. Burrows, the document speaks about fresh raising of capital and not about-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, ye didn't. Why not?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. And what ... in the worst case scenarios, what level of ... of, we'll say, deterioration in the price of property would ye have looked at?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. And do you feel you stressed up across a number of ... broad range of the type of loans and also factoring in how you were financing it through increasingly wholesale funding?
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just go back .... on the area around the guarantee and I want to just go to Vol. 1, BOI ...1 ... CB ... C3b ... and, more particularly ... which is new evidence today, which is that you had a meeting with the former Governor of Central Bank, John Hurley, on the day before the guarantee. When did that meeting actually take place, Mr. Burrows?
Kieran O'Donnell (Limerick City, Fine Gael)
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That was pre-arranged to look at-----
Kieran O'Donnell (Limerick City, Fine Gael)
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On the basis, you made reference in the documentation that it was about collateral from the ECB, the type of collateral. Did you have concerns around liquidity, was that the reason for the meeting?
Mr. Richard Burrows:
No. This was part of a continuing discussion which we were having with the Central Bank in relation to the very point that I was talking about before and the need for us to be able to collateralise our balance sheet, and therefore avail of funding from the ECB. What we were concerned about was that we would have the support of the Central Bank in making sure that that was going to continue to be available to us.
Kieran O'Donnell (Limerick City, Fine Gael)
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Mr. Hurley, in his note to you, page 4 of this document, says that he had done all he could to achieve a change in the ECB rules. The question is had you problems with liquidity, was that the specific reason for that particular meeting with Mr. Hurley?
Kieran O'Donnell (Limerick City, Fine Gael)
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When you broached the issue of Anglo with Mr. Hurley, can you just give me what his response was and how did you view his response?
Mr. Richard Burrows:
I cannot give you in precise terms, but I know that my impression was that he was surprised at the information that I gave him that we'd had this call and this visit by the chairman and chief executive of Anglo and the state of desperation which they had reached on that morning.
Kieran O'Donnell (Limerick City, Fine Gael)
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Had he any knowledge of the Anglo situation?
Kieran O'Donnell (Limerick City, Fine Gael)
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What exactly did he tell you, Mr. Burrows?
Kieran O'Donnell (Limerick City, Fine Gael)
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When he said there was nothing he could do, why did he say there was nothing he could do?
Kieran O'Donnell (Limerick City, Fine Gael)
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So were you surprised with the response, Mr. Burrows?
Kieran O'Donnell (Limerick City, Fine Gael)
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Do you think that, in your view, what else could have been discussed with Mr. Hurley that Mr. Hurley could have ... what approach would you have expected Mr. Hurley to proceed with?
Mr. Richard Burrows:
Well, we were looking at a situation which I felt was extremely serious, not just for Bank of Ireland but for the Irish banking establishment as a whole. Therefore, I felt that remedial action of some kind was going to be necessary. I was not sure what to expect frankly. But when I got the response that I got, and the recommendation from Mr. Hurley that we should talk to Government, that's what we determined we should do.
Kieran O'Donnell (Limerick City, Fine Gael)
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That's what triggered your approach to Government?
Kieran O'Donnell (Limerick City, Fine Gael)
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And your approach to AIB?
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just go to the minutes of 29 September, page 19. These minutes were prepared by an L. Clooney. Can you just clarify one thing for me, would these minutes have been circulated Mr. Burrows?
Kieran O'Donnell (Limerick City, Fine Gael)
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Page 19. What I am more interested in Mr. Burrows, is paragraph 3 - Government Guarantee and AOB, any other business. So the question is would these minutes have been circulated?
Kieran O'Donnell (Limerick City, Fine Gael)
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They were not circulated to you. Even though you were at the meeting?
Kieran O'Donnell (Limerick City, Fine Gael)
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29th. Sorry, you weren't present at that meeting.
Kieran O'Donnell (Limerick City, Fine Gael)
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So you wouldn't have been circulated then with that.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. You are of the view there was no guarantee, any form of draft guarantee, provided by Bank of Ireland to, even though in the minutes here they state that, "The committee prepared a draft of such a guarantee and the list of institutions that it should cover for use by BJG [Brian Goggin] in his meeting later than evening."
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose, in the last minute I have, you believe there was no guarantee, you took no guarantee of any form, any outline guarantee to Government on the night?
Kieran O'Donnell (Limerick City, Fine Gael)
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Your recollection is, Mr. Goggin was in before us, he said that Bank of Ireland looked for a guarantee for subordinated debt. Your recollection is that was not the case.
Kieran O'Donnell (Limerick City, Fine Gael)
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No discussion whatsoever on it?
Kieran O'Donnell (Limerick City, Fine Gael)
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Finally, Mr. Goggin informed us that he had no idea of what the exposure was for the bank. You would take issue with that?
Kieran O'Donnell (Limerick City, Fine Gael)
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Finally, my last question, do you believe Mr. Burrows, on the night of the guarantee, was Anglo Irish and Irish Nationwide Building Society, were they solvent or insolvent?
Ciarán Lynch (Cork South Central, Labour)
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Just in general, Mr. Burrows, in your experience with minutes of meetings, generally accurate at Bank of Ireland?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. I want to move on to the issue of Project Atlas for a moment there with you, Mr. Burrows. It will just be coming up on the screen there in a moment. This was during your tenure. The Project Atlas report in summary would demonstrate that large exposures and mothballing of developments and landbanks were highlighted in this report. It shows them as issues for Bank of Ireland, showing that the ongoing need for the bank to support such clients in the face of loan to values, interest roll-over and availability of further security. What is your view on PwC's output on this? Would you agree with that?
Ciarán Lynch (Cork South Central, Labour)
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Would it be fair or not to say that was a two-sided coin? That when you were actually issued-----
Ciarán Lynch (Cork South Central, Labour)
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Would it be fair or not to say that was a two-sided coin? That when the loans were actually being issued in the first instance, it was a very subjective valuation process as well.
Mr. Richard Burrows:
Well it always is a subjective process, except when the loans were issued, there was a free market operating. Properties were being bought and sold, landbanks were being bought and sold, there was a determination of what market value was. In the period that we are referring to here, that market had pretty well come to a complete halt. Therefore, it was extremely difficult, I think, to try and assign value in those circumstances.
Ciarán Lynch (Cork South Central, Labour)
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When Mr. Daly was before the inquiry a number of weeks ago, I can pull up his speech and all the rest of it, but just a general summary of what he was making. This is the CEO of NAMA, the biggest real estate agency in the world or asset management agency on the planet. What he was saying is that the model was simply like this, is that a developer or builder would come along, they would get a loan from an institution to develop a project, equity would grow in that project during its lifetime, the builder would go for another loan and because of the equity that was in the existing or the previous loan was providing equity to the new loan, there were 100% loans being more or less given out, because of this notional equity that was inside there. The compound outcome of this practice, of loan upon loan, upon equity growing in the previous loan, upon the previous loan, was this not the inevitable outcome of it?
Mr. Richard Burrows:
I think the reason for the property collapse was not due to that. The reason for the property collapse was because the market dried up, because funding was no longer available and transactions could no longer be done. As to the issue of how individual developers established their own equity, that's a subjective manner.
Ciarán Lynch (Cork South Central, Labour)
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Is there not an exposure issue here Mr. Burrows, in that context? The concentration of exposures is an area of concern in PwC in this report, showing 39% of total land and development loans coming from the top 70 of loan and development loans in Bank of Ireland. Did this reflect the board's understanding of such exposures?
Ciarán Lynch (Cork South Central, Labour)
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Okay, and what were you told internally?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And when the figures were told internally, what was the response?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Mr. Boucher was on record here last week as believing that ultimately NAMA was a good idea and indeed, it was something that was a positive construction in regard to getting the property market and all the land sector back into gear. Would you concur or not with that view?
Mr. Richard Burrows:
I would, Chairman. And as I said in my opening remarks, I think it was a very important element of the comprehensive approach that Government took to resolving the problem of the Irish banks and it couldn't have worked without NAMA because banks like Bank of Ireland would have been unable to raise fresh capital unless they had been able to transfer the suspect loans in relation to property off their balance sheet. That brought certainty to any new investor and absent that, you wouldn't have people prepared to put money into a bank.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you, Mr. Burrows. Senator O'Keeffe, ten minutes.
Susan O'Keeffe (Labour)
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Thank you, Chair. Mr. Crowley, in the remuneration report for the Bank of Ireland in 2001- 2002, it says you were paid €247,000 for your role as governor. Is that correct?
Susan O'Keeffe (Labour)
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If it's in here ... it's okay. Mr. Burrows, equally, in 2005-06, it says you were paid €336,000. That's correct?
Susan O'Keeffe (Labour)
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Yes. And again in 2009, €503,000 for your role as governor?
Susan O'Keeffe (Labour)
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Yes. Earlier on, Mr. Burrows, you expressed regret for needing support of taxpayers ... that the bank had required that. Would you go as far as to say that ... is that an apology?
Mr. Richard Burrows:
I was very clear at the time, as I recall in my opening remarks, that I had apologised very comprehensively to shareholders, to people within Bank of Ireland and I had ... and also to the Irish taxpayer. And again, I put on record at that time, our appreciation of what Government had done in relation to the elements that I've described earlier.
Susan O'Keeffe (Labour)
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You were asked earlier today about the Morgan Kelly viewpoint at the time and I hope my note is accurate, you said it was "an interesting angle ... but the weight of opinion was ... in [the opposite] direction, and that's what we listened to." And I suppose we've had a lot of football analogies, I wondered if perhaps in a sailing analogy, that if you were on board your yacht and the sun was shining and it was a lovely afternoon and you were drinking a cup of tea and someone came up and ... one of your crew, and said, "There's a storm brewing, Mr. Burrows. You know, I think there might be trouble. You know, we need to ..." I mean, what would your response be? Because, effectively, Mr. Kelly was doing that ... he was saying, "There's a storm brewing."
Susan O'Keeffe (Labour)
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Yes, so, when Mr. Kelly gave his view that was opposite to what the prevailing views were, what was your response?
Susan O'Keeffe (Labour)
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Although there were plenty of other views, I mean, the IMF, the Central Bank ... there were lots of ... the OECD ... there were lots of other reports where, even though there were some, if you like, comfort in them, there were also lots of people saying, in between, "Look, there are problems. And if certain things happen, there may be trouble." So I'm just wondering why more attention might not have been paid to those remarks? Because if you go back and look, they're there, very readily to be seen.
Susan O'Keeffe (Labour)
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Okay. On page ... 11, I beg your pardon, of Mr. Boucher's testimony here to this ... he was asked if "there was an appropriate level of reporting to the board on the concentration risk being faced by Bank of Ireland?" And Mr. Boucher said, "No, there was not." And he reiterated that. And then he went on to say:
If I look now at the level of reporting, understanding that the board has, of credit risk development, concentration risks, a wide range of risks ... if I compare our ICAAP document of 2013 ... to what was provided in the past in the board, the board didn't seek, and the board was not provided with, a sufficient level of information to make informed decisions on the risks that were being taken.
What would you say about that observation that Mr. Boucher made?
Mr. Richard Burrows:
As I was, yes, and I'm talking about myself. But the fact of the matter is, as I have said, with hindsight, we would've done things differently. We would've looked for more information and it seems to me to be entirely consistent that Mr. Boucher is reporting on a situation where, in the aftermath of what happened in 2008-09, the bank has substantially changed its reporting procedures and structures. And I think that's wise. And I'm sure he's right to have done that.
Susan O'Keeffe (Labour)
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There were a lot of senior business people around that table ... in your court. There were a lot of obviously very experienced bankers working for the Bank of Ireland and yet, between all of you, it's only now with hindsight that you can see what was wrong. How could that be? Given the level of experience ... given the level of business acumen at the table, indeed yourself, Mr. Burrows, appointed, I'm assuming, for that reason ... you know, how come everybody didn't see what was going on at the time?
Mr. Richard Burrows:
I think, Senator, we did see in 2008, we started to realise, but by then, our opportunity to change course and do something about the situation was a bit late. So it isn't as if this burst upon us completely afresh, it was something as a growing problem of which we were aware in 2007- 2008, which crystallised in 2008-2009.
Susan O'Keeffe (Labour)
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You said earlier, when you were talking about the night of the guarantee, you said, "No [it wasn't about the four or six-bank guarantee, it was all about resolving the Anglo crisis]" Is that correct?
Susan O'Keeffe (Labour)
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Now, you had ... in early September there'd been a meeting about INBS and on that ... and on the 29th you'd had a meeting about Irish Life & Permanent. So now there were three, if you like ... there were three institutions that were obviously stressed. Why is it then that on that night, there was only one that came to the fore? What ... where ... I mean, clearly there were three that were struggling.
Susan O'Keeffe (Labour)
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Do you know why Anglo Irish did not go in to see Government?
Susan O'Keeffe (Labour)
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Did you suggest that they might?
Susan O'Keeffe (Labour)
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And they didn't say they were going to go themselves?
Susan O'Keeffe (Labour)
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The testimony that Mr. Boucher gave here about the weekend of 7 September, and that was the time when he sat down with a colleague and AIB to look at INBS, you will recall this.
Susan O'Keeffe (Labour)
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Yes. Now, there was ... I believe that there was a meeting of the court of directors after that to discuss what had been found. Do you-----
Susan O'Keeffe (Labour)
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Okay, right. So ... I have the minute of it and the reference is BOI 02010. And it says that a liability review of INBS had been carried out, that there was a funding gap of €4 billion and that a summary balance sheet for INBS was provided to illustrate this point.
Susan O'Keeffe (Labour)
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Now this meeting was attended by yourself, Mr. Goggin, Mr. Boucher, David Dilger, Heather Ann McSharry, Mr. Kennedy, Mr. McCourt ... basically it was a court meeting-----
Susan O'Keeffe (Labour)
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It was an emergency meeting because it was a Sunday.
Susan O'Keeffe (Labour)
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So you were all very concerned at that point.
Susan O'Keeffe (Labour)
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So can you tell us ... that happened on 7 September. Why was it then that there was radio silence between 7 September and thereafter about INBS, given where you ... what you were thinking of at this point?
Mr. Richard Burrows:
Well it wasn't ... it wasn't a matter of our stewardship and it wasn't a matter of our management. The problem that you're referring to was something which was dealt with ... being dealt with, as I understood it, by the Central Bank ... with them. And that's how we came to come into it. Having been asked to come into it, we decided that there was nothing we could do and that was the end of it, as far as we were concerned.
Susan O'Keeffe (Labour)
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It says at the end the governor and the group chief executive should then assess whether to directly approach the Government to convey the group's assessment of the situation and explain the reasons why Bank of Ireland couldn't accede to the Financial Regulator's request. Did you do that?
Susan O'Keeffe (Labour)
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Did you approach the Government?
Susan O'Keeffe (Labour)
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Even though there was funding gap of €4 billion and you'd been asked-----
Susan O'Keeffe (Labour)
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-----to rescue it?
Susan O'Keeffe (Labour)
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So, you'd been asked to rescue it, and you didn't then go back to Government and say, "We're not going to rescue it". You didn't think that was appropriate.
Susan O'Keeffe (Labour)
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Okay. When Mr. Boucher was here, he gave us a document called Financial Market Development and Scenarios, exhibit B3, and, in this document, which was given to the court, and he said himself on page 11 of his own testimony, that this document was written, he wasn't quite sure, but it was either the first or the second week of September. It was a fairly comprehensive document, in which discussed and laid out available management actions. Are you familiar with this document?
Susan O'Keeffe (Labour)
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And one of the available management actions, in the long list, capital raising, to have a rights issue, a one-for-two rights issue at about 40% discount, would raise €1.7 billion post-transaction costs, and add 1.4% to equity tier 1 ratio at March '09. Obviously, things ... this is a serious option, was it pursued?
Susan O'Keeffe (Labour)
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And then, were any of the options, do you recall, that were laid out here, pursued?
Mr. Richard Burrows:
I don't recall specific options. If I go to the capital option that you're talking about, I often reflect back on that period. By the time that that memo was written, it was clear that capital raising in that form or any other form, was going to be pretty nigh impossible, given what had happened with share price, given the unwillingness, I would say, of the market to invest, given the uncertainty of the situation in Bank of Ireland, but was that something we could have looked at much earlier? Probably yes, but we didn't do that; by the time we came to look at it, clearly, the window had closed.
Susan O'Keeffe (Labour)
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Do you accept, Mr. Burrows, that this document indicates the very, very serious matters that were going on inside your own bank at that time, and that you were talking about stopping? You were talking about increasing deposits, you were talking about stopping - no, it is the last question - you were talking about stopping lending and so on, that everything that was laid out here would indicate a very serious situation in the bank, and I'm wondering whether then on the night of the conversation with Government, that you brought your own level of seriousness, the immediate actions that you were taking, you were running down all kinds of opportunities, you were running down your loan book and looking to dispose of mortgages and so on. Did you bring that level of concern to the table when you went in, given that you'd had this document pulled together for you?
Mr. Richard Burrows:
I believe I did, Senator, as I've said to you earlier. We were in survival mode at that point, and looking very seriously at the things that we could do, and that's one of the reasons why, when Anglo came to us in that early morning, we determined very quickly that there was nothing that we could do independently, and so yes, I think in reporting to Government that night on the situation that pertained, I didn't spare any blushes in relation to the national-international situation, or our own situation.
Susan O'Keeffe (Labour)
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And could I just follow up and say ... you didn't spare blushes, can you recall, Mr. Burrows, whether AIB similarly didn't spare their blushes, so to speak, and shared their, you know, their own ... their internal matters may have been different to yours, but did they share them in the way that you did?
Susan O'Keeffe (Labour)
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No, but can you remember if there was equally a conversation, of them saying, "Well we have our own concerns".
Ciarán Lynch (Cork South Central, Labour)
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....evidence, Senator.
Susan O'Keeffe (Labour)
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Okay, so you both shared your concerns about your own situation with Government at that time?
Susan O'Keeffe (Labour)
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Your own situation, I mean, as well as?
Susan O'Keeffe (Labour)
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Thank you. Thank you, Chair.
Ciarán Lynch (Cork South Central, Labour)
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To clarify two matters, and I just want to raise one matter with you as well, Mr. Burrows and Mr. Crowley. In the questioning there with Senator O'Keeffe, the Met Éireann response when you said that you would ring Met Éireann, and obviously when you heard of the Morgan Kelly article you reached out and made some calls. Was Dan McLaughlin one of the people you reached out to?
Ciarán Lynch (Cork South Central, Labour)
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And what was Dan's view?
Ciarán Lynch (Cork South Central, Labour)
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What was Mr. McLaughlin's view?
Ciarán Lynch (Cork South Central, Labour)
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And was Mr. McLaughlin at any time expressing concerns that were beyond the soft landing interpretation?
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Ciarán Lynch (Cork South Central, Labour)
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Was there any time, Mr. Crowley, that you felt, or did you speak to Mr. McLaughlin with regard to getting a temperature reading in examination of concerns or potential concerns in the broader financial market?
Dr. Laurence Crowley:
We used to have infrequent, but odd - I don't mean odd in that sense - but different meetings, with Mr. McLaughlin present, meetings of the court, and he used give us an overview, generally speaking, on the market, the economy, in Ireland; and he was pessimistic usually. Nothing dramatic, but-----
Ciarán Lynch (Cork South Central, Labour)
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Is this in the pre-2004 period or post-2004?
Ciarán Lynch (Cork South Central, Labour)
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Pre-2004.
Ciarán Lynch (Cork South Central, Labour)
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So, he was pessimistic pre-2004. Okay
Ciarán Lynch (Cork South Central, Labour)
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And would he have been optimistic post-2004?
Ciarán Lynch (Cork South Central, Labour)
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Okay. All right. Okay. I just want to move on to the issue of remuneration before I bring in Deputy McGrath, and just bring a slide upon the screen there, if that's possible, it's the top ten payments and options 2004-2008. And it would appear from this document, Mr. Burrows, that the bonus proposals appear to largely measure performance against growth and earnings per share, EPS, and by comparison with the performance of the bank's peer groups; that's what the bonus programme there would actually indicate. Can you answer the committee today why there was no effective modifier relating to risk built into the measure used for remuneration and bonuses?
Ciarán Lynch (Cork South Central, Labour)
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Because the spreadsheet above there would indicate that the top ten executive remuneration list were all sales-orientated or business executive management, so in that regard, why did the board not consider the need to remunerate risk and compliance executives to a similar level? I understand in football teams, to use the football analogies that Senator O'Keeffe mentioned, sometimes centre forwards get paid more than centre halfs, but you do pay both, and sometimes there's bonuses to both. Your bank would seem to be paying the centre forwards, and not giving any remuneration to the defenders.
Ciarán Lynch (Cork South Central, Labour)
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So was there a remuneration model for risk and compliance executives?
Ciarán Lynch (Cork South Central, Labour)
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I could maybe stand corrected on this, but our examination of Bank of Ireland records would not indicate that there was such a process in place.
Ciarán Lynch (Cork South Central, Labour)
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Okay. All right, so if I can just finish up on that. The bonus and pension plans offered to senior executives of the bank were significant. Would you be in acceptance of the term "significant" that they were?
Ciarán Lynch (Cork South Central, Labour)
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Okay, and, on reflection, do you believe that they were justified and appropriate for an Irish financial institution?
Mr. Richard Burrows:
At that time I think they were, because we were competing for talent, and the question of having the right people, and retaining the right people, was a constant issue, and you've already, you know, touched on other institutions that were behaving rather differently in the market. We were always at the risk of losing good people, hence the need, not just to pay, but to retain the very best people, and that meant adherence to market norms.
Ciarán Lynch (Cork South Central, Labour)
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Okay, and given the period of time that those remunerations were issued, and the ultimate position of Bank of Ireland on examination now, and given that the remuneration was tied to a particular growth strategy that had presentable risks to it, do you believe that the remuneration was merited?
Ciarán Lynch (Cork South Central, Labour)
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We know that, and part of the purpose of this inquiry is looking into the future as much as it is looking into the past, and developing best practice models and so forth. Do you believe that the methodology, and ... by how these remuneration packages were issued, were merited? And should ... should we need a different type of remuneration project going into the future?
Ciarán Lynch (Cork South Central, Labour)
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And how would that model work?
Mr. Richard Burrows:
That model would work on the basis that bonuses would be declared and paid or held in reserve for some period of time, vested in other words, but not paid and that, if subsequent events proved that the profit performance of the bank in a particular period was inflated by lending or other events, which subsequently turned out not to be as good as it was thought at the time, there would be the opportunity for claw-back of, of bonuses.
Ciarán Lynch (Cork South Central, Labour)
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And, using such a model, would these bonuses and remunerations be clawed back?
Ciarán Lynch (Cork South Central, Labour)
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That you just described to me.
Ciarán Lynch (Cork South Central, Labour)
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Would that claw back those bonuses?
Ciarán Lynch (Cork South Central, Labour)
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Yes. Well you're quite explicit in the model you're describing.
Ciarán Lynch (Cork South Central, Labour)
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If that model was in place back then, would those bonuses have been clawed back?
Ciarán Lynch (Cork South Central, Labour)
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But what we're doing is we're testing models. There was a model in place at that time that put out that remuneration in which there wasn't a claw-back. We're now applying ... we hypothetically applied a model that you're now outlining, and put that framework on that period of time. Would there have been a claw-back?
Ciarán Lynch (Cork South Central, Labour)
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And there would have been claw-back in that instance?
Ciarán Lynch (Cork South Central, Labour)
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There would have been clawed-back in these instances, then, using that model you described, yes?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Deputy Michael McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you, Chair, and I'd like to welcome Mr. Crowley and Mr. Burrows. Good afternoon. Can I ask the secretariat to open up BOI - Vol. 1, B4, page 21. What I'm referring to there, Mr. Burrows, is extracts from a number of meetings to do with the group risk policy committee, essentially dealing with a review of credit quality, and serious issues were raised regarding ... the level of unsatisfactory business manager and senior business manager reviews, doubled, for example, in the year to the end of March 2006. The examples were cited about the management of excesses, drawdown of facilities, reporting of accounts to the business, banking credit etc. Issues are raised about the legal services unit, coding with the bookkeeping system etc. Were these issues brought to the attention of the board over, over the course of those years from 2002 to 2008, these review of credit qualities by that committee and internal audit?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. And what remedial action would have been taken then, in the event of ... of these specific issues being identified, where certain business managers would not have met the standards which were set by the bank?
Mr. Richard Burrows:
Well, in those cases, of course, the matters are resolved before it ever gets anywhere near the ... the board. That's ... that's the process which was in place at the time, with ... with the step-up where ... where difficulties were incurred ... or encountered at one level of credit committee, the matter was then referred to the next highest level in order for resolution. So, it wasn't a question of waiting until matters got to the board before any remedial action would have been taken. That would have been a matter for management dealing with it as and when it came before them on the agenda.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I ask, Mr. Burrows, as ... as a member of the board, would you have access to all documents that you might seek? Would you be able to seek any document, for example, the minutes of any committee meeting from the ... within the bank?
Mr. Richard Burrows:
The protocol on that was, no, that I would not, as chairman of the board, have access, unfettered access to, to any document. For example, any matters to do with clients, anything like that, I would have no access. To minutes of meetings, if I, if I requested the chief executive to give me the minutes of a meeting it would be a very strange thing if he didn't comply with that.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. And would the board regularly be circulated with, with the minutes of all of the, the internal committees?
Michael McGrath (Cork South Central, Fianna Fail)
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Would, would the board have got reports from the group risk policy committee?
Michael McGrath (Cork South Central, Fianna Fail)
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Regularly?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. And when decisions are, are taken by the board, are ... is there collective responsibility?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, so it is ... it would be a collective decision, as such. Can I ask the secretariat to move to BOI - Vol. 1, B1, page 95. So ... that will come up on the screen, Mr. Burrows. That is a group risk policy committee meeting on 13 December 2007 and I suppose, just to put this in context, you ... you have pointed out a number of times today your view that one of the problems was the quantum of lending to the property-related sector, and you don't believe that it grew disproportionately over the years in which you were governor, is ... is that the case?
Michael McGrath (Cork South Central, Fianna Fail)
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And you don't believe that property represented an unhealthy proportion of the bank's exposure, in terms of its loan book, is that your position?
Michael McGrath (Cork South Central, Fianna Fail)
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Well, too high a proportion.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. But you also said it did not grow in a disproportionate fashion.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I just put a number of, of points to you, from, from this particular meeting, which was December 2007.
Michael McGrath (Cork South Central, Fianna Fail)
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It says:
Property now accounts for 44% of all non mortgage lending. [44%] The levels of property exposure ... within our book are increasing at a faster rate than other sectors. Figure 1 below it shows, our exposure has grown from €29.5 [billion] in March 07 to €33.5 [billion] in September 07 and from 23% of the book to 25%.
If you move on to page 97, there's a reference to Moody's, the rating agency, looking at the sectoral concentration methodology:
Under this measure, property and construction is growing in significance more rapidly than other sectors. ... Construction & Property ... accounted for 359% of our Tier 1 Capital at the end of September [']07, up from 345% three months earlier and 275% at March 06.
By any measure, is that not rapid growth?
Michael McGrath (Cork South Central, Fianna Fail)
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But is there not evidence there that the exposure to that sector was growing in a disproportionate fashion?
Mr. Richard Burrows:
Well, I think if you go back to one of the figures that you quoted there, the ... the growth in the total loan book of property from 23% to 25%, yes it is growth. Is it disproportionate? I don't believe so, given the circumstances that pertained at the time. But, yes, it ... it is rapid growth. I, I fully acknowledge that the figures that you have read out illustrate that this business was growing very fast.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. And property being 44% of all non-mortgage lending, was that too high?
Michael McGrath (Cork South Central, Fianna Fail)
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Of all non-mortgage lending.
Mr. Richard Burrows:
Well, it goes back to either percentage of non-mortgage lending or percentage of total book. That, that didn't show any enormous deviation or disproportionate deviation over the period of time that we're referring to. But I have said, and I say again, the absolute amount of property lending, which we had, was one of the reasons we got into trouble, it was too much.
Michael McGrath (Cork South Central, Fianna Fail)
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The absolute amount?
Michael McGrath (Cork South Central, Fianna Fail)
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But not the proportion?
Mr. Richard Burrows:
No, it was property ... the property value was, was ... the collapse of property values was one of the big issues which caused the, the whole banking situation. It wasn't, it wasn't a deterioration in lending to other sectors that caused the problem. It was primarily lending to the property sector in the broadest sense.
Michael McGrath (Cork South Central, Fianna Fail)
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But why do you feel it so important to, to emphasise the point that property was not too high a percentage of the bank's overall lending? What is the essential difference? If you're saying that we basically lent too much money to the property sector but it didn't account for too high a proportion of our, of our overall lending, what's the significance of that?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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From 2001 to 2009, lending to property and the construction sector grew by 30% per annum.
Michael McGrath (Cork South Central, Fianna Fail)
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Is there any other arm of the bank's business that grew to the same extent over that period?
Mr. Richard Burrows:
Well, if you look at the way in which the percentage of property lending declined, it declined from about ...or increased rather ... it increased from about 23% to 26% or 27%, I think, it wasn't disproportionate; it did increase as a percentage of our total loan book. But the conclusion that you would draw from that immediately is that the other parts of the loan book were also growing quite fast at that time.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. I mean, page 98 of the same minutes extract is saying, "While the above statements remain valid, the level of concentration within the book is increasing and the committee is asked to consider if the current level is acceptable and a number of options are set out as to how the concentration could be reduced". Is that not an admission that there was an over-concentration in proportionate terms to the property and construction sector by the bank in its lending portfolio?
Michael McGrath (Cork South Central, Fianna Fail)
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But we're not agreeing on what the problem is,
Michael McGrath (Cork South Central, Fianna Fail)
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I put it to you that the thrust of these minutes at the end of 2007 is that there was an over-concentration of lending in property and construction and the options for reducing that are set out.
Michael McGrath (Cork South Central, Fianna Fail)
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On the issue of the inclusion of subordinated debt in the bank guarantee, just to clarify again your evidence in that regard and I put it to you that your CEO at the time, Mr. Goggin, gave clear evidence to the committee that on the night he requested that dated subordinated debt would be included in the guarantee. Were you present when that request was made?
Michael McGrath (Cork South Central, Fianna Fail)
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Were you together at all times during that evening?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Are you saying you can't recall or are you saying it didn't happen, Mr. Burrows?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Was there any-----
Mr. Richard Burrows:
May I just add to that? If I just go back ... the night of the guarantee, there was the announcement of the guarantee and we all went home to bed and got into work pretty early the following morning for the announcement. And in the aftermath of that, then all sorts of questions about how extensive the guarantee was, how long it was going to be in place for, all of these questions that didn't come up the night before started to surface and I certainly recall in the period of that day or the following day, a discussion about the parameters of the guarantee and as to whether bonds, subordinated debt and so on would have been included. I do remember that, but not on the night and I think the specific question that you're asking is on the night.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, because Mr. Goggin said in response to Deputy O'Donnell:
Actually that night I had no idea of the maturity profile of the bond portfolio in Bank of Ireland but what we did offer into the room, when asked for an opinion on what should be covered, it was very clear having had that dialogue with my colleagues over the course of the evening, the Bank of Ireland position was that senior creditors clearly needed to be covered, junior creditors in so far as they were dated instruments and we didn't feel that undated juniors should be covered...
And he went on to explain the rationale behind that position. That didn't happen on the night is what you're saying.
Michael McGrath (Cork South Central, Fianna Fail)
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And was there any contact over the course of that evening with HQ as to the profile of the bank's liabilities? Did you know that the guarantee ended up being €133 billion for Bank of Ireland, that was your share of the guarantee, that €5.2 billion of dated subordinated debt was included in the guarantee in respect of Bank of Ireland? Did you have that detail on the night?
Mr. Richard Burrows:
Not on that night but to your question, there was a lot of contact between Brian and the Bank of Ireland head office because the task we'd been set was to raise the finance to prevent the Anglo situation going wrong the following morning and so there was a lot of coming and going. I mean, as I said to you, that was a pretty complex thing to put in place at that hour of the night with that kind of urgency. So, yes, there was a lot of contact but that was the focus of what was going on and it wasn't until after we had satisfied ourselves that we could answer that question to Government along with AIB, that the question of the guarantee ever came on the table as part of the announcement. The response from Government to us that night was that, "Thank you very much, we're going to, in fact, go for a guarantee".
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and you're aware of the evidence of Mr. Boucher that he was surprised at the inclusion of the dated subordinated debt.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. The final question I want to raise is and I'll take you to BOI - Vol. 1, B2, page 99. I'll give a moment for that to come up. Just to put it in context again, it's an extract from a group risk policy committee meeting of 17 April 2008 and I understand you wouldn't have been at the meeting but I just want to raise the issue with you because the lending limits were clearly set out in respect of the landbank book, for example, which was very, very close to the limit and against the advice of the head of group credit, a decision was taken to increase the lending limit in respect of landbank by €100 million. Now, would that have been brought to the attention of the board, for example?
Mr. Richard Burrows:
My recollection is that that was reported upon subsequently to the board, yes. And the reason for it, by the way, was simply that we had loans to the owners of these landbanks. They were in development and it was a question of following our original loan with an additional loan to enable whatever work was in progress to take place. So, it wasn't new lending in that sense.
Michael McGrath (Cork South Central, Fianna Fail)
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It was one client-related, is it?
Michael McGrath (Cork South Central, Fianna Fail)
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Thanks, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chair. Good afternoon, gentlemen. I've only ten minutes so, thank you. I noticed the questioning times had changed a little and I'd ask you to be as brief as you can maybe in response. All of my references are to core document C3b and I want to start on page 40 which is the last page of that where there are several references to Bank ... several references on that page, the end of the third last paragraph, "Bank of Ireland should approach the Government for capital"; the last paragraph, "Consideration was given to an immediate contact with the Government"; but I think that that wasn't followed up on because in the following sentence it said that the budget, the Exchequer budget, was imminent. On page 16 of the same document - the last sentence on that page - it's stated that "Mr. Goggin was going to explore a capital injection by the State". When did Bank of Ireland first explore the idea of a capital injection by the taxpayers? And I might also ask you that at the time, the stated position of the bank publicly, through Mr. Goggin and possibly others, was that no such consideration was happening and that Bank of Ireland did not need taxpayer funding?
Mr. Richard Burrows:
Well, if I may deal with the second part of the question first. In any public statement, if you're in a situation looking for capital, the last thing you want to do is to start talking about that publicly because that just engenders a great deal of uncertainty and loss of confidence in an institution. It's like a central banker or Minister for Finance not talking about a devaluation before he does it; he can't because you almost make the situation worse-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Mr. Burrows, there's a difference between not talking about it and actually saying publicly that you weren't looking for it ... not talking for it ... or not talking about it is quite a different position.
Mr. Richard Burrows:
I don't think in those circumstances it is, frankly, because the question would come up and if you don't answer it, you leave uncertainty, so that would have been the situation.
In the first question of capitalisation, I can't recall the exact date but I do remember a meeting with the Minister for Finance at which the topic of capitalisation ... recapitalisation came up.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Roughly speaking, do you, would you------
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Before the end of 2008?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I want to put the following quote to you. Almost a full month after the previous references that I've given, on 19 November 2008, Mr. Cowen, in the Dáil, it's on the Dáil record, stated that he expected covered institutions to explore the potential for meeting these capital needs through "raising private capital and the disposal of appropriate assets". He gave no mention of the taxpayer bailout, which was to come in February. Do you believe ... well, I suppose you have suggested at least, and ... the best of you recollection, that you were having those discussion with him before the end of 2008. Why was he not making reference to it, in light of the fact that that capital injection did come in February? On the record of the Dáil, he said something different.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Those are all mentioned in those minutes that I've referenced earlier-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----but also State capital injection is specifically referenced in them too.
Mr. Richard Burrows:
Yes, yes, as I'm sure it needed to be because, if I go back to what I was saying earlier, at that early stage, Bank of Ireland would have been a pretty difficult investment case to have made to any external investor absent the later creation of NAMA and the transfer and the certainty to the loan book of what was engaged in in property loans. So that all had to happen before, realistically, you could talk to external investors. Notwithstanding that, there were a number of interested parties moving around who were engaging us in conversations about capital. They came to nothing.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I turn now to your discussions on the 28th with Mr. Hurley in relation to the impending situation with regard to Anglo and you said ... you expressed surprise that he didn't seem to be aware fully of what ... of the €1.5 billion liability that was going to fall due. Did you ... can you elaborate on the discussions that you had with him? Did you express that surprise to him-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----that he should have been aware, or have you any other information for the inquiry?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Why didn't you express surprise to him?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But why didn't you express your surprise to him?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I want to turn to page 5 of the same document now; I'll give it a moment for it to come up on the screen. It's paragraph one, two, three, four, five, the bottom of it, where there is a direct quotation, page 5 of C3b. I'll put the quotation to you anyway. It said that "No indication of Anglo's specific needs was given [this is a court minute again] except that it was due to repay €1.5 [billion] on Tuesday to a German bank and may need a further €4 [billion] later in the week." First of all, do you recall which German bank was ... that liability was due to on the Tuesday? And do you believe it likely, in your experience as a banker, that that particular German bank would have been making the position known to either authorities in Germany or Europe or, dare I say, even potentially Irish authorities, that this potential liability was falling due and might not be met on the Tuesday?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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That's fair enough. I want to refer, Deputy McGrath spoke about the night of the guarantee and Mr. Goggin having proffered the view here ... I think the quote or the phrase that he used when he made the suggestion about subordinated, certain dated subordinated debt, was that there was a potential overlap with senior debt and potentially with sovereign. How was it possible that your chief executive at the time can give evidence to the inquiry to the effect that he made that suggestion on the night on behalf of Bank of Ireland and its shareholders and everyone concerned and that you, as chairman, say that that suggestion didn't happen or you've no recollection of that suggestion?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, no, I won't go further into that. My final question is again in relation to the evidence given by Mr. Goggin to the inquiry. In answer to a question from me, he said:
You'll recall that when I was describing the events of 29 September, a few days earlier than this, the governor of the Bank of Ireland [yourself] met with the Governor of the Central Bank to assist me in my unsuccessful attempts to have the ECB collateral rules expanded. The Governor of the Central Bank told the governor of the Bank of Ireland at that meeting that there was nothing further he could do.
I want you to talk about those unsuccessful attempts, or any discussions you had with Mr. Hurley, who was the then Governor of the Central Bank, in relation to his attempts either to gain additional funding for the Irish banking sector or to change the collateral rules of the ECB at the time. And do you believe that if those collateral rules had to have been changed, and they were changed two weeks subsequent to the guarantee, that the guarantee may not have been, as constituted, necessary, if the changes had occurred before its announcement?
Mr. Richard Burrows:
I think we're mixing up two things here. The guarantee was primarily to stop a deposit run the following day. The wholesale funding or the ECB funding on collateralised security was a different thing entirely. Let me say this: I don't remember the exact detail of the conversations which we had with Mr. Hurley about that but I can tell you that we always found in Mr. Hurley a very sympathetic ear in terms of taking the issues as we saw them in Ireland to the ECB and so therefore I'm quite sure that he explored every possible avenue to give us what we wanted, but clearly was up against the authority of the ECB and that's what he was reporting to us.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You don't have any more detail as to what he-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----what he was saying about the changes or looking for changes to collateral rules?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Okay, maybe just to finalise on that, do you have a current view as to the appropriateness of the guarantee, Mr. Burrows?
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Mr. Richard Burrows:
-----focus on, I said that I wasn't aware of all of the issues and all of the things that Government was party to on that night; I was just looking at it from Bank of Ireland point of view. And, from my point of view, it seemed that, in the situation where we could come up, with AIB, with the funds necessary to prevent a default by Anglo the following day, that that could have built time into the system to at least allow a few more days of consideration of the implications of all of that. That said, I believe a guarantee was necessary and was an absolutely integral part of the package of measures which Government put into place.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And when you say the guarantee was necessary, was it the explicit guarantee that was put in place or a guarantee of sorts?
Ciarán Lynch (Cork South Central, Labour)
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When you say that ... you're categorical in regards to the requirement of a guarantee.
Ciarán Lynch (Cork South Central, Labour)
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Was the guarantee, in its ultimate shape, the type of guarantee that you would have seen as the one necessary, or would you have preferred, or have seen an alternative that may have worked better?
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Just one other matter before that, before we move to the wrap-up to Deputy Murphy and Senator Barrett. Earlier you were saying that, just to clarify this, Irish Life & Permanent was offered to Bank of Ireland on the morning of 29 September 2008. Was that the case, was it?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So who was in the ... who was making the offer? Was it the Central Bank or the Government?
Ciarán Lynch (Cork South Central, Labour)
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Central Bank, okay. Could you maybe then, if this was on the agenda and certainly there as an item of discussion, can you not, or can you explain why it did not form part of the conversation that night if Irish Nation ... if Irish Life & Permanent was on the space of being pushed into Bank of Ireland, or taking over Bank of Ireland, what happened between the morning and that night that that wasn't a part of the conversation?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. Richard Burrows:
And that was the sole purpose of the meeting. It wasn't to have a discussion with Government about consolidation within the banking sector or anything like that. It was simply to make sure that Government were aware of our viewpoint in Bank of Ireland about the seriousness of the situation with regard to the liquidity of Anglo.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Would that not have been peculiar, given that it was in explicit discussion that took place that morning, and now you were into a far, far more evolved situation, that Irish Life & Permanent wasn't part of the agenda or the discussion that evening for Bank of Ireland?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And in regard to INBS, do you have any view as to why no action was taken in regard to them that evening?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Murphy. Or, sorry, Senator Barrett, my apologies.
Sean Barrett (Independent)
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Thank you, Chairman, and I just want to put some questions to our visitors, Chairman. Just the ... your ... paragraph 12 of your remarks, Mr. Burrows, strategy 2000-2007, to go from €12 billion capitalisation to €30 billion, and then €40 billion; that was a ... by 2007. That was a board decision, was the ... to adopt that? Was it?
Sean Barrett (Independent)
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Thank you. Now, could I ask that CIF, page 99, Vol. 1, be put on the screen, please? Now, it's from the presentation of Mr. Simon Carswell, Chairman, on 26 February, and the third paragraph on page 99 reads:
In 2006 the Financial Regulator started to consider the introduction of compliance statements for directors of banks. This would allow the regulator to force the management and the boards of banks to stick by assurances they gave, for example agreeing to reduce their lending into one particular area, and would give the regulator an important tool to exert greater control over the activities of banks. After intensive lobbying by the financial services industry the Department of Finance asked the Financial Regulator to drop the process of consultation, and it was shelved.
Was Bank of Ireland part of that lobby?
Sean Barrett (Independent)
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Yes. Because, you know, there's part of the earlier matter that we discussed, the letter of 2 April 2007 to the regulator saying the Bank of Ireland was comfortable exceeding the 200% limit. It looks like the regulator tried to do something about it, and the industry lobbied, but not the Bank of Ireland; is that ...?
Sean Barrett (Independent)
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Was there a board discussion of the matter?
Sean Barrett (Independent)
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I see. Could I also say in relation to regulation, if we bring up document R3b? And this was ... it's the minutes, it's page 7, it's the minutes, Chairman, of a meeting of the group risk policy committee where they were asked by the regulator to address failures to adequately verify the income or the source of the borrower deposit. That was the regulator's concern. And the reply is on the following page 8. They say that they would only do so, the Bank of Ireland would only do so in exceptional defined circumstances. And they'd already written to the Central Bank twice in 2001 and 2002 to notify them of that. And then they go on and say, "...we were fully compliant with our stated procedures...". In other words, they didn't want to do the degree of income verification that the regulator had recommended, but they found 21 instances in which there was an insufficient or no evidence of the balance of the funding. So, as well as on the asset issue that we discussed, it seemed like you didn't want to comply with income verification either when requested by the regulator? You were more or less told, "We told you already two years ago that we don't do it." And, you know, this was a situation which led to €64 billion, you know, being required of taxpayers because banks, you know, have this reluctance, I suppose, to comply with the regulator.
Ciarán Lynch (Cork South Central, Labour)
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We should question rather than maybe an implied conclusion, Senator. It would be helpful.
Sean Barrett (Independent)
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Yes. Does it not indicate that, to say the least, you were a hard company to regulate in the attitude to the regulator, or do you say you maybe ... perhaps you were an easy company to regulate? But it does seem strange that not verifying the income of the borrowers should become an issue between the regulator and the bank.
Ciarán Lynch (Cork South Central, Labour)
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I think Mr. Crowley would like to comment upon that as well, Mr. Burrows, when you've finished.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Burrows? Or Mr. Crowley?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Senator Barrett, one final question.
Sean Barrett (Independent)
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There's just one other that there's ... in volume B4 on page 30
Ciarán Lynch (Cork South Central, Labour)
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Okay, Senator.
Sean Barrett (Independent)
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Thank you. There's a ... this is from the regulator to the bank: "[Bank of Ireland] is to advise the Financial Regulator as to whether it is satisfied that the concerns expressed at the Group Credit Committee meeting on 30 August 2007 have been addressed." And that communication is dated March 2008, so there appears that something that arose in 2007 had not been satisfactorily replied to, Chairman, by the following March 2008. Again, what ... just to ask our visitors: why does there seem to be such delays in dealing with regulatory issues?
Sean Barrett (Independent)
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Thank you, gentlemen. Thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you to you both. Just two broad areas I want to just briefly touch upon, if I may, and the evidence document is BOI - B2, page 56, for the first area, and it's regarding exceptions to credit policy on lending. This is a document that we got back from the Bank of Ireland actually, looking at the period 2004 to 2008. The average exception rate for buy-to-let mortgages was 17%, almost one in five. And when we look at what went to NAMA from Bank of Ireland, 191 connections were transferred, and policy exceptions were identified in 73% of those connections. Mr Burrows, would you regard those exception rates as high?
Mr. Richard Burrows:
No, I wouldn't, and I think I covered the matter earlier in relation to the way in which credit policy and lending policies were drawn within Bank of Ireland, which was to draw them very tightly, so that that, in any ordinary course of business, would give rise to exceptions. That's the purpose of drawing a very tight perimeter, that exceptions are forced into a situation where there has to be consultation with a higher authority, whether that's a more superior credit committee or a senior executive before being resolved. So I think it's not unusual, in my opinion.
Eoghan Murphy (Dublin South East, Fine Gael)
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So just to clarify then, a high level of exceptions like we see there means that there is greater scrutiny of what's going on with each of those lending decisions?
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes. So there isn't a correlation the between, say 73% of those connections in terms of what was transferred to NAMA and the write-down in NAMA loans?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you. The other area I want to touch upon is just briefly, going back to the night of the guarantee because it's just something I don't understand myself, if I may? On the night itself, yourself and AIB were together in the room at all times. The two banks and no one else, except for when you were with Government officials, is that correct?
Eoghan Murphy (Dublin South East, Fine Gael)
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So, when Mr. Goggin would have been making phone calls to Mr. Boucher, back in Bank of Ireland, he was doing that in front of you and in front of AIB.
Eoghan Murphy (Dublin South East, Fine Gael)
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And this is in the context of them trying to see if they could secure this €5 billion-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----each in funding. And did you make any phone calls yourself?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And did you have any contacts with anyone else in Government Buildings that evening?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And just finally then, to clarify. You go back in to meet with the Government, I take it with the Taoiseach and the Minister for Finance, is that correct?
Eoghan Murphy (Dublin South East, Fine Gael)
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And others. And you were saying to them that you can provide the €10 billion that was needed for Anglo Irish Bank?
Eoghan Murphy (Dublin South East, Fine Gael)
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And they say to you that they are going to provide a guarantee?
Eoghan Murphy (Dublin South East, Fine Gael)
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In that same instance.
Eoghan Murphy (Dublin South East, Fine Gael)
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And at that point then, is the €10 billion no longer needed for Anglo Irish Bank?
Mr. Richard Burrows:
Well, I'm not sure that that was the case because we were left on the basis that the €10 billion could well be required and everything was in place for it to be available the following morning. The subsequent thing that happened was that it was not required. And I am not clear as to how AI ... how Anglo sorted itself out. But it didn't come back to us for the money that had been put in place.
Eoghan Murphy (Dublin South East, Fine Gael)
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So, just to clarify. You left Government Buildings, your understanding was that €10 billion was still required and that a guarantee of the six banks was coming into effect the next morning.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you. Thank you, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Just to wrap one thing, just to clarify, Mr. Burrows, can you clarify and inform the inquiry as to the date Bank of Ireland was seeking State capital?
Ciarán Lynch (Cork South Central, Labour)
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Okay, well a period. Was it-----
Ciarán Lynch (Cork South Central, Labour)
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Of 2008 is it?
Ciarán Lynch (Cork South Central, Labour)
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Okay, so there was a discussion between Bank of Ireland and the State at that time that there would need be a capital provision for Bank of Ireland or were you exploring it?
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Mr. Richard Burrows:
-----I kept the Minister for Finance pretty well informed as to how we were progressing in relation to trying to find third party funds to supplement our capital base. And so he was well aware and we had quite a number of discussions about how that was progressing. And indeed, I think his officials had with Brian Goggin and with others in the Bank of Ireland. So there was a continuing dialogue about that.
Ciarán Lynch (Cork South Central, Labour)
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So we know the conclusion of that dialogue ended with a capital ... with a State capitalisation into Bank of Ireland. But are you saying to the committee today that in the period after the guarantee in 2008, that Bank of Ireland was discussing the necessity and the requirement for capitalisation from the State?
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. I'm going to bring matters to a conclusion. Mr. Crowley and Mr. Burrows, is there anything finally, or further you would like to add before we wrap up?
Mr. Richard Burrows:
I don't think so, Chairman. I would just like to thank you and the members of your committee for the courtesy with which you have received us this morning. And if I may just also put on the record my thanks, seeing as I left Bank of Ireland in 2009, I've relied enormously upon the support of former colleagues there in order to prepare for today. So thank you to all of them. And if I may, just one final word. There is a bunch of people in .... watching all of this in Malahide, Clontarf, London, Miami. Thank you to them.
Ciarán Lynch (Cork South Central, Labour)
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I didn't know you were broadcast that far, Mr. Burrows, thank you very much. Mr. Crowley -----
Ciarán Lynch (Cork South Central, Labour)
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-----maybe you could go a bit further geographically.
Ciarán Lynch (Cork South Central, Labour)
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A bit of order, please. I'm just getting order, Mr. Crowley.
Ciarán Lynch (Cork South Central, Labour)
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With that said, thank you both, Mr. Crowley and Mr. Burrows. I would like to thank the both of you for your participation here today and with your engagement with the inquiry. I now state that the witnesses are excused and that we suspend until 2.45 p.m. at which time we will resume to hear from KPMG. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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So I now propose that the committee return back into public session. Is that agreed? Agreed.
Okay. And this afternoon's session is a public hearing with Mr. Terence O'Rourke, former managing director, KPMG, and Mr. Paul Dobey, partner, KPMG Financial Services. The Committee of Inquiry into the Banking Crisis is now resuming in public session and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. Today, we continue our hearings with senior auditors who had roles during and after the crisis. This afternoon, we will hear from witnesses from KPMG: Mr. Terence O'Rourke, former managing director at KPMG and Mr. Paul Dobey, partner, KPMG Financial Services.
Terence O'Rourke was managing partner at KPMG from 2006 until his retirement in April 2013. He was a member of KPMG's global board, global executive team and EMA board from 2007 to 2013, head of audit, KPMG, from 2003 to 2006, and audit partner from 1988. Mr. O'Rourke was appointed chairman of Enterprise Ireland in August 2013. Mr. Dobey is a partner in KPMG Financial Services. He has been with KPMG since 1987 and became an audit partner in 1998. He is currently the AIB audit partner in KPMG.
Mr. O'Rourke and Mr. Dobey, you're both welcome before the inquiry this afternoon. 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. 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, those documents will be displayed on the screen to your left and right, and members of the public and journalists are reminded that these documents are confidential and that they should not publish any of these documents so displayed. 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, will be relied upon in questioning and form part of the evidence of the inquiry. So if I can now ask the clerk to administer the oath to you.
Ciarán Lynch (Cork South Central, Labour)
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So once again to thank Mr. O'Rourke and Mr. Dobey for being here this afternoon with us, and if I can invite you, in which either order you choose, to make your opening comments and statements to the inquiry, please.
Mr. Terence O'Rourke:
Thank you, Chairman, and good afternoon, members of the joint committee. As managing partner of KPMG from 2006 to 2013, I welcome this opportunity of discussing with you the role of KMPG as auditors in the period you're looking at. I have provided a written ... a detailed written witness statement in response to the themes identified by the committee. These themes include the integrity of financial reporting and the impact of prevailing standards in recognising risks. In this brief opening oral statement I will deal with a number of matters in that witness statement, specifically the role of an audit, the purpose of financial reporting and the basis of the accounting standards used in financial reporting, the going concern issue when preparing accounts, and, finally, I'll speak briefly about changes in these areas since 2008, which might have contributed to the avoidance of the crisis like the one we've gone through.
Personally, I've spent all my professional life in KPMG since joining in 1975. I was a partner from May 1988 to April 2013. I was head of audit from May 2004 to December 2006, which also involved participation in a number of financial institution audits, including a role on the AIB audit. I held the position of managing partner from December 2006 to April 2013. I've not held an active role within KPMG since retiring as managing partner in April 2013 but the firm has provided support and assistance to me in preparing for today, and I confirm that, in particular, I have consulted with, and received input from, Mr. Paul Dobey, who's also here today, and who was the lead partner on the AIB audit.
I'd, firstly, like to discuss the purpose of financial statements and the role of the external auditor, as there can be misunderstandings in relation to what an audit actually is and what certain commentators think or would like it to be, particularly in relation to the strategy and risk appetite of an entity. The management of an entity is responsible for the preparation of its financial statements. The overall responsibility for financial statements rests with the board. The role of the audit is to provide a report to shareholders on those financial statements. In reporting on whether the accounts present a true and fair view, auditors do an extensive amount of work in checking and verifying the systems producing the accounts as well as the financial information that is presented. Those who prepare the accounts and the auditors who audit the statements must comply with an extensive framework of technical rules known as financial reporting standards and auditing standards. These standards are set by independent international bodies, apply currently in some 280 jurisdictions, and are underpinned by national and by EU regulation. The objective of having clearly defined financial reporting and auditing frameworks, standards and rules is to provide uniformity, consistency and transparency to the users of financial statements. Without such rules, it would be very difficult to ensure the level playing field ... to ensure a level playing field in comparing the results and financial positions of companies across the world and the quality of audit reports on the accounts of those companies. As far as KPMG is concerned, our work was carried out in accordance with our quality control framework for performing high quality audits and we believe that the accounts of the financial institutions we audited were prepared in compliance with the relevant international standards and that KPMG audited those accounts in accordance with their statutory duty and the auditing rules.
In addition, I'd make the following two points. Financial statements are a point-in-time record of financial information of an entity, including its results. By definition, financial statements are a record of past financial performance and do not seek to forecast or predict future performance. An audit opinion, which deals with whether accounts give a true and fair view in accordance with IFRS, does not assure, for example, the long-term success or sustainability of the business model of an entity nor the effectiveness with which management has conducted its affairs.
This responsibility rests with the management and boards of the entity.
I would like briefly to discuss the accounting rules which make up the financial reporting framework. From 2005 onwards, the rules that applied to Irish financial institutions was the set of international financial reporting standards known by the acronym IFRS. The IFRS was developed by the International Accounting Standards Board, IASB, through a formal system of due process and broad international consultation involving the accounting profession, investors, governments, regulators and other interested parties. IFRS seeks to ensure that financial statements provide consistent information about the financial position, past performance and cash flows of an entity that is useful to those making economic decisions. The adoption of IFRS in 2002 across the EU was endorsed with an overwhelming majority vote in the European Parliament and IFRS has force of law in Ireland by way of statutory instrument.
The auditing framework applicable to the audits of the financial statements of Irish institutions was the auditing and assurance pronouncement issued by the UK's Financial Reporting Council, a body independent of the auditing profession. The use of this framework is part of the statutory licensing regime for auditors in Ireland. The directors of our financial institutions which audit clients thus had responsibility for the preparation of financial statements in accordance with IFRS from 2005 onwards. It was, and remains, KPMG’s view that the financial reporting of the relevant institutions was conducted in accordance with the requirements of IFRS.
The KPMG teams performing bank audits during the relevant period were experienced in the application of auditing standards in IFRS and had an in-depth understanding of the banking sector. These teams monitored emerging best practice through their connection with fellow KPMG firms in Europe and the US. These audit teams had particularly close ties with our UK firm and were, therefore, familiar with best practice in the UK market and how the accounting and auditing standards were being applied there.
One of the most significant accounting standards impacting the Irish institutions was IAS 39, and its requirements regarding the recognition of provisions for loan losses. My colleague, Paul Dobey, will deal with the issues arising from the fact that IAS 39 is based on an incurred rather than an expected loss model.
I said earlier that accounts were a point in time, and that the numbers that auditors reported on were historic and thus backward looking. There is one matter however that falls to be considered in preparing a set of accounts that is forward looking, and that is the going concern basis of preparation. This means that every year, when preparing the annual accounts, the directors of the company or a bank are required to consider whether they believe the entity will be in operational existence for at least one further year. Typically directors make that assessment based on forecasts, budgets and an evaluation of the risks that the business faces. Auditors are then required to assess whether directors' judgments and conclusions are reasonable and whether it is appropriate for the accounts to be prepared on the going concern basis.
Up to and including 2006 year end, the assessment of our audit teams, based on the economic assessments and forecasts of respected bodies, was that the going concern basis of preparation of the banks’ financial statements was appropriate. The additional steps taken by our audit teams in respect of the subsequent years, in light of the unprecedented economic conditions, will be dealt with by Mr. Dobey.
KPMG is very conscious of and acknowledges the significant adverse impact which the banking crisis has had on our society, our people and our clients. We recognise the important work of the joint committee in looking at the systemic issues involved in the crisis and more important, in identifying steps that might be taken to avoid a repeat. KPMG is committed to and is assisting in this process, in particular in relation to further developing audit and corporate and financial reporting standards to reflect the lessons learned from the crisis.
And so the final issue I want to address are the changes in financial and reporting standards since 2008. In light of the global financial crisis the International Accounting Standards Board, the IASB, completed a review of what changes might need to be made to accounting standards. This review considered the lessons learned across more than 100 jurisdictions in which the IFRS had applied by 2008. The IASB's post-crisis review confirmed the important role of financial reporting in providing unbiased, transparent and relevant information. However, it also recognised that only so much can be expected of accounting. The IASB noted, and I cite the IASB chairman who said, that accounting standards could contribute to financial stability, but they should not be expected to provide a veneer of stability by ignoring volatility when it is really there.
The most important conclusion of the review, however, was probably that there should be a more forward looking impairment model for loan loss provisions. It is only recently, after much debate and lots of transatlantic dialogue, that the IASB has agreed a new revised loan loss provisioning model that specified an expected rather than incurred loss model for loan loss provisioning. This standard should permit the earlier recognition of loan losses. As a result, it will be possible to recognise expected losses in the downturn when there is evidence of expected impairment.
Apart from the issue of how losses are recognised, a more wide ranging debate is also under way globally regarding how corporate reporting can be improved. One body, the International Integrated Reporting Counsel, a global coalition of regulators, investors, companies, standards setters and the accounting profession, is examining ways in which to better set out in an integrated report what is happening in a business in more than just financial terms. Such an integrated report would be a concise communication about how an organisational strategy, governance, performance and prospects in the context of an external environment, is intended to lead to the creation of value in the short, medium and long term.
To conclude, I have sought to give the committee an overview of the context of which financial statements are prepared and audited, the legal framework within which that work is done and some developments in standards since the crisis. Mr. Dobey will address now, in more detail, how these principles and standards were applied now in the case of AIB. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Mr. O'Rourke. I call Mr. Dobey.
Mr. Paul Dobey:
Thank you, Chairman. And thank you for the opportunity to give evidence to assist the committee in its very important work. I am here specifically in view of my role as lead partner on the AIB audit from 2005 to 2008. I'll make some high level comments on the lines of inquiry dealt with in detail in my witness statement. Specifically, I will explain why it is KPMG's view that the AIB financial statements were prepared in accordance with IFRS and Irish law.
KPMG audited AIB in accordance with our statutory duty and the auditing rules. The AIB accounts gave a true and fair view and the accounting rules and related laws were not a contributing factors to the banking crisis in Ireland. Notwithstanding this, there are important lessons to be learned for the accounting profession from the crisis.
AIB was a large and complex organisation with over 25,000 employees in 2008 operating in Ireland, the UK, Poland and the US. AIB had a very experienced board of directors, and an audit committee drawn from a wide range of disciplines. The board oversaw the implementation of the strategy. The audit committee oversaw the internal control and financial reporting of the bank. The AIB accounts are very complex and expertise was required to make sure the transactions, balances and disclosures in these accounts were complete and the accounting was in accordance with IFRS.
The KPMG audit team, which comprised approximately 20 partners and over 200 managers and staff, had the expertise to deal with these matters. The team applied the best practice auditing and accounting standards to the bank's published accounts. A quality review partner for KPMG UK and an SEC reviewing partner from our US firm was also involved in the AIB audit, bringing a further international perspective.
As Mr. O' Rourke has outlined, AIB was required by EU and Irish law to comply with the IFRS accounting rules. Similarly, KPMG was required to carry out its statutory duties as auditors in accordance with Irish law and the relevant auditing rules which were international standards on auditing. The AIB team took all the necessary steps to form an opinion that the AIB accounts gave a true and fair view.
The financial statements set out AIB's exposure to each sector, including the property and construction lending. KPMG is satisfied that the financial statements appropriately disclosed the banks property related lending exposures. AIB was aware of the risks arising from these business strategies, but like other financial institutions, did not anticipate the scale of the adverse circumstances which would give rise to unprecedented loses.
AIB had an extensive risk infrastructure and semi-annual risk reports were presented to the AIB board by the chief risk officer. These reports dealt with the top ten risks facing AIB, including credit risk, operational risk, market risk and liquidity risk. The risk relating to credit and liquidity featured with increasing prominence in these reports in the period from 2005 to 2008. As Mr. O'Rourke has mentioned, there is a common misunderstanding in relation to the role that an auditor plays regarding the strategy and risk appetite. For KPMG to have sought to determine AIB's business strategies would have been beyond our role and expertise as auditors, and would undermine our ability to give an independent auditor's report on the financial statements of our audit clients.
What KPMG did do, was to identify and report the risks to the AIB audit committee in the context of our audit work in order to ensure that the financial reporting implications were properly reflected in the financial statements. Our consideration of these risks, and the audit findings on other communications with the AIB audit committee, were circulated to the Financial Regulator at the end of each audit.
Turning, if I may, to the integrity of financial reporting. The most relevant standard for loan loss provisioning was IAS 39 which required the use of an incurred loss model. This model has been criticised because, in order to avoid smoothing of profits which was and is considered undesirable, it did not allow banks to create or hold general provisions in the good years to offset problems in the bad years. It is the view of KPMG that the operation of IAS 39 was not a contributing factor to the issues which AIB faced in 2008. I am not saying that IAS 39 was perfect, we have learned from the crisis that it needs to be changed and Mr. O'Rourke has outlined some of the steps being taken in this regard. The major shortcoming of IAS 39 was that it delayed the recognition of the loan loss provisions when the downturn came in 2008.
It was always acknowledged that IAS 39 was pro-cyclical and would give rise to significant additional provisions in a downturn. The scale of these additional provisions would reflect the scale of the downturn as it occurred. When the downturn came in 2008, AIB was not permitted by IAS 39 to make impairment provisions for all of the losses it was forecasting for subsequent years. It was for this reason that AIB disclosed to the market in its investor presentation in February 2009 that it expected to book further losses of between €4.6 billion, base case, and €6.7 billion, stress case, in 2009 and 2010 as the Irish economy further contracted and property prices further declined. These estimates were based on models and assumed a contraction of the economy in 2009 of between 5.5% and 7% and a peak-to-trough decline in property values of between 20% to 50%, excluding land, and 30% to 80% for land. It is now known that the economy contracted by over 10% in 2009 and certain categories of property such as land became almost worthless. As a result, the actual losses recorded by AIB in 2009 and 2010 were much greater than the forecasts. Finally on this issue, I would add that financial regulators can require banks to hold additional capital to absorb losses that could arise in a downturn. This was done in some jurisdictions such as Spain and Canada. Regulators may also do this in the downturn to reinforce confidence, and that was done in Ireland in 2011.
Chairman, I'd just like to make a few comments on the liquidity and solvency of AIB in 2007 and 2008. At each year end, our audit team was required to consider whether the going concern basis of AIB's financial statements was appropriate. In performing the 2007 year-end audit in early 2008, we were concerned about the effect of worsening financial markets on the liquidity and funding position of the bank. AIB prepared a detailed going concern paper in early 2008, and based on this and AIB's liquidity plans, KPMG was satisfied with the going concern basis. One year later, when it came to our 2008 year-end audit, our audit team had very significant concerns in relation to both liquidity and solvency of the bank. These concerns arose for a number of, from a number of factors. There was great uncertainty in Ireland and the economy was contracting rapidly, AIB was forecasting losses of up to €8.5 billion between 2008 and 2010. It had agreed to take €3.5 billion from the Government in preference shares. The position in relation to the availability of emergency liquidity access from the Central Bank and the euro system was not at all clear. In early 2009, we informed AIB that we needed to take additional steps on the going concern issue and engage with the regulator, the Central Bank and the Government as part of our 2008 year-end audit completion process. Confirmation and clarification was sought of our understanding of the public statements made by the Minister for Finance in relation to the Government's support for AIB. This was provided to the AIB audit team at meetings held in February 2009 with the head of banking supervision of the Financial Regulator, with the deputy governor of the Central Bank of Ireland and the assistant secretary general of the Department of Finance.
The onset of the global financial crisis was a shock to all of us. The worldwide financial system broke down and regulators and Governments were forced to take unprecedented steps in response. In my role as lead audit partner in AIB, I experienced some of these challenges first hand. From mid-2008, the KPMG team knew that the 2008 audit of AIB was going to be the most difficult we had ever done. Based on the Irish and international environment at the time, there were factors at play on this audit that were without precedent. In the face of these challenging circumstances, our audit team and AIB, in late 2008 and early 2009, worked tirelessly to deal with those issues. We brought all of the global expertise and local expertise of KPMG to bring to bear, and all of our personal energies to bear, in completing and ensuring that the audit was in compliance with the required standards, both for the bank and for us.
Chairman, to conclude my opening statements I would reiterate that the AIB financial statements in each of the years, relevant years, was prepared in accordance with IFRS and Irish law. KPMG audited AIB in accordance with our statutory duty and auditing rules. The directors of AIB had a legal obligation to prepare accounts that gave a true and fair view and fulfilled this obligation. We formed an audit opinion that AIB's accounts gave a true and fair view. The accounting rules and the related laws did not, in our view, contribute to the banking crisis in Ireland. However, as I said at the outset, there are important lessons to be learned by the accounting profession from the crisis and I would be happy to give my views on some of these to the committee if it considers it helpful in its questioning. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank Mr. Dobey and thank you, Mr. O'Rourke, for your earlier statement. Just to restate as well that your purpose before the joint committee is to give evidence relating to your roles as partner and lead engagement partner at KPMG. So it's not just about what KPMG were doing but your specific roles actually inside there. So with that said, if I can invite Senator MacSharry. Please, Senator, you have 25 minutes.
Marc MacSharry (Fianna Fail)
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Thanks very much, welcome gentlemen and thanks for being here. Can I ask at the outset who regulates KPMG?
Mr. Paul Dobey:
Our work is regulated in a number of different ways. Firstly, we are registered with the PCAOB in relation to our SEC registrants, and AIB was a SEC registrant. The accounts of AIB were reviewed regularly by the SEC, the Securities and Exchange Commission in the US and they would have looked at the detailed application of accounting policies, including IFRS. They looked at fair value accounting in 2008, they looked at credit risk disclosures in 2007, they looked at compliance with IAS 39 in 2005 and they looked at the M&T accounting in 2005.
Marc MacSharry (Fianna Fail)
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So who was regulating this, sorry?
Marc MacSharry (Fianna Fail)
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And did they ever specifically review your audit, say, of financial institutions?
Mr. Paul Dobey:
Yes. CARB reviewed our AIB audit for 2007, and that was completed in early 2009 with no negative findings. You may also be aware that there was a review carried out by CARB in relation to the 2008 audit for all the covered banks, and that work is not complete but we ... we have spoken to CARB and have asked them what we can say to the committee.
And if I may just read out some of what CARB have said we can say. Our firm is registered as a statutory audit firm by CARB. CARB is subject to oversight by IAASA. CARB, as part of its regulatory responsibilities, carried out inspections of the firm's compliance with auditing standards. CARB, as part of its ongoing regulatory responsibilities, is reviewing the audits of the covered institutions for the financial years ending 2008 and, where relevant, 2009. The purpose of these reviews was to determine whether the auditors applied appropriate procedures and complied with relevant standards in the audit work carried out on the provisions for impairment as part of the firm's audit of the financial statements as a whole. CARB's review is not yet concluded. On their conclusion, CARB will prepare and issue a public report, in accordance with its governance procedures, which will outline the overall results of the reviews conducted without naming specific firms. Conclusion has been reached in relation to our firm and we have received a report on AIB. And I note what CARB have said is, audit work of the firm in relation to all of its financial institution audits complied with relevant auditing standards. While there are a number of instances where improvements were recommended, these are not material. Should further questions arise, for example, regarding improvements required, these are set out in detail in the firm's responses to the quality assurance committee. The report arising from the review could be sought by the committee but it should be sought directly through CARB.
Marc MacSharry (Fianna Fail)
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Okay, that's interesting. Can I ask, of the issues that have been highlighted, has there been lessons learned ... from the, you've got the report from CARB from the look at your 2008 and 2007 audits of AIB, in particular, or other financial institutions? And are there lessons, with the benefit of hindsight, that they've raised and that you've taken action to remedy?
Mr. Paul Dobey:
Yes. As you know, when regulators do a review, they would have findings. The findings in relation to our audits, as CARB had said, were not material. There was a couple of matters in relation to documentation ... there was, specifically, we had a consultation in the firm in February ... sorry, in January 2009 in relation to the going concern basis of preparation and that involved the partner I mentioned earlier from the UK firm, myself, Terence and our risk management partner. I prepared a detailed agenda for that meeting with some actions suggested which we subsequently took. I think CARB would prefer it if we documented that better; I think the actions were clear. We also communicated with the regulator in writing and it's in the pack on 29 April.
Given the matters raised ... our concerns in relation to going concern and liquidity, we engaged with the Financial Regulator and had meetings with them - that I mentioned during my opening statement - in February. I think CARB would have preferred if that ... the letter that we sent on 29 April had gone in earlier and there were some other minor documentation matters but nothing of substance.
Marc MacSharry (Fianna Fail)
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And all firms, to your knowledge, were subject to these reviews, were they?
Marc MacSharry (Fianna Fail)
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Okay. Can I ask ... the 2007 and 2008 financial statements were audited and provided an unqualified independent audit opinion. So in hindsight, would you provide those opinions and the accounts as a true and fair view, with the benefit of hindsight?
Mr. Paul Dobey:
I'm very comfortable that the opinions we gave in 2007 and 2008 did give a true and fair view. I've outlined in my opening statement some of the steps we took in relation to liquidity in 2007 and some of the very detailed and unprecedented steps we took in relation to engaging with the Government and others in 200, in relation to going concern based preparation. So, very comfortable with ... that those accounts give a true and fair view.
Marc MacSharry (Fianna Fail)
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Okay. In a property construction loan portfolio of 3 November 2008 report to the audit committee, it states and quote: "there has been a significant deterioration in the quality of the Property and Construction loan portfolio".
Ciarán Lynch (Cork South Central, Labour)
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That is coming up on the screen, okay, that's page 11 to 14, KPMG audit committee, 3 November, it's coming up now.
Marc MacSharry (Fianna Fail)
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Sorry, I meant to ... so I'll let you get it there first. That said, just quoting, "there has been a significant deterioration in the quality of the Property and Construction loan portfolio", continued later, "Given the concentration of advances to the Property and Construction sector in the [Republic of Ireland] division, we are carrying out extensive loan review procedures on this portfolio." Did KPMG ever perform a review on the valuations received for assets offered as security and were KPMG satisfied with the valuation policy?
Mr. Paul Dobey:
We did carry out reviews of valuations. When we looked at each individual loan in our sample, we looked at what the security was, what the circumstances of the borrower was and we looked at the collateral value as well. In most instances, certainly for the large cases, AIB sought valuations. However, as we moved into late 2008 and early 2009, valuations were not very reliable so we were applying haircuts, as were AIB, of between 20% to 30% in the latter part of 2009 ... sorry, the latter part of 2008. And when we got to 2009, our view was that the haircuts that needed to be applied were 40%, particularly for land, and maybe 30% for property.
Marc MacSharry (Fianna Fail)
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Okay, that's because we had no clear market at the time, is it or not?
Marc MacSharry (Fianna Fail)
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When ... you said that in most instances you were happy with the valuations. Were there instances of any large ones that you were unhappy, that looked-----
Mr. Paul Dobey:
Yes, we looked at ... where we were unhappy with the valuations, we would have looked at steps ... the analysis that AIB had done to assess the provision - because they may have looked at the valuation as well - and if we weren't satisfied with the provisions that were made by AIB, we requested that they would make additional provisions.
Marc MacSharry (Fianna Fail)
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Did you ever come across a situation where you felt that the valuations weren't being provided?
Marc MacSharry (Fianna Fail)
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Did KPMG ever review AIB's process for the registration of mortgage securities?
Mr. Paul Dobey:
We did and we were satisfied that the registration of mortgage securities were fine. There was a practice in the market in relation to getting solicitors' undertakings for security ... more for commercial lending but we were satisfied with the security arrangements for the mortgages.
Marc MacSharry (Fianna Fail)
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And this practice in the market, did that have a foundation in law or regulation?
Mr. Paul Dobey:
Not particularly. I mean, there was an issue with the registering of security and there was a delay in that process. And what would happen was AIB would appoint ... for the larger loans, would appoint a top tier firm to perfect the security after the loan was given. That would take some time but we would ... we and AIB would rely on the solicitors' undertakings in the period where ... between when the loan was given and when the security was perfected. There were some delays in that process.
Marc MacSharry (Fianna Fail)
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But it was taken as given that if, as you put it, a top tier firm were to say "Leave it to me", then the practice was that was accepted as gospel.
Mr. Paul Dobey:
No. There was a follow up process in AIB, they had a register of security that hadn't been perfected. That ... there was a large number of outstanding matters towards ... in mid-2007. There was a project under way within AIB to perfect the security but while that project was under way, we were satisfied that we could rely on the solicitors' undertakings.
Marc MacSharry (Fianna Fail)
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And in 2008, for example, would there have been a large amount of these?
Marc MacSharry (Fianna Fail)
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And just to the best of your recollection, would that project have gone back over six months, a year, five years, ten years?
Marc MacSharry (Fianna Fail)
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So recent, as opposed to historic?
Marc MacSharry (Fianna Fail)
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Does this practice still exist?
Marc MacSharry (Fianna Fail)
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Okay. In regulation or in-----
Marc MacSharry (Fianna Fail)
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The practice has improved or there's been a law to improve it?
Mr. Paul Dobey:
No, I think it's just been improved. It's been recognised that it needs to be improved. There's a register now and the banks haven't got the same level of volume of loans and there isn't the same level of backlog and there's more discipline in the banks around how this process works.
Marc MacSharry (Fianna Fail)
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Do you feel that the process and controls around such things are sufficient now?
Marc MacSharry (Fianna Fail)
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They're better. Okay. When NAMA acquired loan portfolios from AIB, NAMA imposed a haircut of 40% of the nominal loan ... on the values of the assets at the particular time. Were you satisfied with the valuation methodology used by NAMA in assessing the value of AIB land and development loan book and the potential impact on subsequent provisioning?
Ciarán Lynch (Cork South Central, Labour)
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Page 17 of KPMG, annual report and financial statement 2011.
Marc MacSharry (Fianna Fail)
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So it's the KPMG annual report and financial statement 2011. Page 17.
Mr. Paul Dobey:
I wasn't involved in AIB at the time and I wasn't involved in the process ... I'd no involvement in the process that AIB ... sorry, that NAMA used to assess those discounts.
Marc MacSharry (Fianna Fail)
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No, I appreciate that you'd no involvement but I am asking were you satisfied, as a firm of auditors - as a firm that had a professional opinion on these issues - were you satisfied that the valuation methodology in assessing was right, was good, what did you feel about it?
Mr. Terence O'Rourke:
As a firm, I think we understood what NAMA was doing. NAMA was acquiring the loans on a very specified basis. They went through that process and all the audits that have been done of NAMA since have not shown anything to show that that valuation ... on that special basis ... it was a particular basis that NAMA took over the loans on ... and it seemed that they acquired the loans on that basis, properly.
Marc MacSharry (Fianna Fail)
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So, I mean, the practice was just to take it as read or not or did you have a view at the time, "Look, that looks a bit high ... it looks a bit low"?
Mr. Terence O'Rourke:
I mean, in the case of AIB transferring loans to NAMA, AIB got what NAMA valued the loans at. AIB, you know, took ... so from the point of view of our audit of AIB, all we could do is accept the values that AIB got and that was it. So we didn't have a view on it, one way or the other, except to make sure that AIB recorded the correct values in which loans had been transferred.
Marc MacSharry (Fianna Fail)
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And can you provide an explanation in your view as to why the haircut was so high?
Mr. Paul Dobey:
Yes, I can. As I mentioned in my opening statement, when AIB announced to the market in early 2009 that they expected through ... they expected to take additional provisions in 2009 and '10. And those provisions ... and they were some €6.2 billion I believe ... those provisions were based on this investor presentation from AIB that's ... that contained this information. It's still on the AIB website. But it assumed certain declines in values. So, for example, it assumed, on a base case ... a base case declining values of ... for residential property between 20% and 40% in a base case and 50% on a stress case for zoned land.
A base case with a decline of values of 25% to 50% and a stress case of 70%. So ... and ... so broadly, declines on a stress scenario were between 50% and 70%. So, in that light, there would've been equity in a number of the transactions that were transferred to NAMA so the 60% ... the 56% discount isn't a particular surprise in the context of the numbers that AIB issued to the market in 2009. They wouldn't have planned to ... AIB would've planned at the time to hold these loans to the cycle. What happened, with the benefit of hindsight, is these loans were transferred to NAMA at the bottom of the cycle.
Marc MacSharry (Fianna Fail)
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Okay, I just take a ... on then to page 29 of core documents, AIB report to the audit committee, 23 July 2008. In the KPMG report to the audit committee of 23 July 2008, it outlines: "We expect the increasing arrears across the bank's books and sectors will continue to feature in the second half of 2008 and into 2009 as the worsening economic conditions in Ireland and the UK take hold." Given the market environment, did KPMG express an opinion on the planned dividend payment to shareholders?
Marc MacSharry (Fianna Fail)
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I suppose I should've asked earlier. Apart from auditing, do KPMG, at the time, provide other services to AIB?
Mr. Paul Dobey:
Our primary role in AIB was to provide audit services in that period and AIB viewed us as their auditor. We did do some audit-related work, particularly in relation to the SOX project, which was a very significant project for AIB and was very important to AIB in the context of its securities listing on the US markets. And we did some relatively small amounts of tax work, so the lion's share of the work that we did for AIB was audit work and audit-related work in that period ... in the period I was involved anyway.
Marc MacSharry (Fianna Fail)
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So, would you have a view on the appropriateness of paying a dividend, given the situation at the time?
Mr. Paul Dobey:
I'm familiar with the decision-making process that happened in AIB at the time. It's documented in the minutes. There was a dialogue. AIB took a decision to declare that dividend, I believe, in July and then it was paid subsequently in September and I think the view is, it was committed from July to pay that dividend and, ultimately, paid it in September. There was a lot of dialogue within AIB and at the board of AIB and I do recall having a discussion with the, certainly the finance director and the chief executive in relation to the dividend, and I understand the reasons why it was done.
Marc MacSharry (Fianna Fail)
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And what were the reasons?
Marc MacSharry (Fianna Fail)
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Okay. In July 2006, the bank's exposures to the broad property and building construction sector amounted to 260% of all funds when the Central Bank's limit was 250%. The bank continued to breach these limits and such lending reached a level as high as 390% at September 2008. Did KPMG ever analyse the risk level associated with the percentage share of the property-related lending?
Mr. Paul Dobey:
We were aware of all of this. In the accounts of AIB, the sectoral exposure is set out in great detail and was set out in great detail for all of the years. If you go back to 2004, we would've been highlighting a concentration of credit risk in property and construction, also in 2005, 6 and 7, as a matter that needed to be considered in the context of disclosures in the financial statements. As I mentioned in my opening statement, AIB were setting the strategy but we were concerned to make sure that the risks associated with those strategies were set out in the financial statements and they were very clearly set out in the financial statements ... set out all the exposures to the property lending and the exposure to the Irish economy in particular. And the breaches were addressed. The breaches first started to happen in June 2006. We had ... we attended all of the AIB audit committee meetings and we would've read the AIB board minutes. And we read the board minutes of 27 July, which are in the pack, which set out a dialogue that the management of AIB were having with IFSRA at the time. It was discussed subsequently at a board ... at an audit committee meeting, I remember it being discussed. It was probably either at the meeting just after ... just before ... around that time in July 2006. And we were very happy that that dialogue was happening at the board level, as, you know ... there was an open dialogue at the board level, there was an open dialogue at the audit committee, there was a discussion with the regulator, there was-----
Marc MacSharry (Fianna Fail)
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It was being discussed, but it was increasing.
Mr. Paul Dobey:
Yes, AIB was going through a process with the regulator of getting its Basel models approved and the view in AIB, likely or not at the time, was that the Basel models would look at the exposures at a borrower level and apply capital ... allocate capital at a borrower level and that-----
Marc MacSharry (Fianna Fail)
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The definitions of Basel were going to be different and, therefore, the exposures wouldn't be as high. Is that what you mean?
Marc MacSharry (Fianna Fail)
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Okay. In terms of ... just on page 47 of ... is it page 47 of the evidence book? It shows an individual worth €3.2 billion ... total bank borrowing of circa €1.8 billion comprising residential and commercial developments and investment properties. It had a peak underwrite of facilities of €790 million with AIB in September 2007. So the top 30 exposures of AIB accounted for €8.8 billion or 29% of the total portfolio. Was there ever concerns raised by KPMG about group large exposure policy limits?
Mr. Paul Dobey:
We were ... we looked at the group large exposure policy and the group large exposure policy was such that, if limits were breached ... sanctioning limits were breached at one level within the organisation, they kept getting elevated up through the process. And the reason why those limits exist is when the exposures get larger, you want to make sure that there's a fair amount of distance between the lender ... the lending ... the relationship person and the borrower. So there's a process of going through approvals. This would've come through the AIB ROI credit committee and it, ultimately, came to the board. I believe this document is a summary that went to the chairman's committee and there was a very large document that supported this, that analysed it in very great detail that went to the chairman and would've been considered by the group credit committee. So there was a process by which AIB considered this loan. It elevated it up through those processes and, ultimately, it was approved by the board. So when I mentioned in my opening statement AIB board set the strategy, their strategy was, in relation to this lender, to advance more on the basis of what they thought was a very good LTV position or they believed it was a very good LTV-----
Marc MacSharry (Fianna Fail)
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Would you have a view on the top 30 exposures accounting for 29% of the total portfolio?
Marc MacSharry (Fianna Fail)
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But you wouldn't have a view that----
Marc MacSharry (Fianna Fail)
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Okay. Just one final question for Mr. O'Rourke. At any time in your period as managing partner, would any financial institution have ever complained to you about the intrusive nature of auditing?
Marc MacSharry (Fianna Fail)
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No, no, but any financial institution?
Marc MacSharry (Fianna Fail)
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All right, I'm not going to mention the names.
Mr. Terence O'Rourke:
In terms of, generally speaking, as a practice in my experience as managing partner, occasionally and rarely happened that we did get approaches from companies to say, you know, we're not getting on well with the audits ... a member to the audit team. In those circumstances, where there was any request for a change in audit team, we would take that very seriously because obviously, that's an issue in terms of audit independence. If an audit partner, for example, is causing too much trouble, we need to be very sure that the request for any changes are ... is well-founded and all the rest. So we will take any such requests to a separate group on the firm and any such issues would've been referred to a group, including myself as managing partner, the head of audit and the head of risk. We would've looked to the issues and we would've tried to understand the circumstances that were going on and we would have sought to make sure that the independent position of the firm was unaffected. And that if, you know, we can see life is life and personalities don't get on sometimes and it is a matter if there's somebody, you know, not liking the way somebody sat or looked at you or something like that, then we will accede to requests but if a person was doing the right thing, and the client was not liking the way they were doing the right thing, well then we would do the right thing and we wouldn't change an audit partner for that.
Any such decision would involve us, the client didn't request ... we would appoint any replacement partner, we decided who the right person was to reflect the skills required and the experience ... and the client didn't have any choice as to who they got. We decided who the partner would be in those ... and, as I say, it's very rarely happened over my life as managing partner.
Marc MacSharry (Fianna Fail)
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Just to finish this line, if it's okay. So, how many times did it happen in your time as managing partner?
Marc MacSharry (Fianna Fail)
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And of the three or four times that it happened, was the person removed from the audit team, or how many of the three or four times were they?
Marc MacSharry (Fianna Fail)
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Okay. And of those instances that ... that ... that you removed the two or three ... that the person was removed, was the complaint over-intrusiveness or the way the person sat or a personality - use your own-----
Mr. Terence O'Rourke:
Well, yes, I mean, there are two sides to any story. So the client will tell us it's personality and all the rest and the audit partner might say "Well, I'm not sure of that, I think I was just doing a good job". So we'd have to sit back and say "What's going on here?" No, the right thing is that for us to do our job properly, we've got to have an effective audit relationship. We've got to have people who can walk in, get full co-operation with the client, have respect for the client, lead the team, apply the judgments, get things done - that's the most important thing for us.
Marc MacSharry (Fianna Fail)
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And you don't want to lose the ... you don't want to lose the business, either.
Mr. Terence O'Rourke:
Well, we want to get the right audit. I mean, we've walked away from business too, there's, you know, we want to do the right job is what we want to do. So we want to make sure the right person does the job. In circumstances where we've felt the client was just, it wasn't going to work, there was no point in us persisting with somebody that wasn't going to work with the client ... but we often make sure that if there was intrusiveness to be done, there was ... intrusiveness continued ... and the new partner may have a different style but he was going to address the same issues and carry on the same way.
Marc MacSharry (Fianna Fail)
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Did it happen with Irish Nationwide?
Ciarán Lynch (Cork South Central, Labour)
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Senator-----
Marc MacSharry (Fianna Fail)
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Am I'm allowed answer that, no?
Ciarán Lynch (Cork South Central, Labour)
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If you get the question ... I will be bringing you in at the end. You'll get some more time later towards the wrap-up.
Marc MacSharry (Fianna Fail)
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I don't know whether I'm allowed ask this so I'll-----
Ciarán Lynch (Cork South Central, Labour)
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Well, if you don't know whether you can ask it maybe ... we'll be taking a coffee break later and you can find out if you can ask it or not.
Marc MacSharry (Fianna Fail)
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Okay. Well, we'll ask it now and you can rule me out of order: did it happen with INBS?
Ciarán Lynch (Cork South Central, Labour)
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I'd say we'll move on the next questioner. I just want to deal with the dividend issue there before I move into Senator D'Arcy, and just bring you to core document ... page 33, it's the minutes of the board's meeting of AIB in December 2008, and, Mr. Dobey, you were speaking to Senator MacSharry there a while ago, with regard to the appropriateness or inappropriateness of the view of AIB on this. Can I just ask you ... if you look at paragraph three in that ... Mr. Sheehy reported that investors were expressing concerns with respect to capital adequacy and dividend policy. He considered the capital position to be satisfactory and did not foresee a need to go to the market for equity. With respect to dividend, he advised that, in due course, management was likely to recommend a 10% increase in the interim dividend. Some directors expressed reservations in relation to such an increase. Now, in your own comment there earlier, you said that your interpretation of this is ... was that it was a show of strength. Now, a show of strength can be a real show of strength or an implied show of strength. Which do you think it was?
Ciarán Lynch (Cork South Central, Labour)
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It is, that's why I'm asking you.
Ciarán Lynch (Cork South Central, Labour)
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Okay, ah, but the ... and I know that, I'm not asking you for a view of Mr. Gleeson's opinion but, as an auditor, I would imagine that you would've been looking at the group management accounts and how would you have interpreted the group management accounts?
Mr. Paul Dobey:
Well, we had just completed an interim review, that's not an audit, but it is an interim review. AIB had raised capital, I think it's referred to earlier in the minutes, it has raised tier 2 capital, around that time, so the capital markets were still open to AIB at that time. And ... we didn't have to form a view, as auditor, as to whether that opinion ... that dividend was appropriate. The circumstances where an auditor would get involved in whether a dividend was appropriate would be as part of our year-end audit, if there's a distribution made that is illegal or is beyond ... brings them beyond the capital distributed reserves, then that's an issue. But at that time, AIB's belief was that they had distributed reserves and based on our previous audit -we hadn't done an audit at the half-year but we had done some work - the AIB financial statements were still showing very significant distributed reserves.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. And just on the issue of the 30 loan concentrations, might that have had an influence on the going concern consideration?
Mr. Paul Dobey:
I mentioned in my opening statement ... when we got to February 2009 we were very concerned about a number of aspects of going concern, including liquidity and solvency. The fact that AIB was predicting ... had taken loan loss provisions of €1.8 billion in 2008 and was predicting a further €6.2 [billion], I believe, on a stress case, was ... important in our consideration of the going concern and yes, it was important, and we engaged. So we were concerned in 2009 about liquidity and we spoke to the deputy governor of the Central Bank around the availability of ELA, and we got assurances in relation to that matter. We were also concerned, in 2009, about the capital of the bank and solvency, if I can put it that way. They had agreed ... the Government had agreed to put capital into the bank of €3.5 billion. That came in Q2. We weren't sure whether that was enough and we spoke to the Department of Finance ... to the assistant secretary general of the Department of Finance in February 2009 to get assurances that if more capital was required it would be made available.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you, Mr. Dobey. Senator MacSharry. Sorry, excuse me, Senator D'Arcy.
Michael D'Arcy (Fine Gael)
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Chairman. Gentlemen, you're welcome. To Mr. O'Rourke - CARB ... who funds CARB?
Michael D'Arcy (Fine Gael)
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Who funds CARB?
Michael D'Arcy (Fine Gael)
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So it's funded by the industry itself.
Mr. Terence O'Rourke:
It's funded by ... yes. CARB is part of the legal structure of the Institute of Chartered Accountants. Its board, of which I was a member from 2007 'til last May ... May '14 ... its board ... is a majority of non-accountants on the board of CARB, so it is an independent body within the Institute of Chartered Accountants framework.
Michael D'Arcy (Fine Gael)
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And, Mr. Dobey, you said that the review wasn't concluded about the AIB '08 accounts, is that correct?
Michael D'Arcy (Fine Gael)
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But it's not concluded.
Michael D'Arcy (Fine Gael)
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And, Mr. O'Rourke, you were a member of the board, was it?
Michael D'Arcy (Fine Gael)
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Would it usually take that long to conclude a review?
Michael D'Arcy (Fine Gael)
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Yes, I understand-----
Michael D'Arcy (Fine Gael)
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I'm talking in general.
Michael D'Arcy (Fine Gael)
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Do you have any ... can you offer an opinion of why this is taking so long?
Michael D'Arcy (Fine Gael)
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Okay. Mr. O'Rourke, there were ... during your tenure as managing partner, did KPMG audit any other financial institution within the State?
Michael D'Arcy (Fine Gael)
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And any of the other non-Irish domiciled banks, but banks that trade here, KBC, Rabo?
Michael D'Arcy (Fine Gael)
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So you've a lot of banks on your books.
Michael D'Arcy (Fine Gael)
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Can I ask about the ... I mean, you've a lot of banks on your books ... can I ask about the changing of staff who would go in to ... would you leave particular staff with a bank? I see in a document here ... you've been auditing AIB from '02 to '10. Do you change them around, do you leave the same people? What way does that work?
Mr. Terence O'Rourke:
Well, the key person is the partner because the partner is the person who directs the audit and the partner is the person, at the end of the day, who expresses the opinion and decides whether they're going to sign the audit report or not.
The rotation was that partners ... would spend no more than five years in charge of the AIB audit. As it happened, the auditor who, when we were appointed auditor in 2002, the partner who was in charge of the audit retired about three or four years later so he didn't do it five years. And then somebody, Paul, did it for five years after that-----
Mr. Terence O'Rourke:
For three, three years after that. And then we had another partner after that 'cause Paul changed role in the firm so he had another responsibility. So we did rotate people, and then below that level there would be other people coming through as well, there would be changes. There'd be a combination of continuity and some changes, yes.
Michael D'Arcy (Fine Gael)
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But your , your, your standard rate near ... standard term is five years.
Michael D'Arcy (Fine Gael)
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A maximum, maximum of five.
Michael D'Arcy (Fine Gael)
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And is that ... in your view is that too long?
Mr. Terence O'Rourke:
No, I think a bank's a very complex entity to understand, and to understand the, the systems and to understand the people, understand the strategies, understand the business models, and if you've got to, sort of, every year, every two years, you get a new person in there, it just takes a huge amount of learning. So I think the most effective way is to get somebody in, and, typically, when somebody's taking over they would probably be shadowing the year before they take over to get an understanding of it, so they come in ... so it's ... it's an extensive process, and I think five years is about right to get familiarity and in-depth knowledge, but not too long to be over-familiar, and not to be fresh in your approach to it.
Michael D'Arcy (Fine Gael)
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And in terms of the staff who were there, are you satisfied that they had enough banking knowledge and experience?
Mr. Terence O'Rourke:
Yes, we are, yes, 'cause, as I say, KPMG, not just in Ireland, but globally, would have a strong market share in ... in banking audits. Our teams were not only working on bank audits but they got extensive training in bank audits, some of which we organised locally, some of which would be part of KPMG international training as well. So we were very conscious-----
Ciarán Lynch (Cork South Central, Labour)
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Including property experience as well, yes?
Ciarán Lynch (Cork South Central, Labour)
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Include property experience as well, at the bank.
Mr. Terence O'Rourke:
Property experience as well, yes we did have, yes. I ... the thing we'd obviously take a look at every now and again, when I was head of audit and the managing partner ... make sure there'd be the right level of expertise in the main audits and every now and again, we'd take a look at the make-up of the teams in each of our main clients, and we'd make sure we got the skills, we got the appropriate experience, we got the people doing ... who got the right training. AIB is also an SEC registrant, so in terms of being knowledgeable of the US rules, and the SEC rules, we had to make sure they had ... the people that were assigned to those, those audits, had the full range of experience and expertise.
Michael D'Arcy (Fine Gael)
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And, in particular, the people with property experience, what profession would you pull them from?
Michael D'Arcy (Fine Gael)
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Should you have?
Michael D'Arcy (Fine Gael)
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Should you have?
Mr. Terence O'Rourke:
Well, I think we had sufficient knowledge. I mean, I was quite happy that, obviously, property lending was a feature of banks' audits, has always been, and banks always have lent to property. So I was ... anybody who has experienced knowledge of the bank audits, who understood the issues of property lending, they understood the issues in terms of the ... the lending decisions, the credit decisions, collateral, all those issues. So I'm quite happy that the people involved in the audits of AIB and other financial institution audits understood property lending and understood the issues in assessing the quality of the loans.
Michael D'Arcy (Fine Gael)
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And specifically, within property, in terms of commercial real estate property, did you have enough expertise within your firm to be able to be satisfied that, specifically for commercial real estate property, that those people have enough experience?
Mr. Terence O'Rourke:
Yes. Yes, I believe so, I mean, our client ... in AIB ... they would do extensive work. There was huge papers produced in terms of, of the bank clients, they would produce papers. But there's also KPMG international guidance as well, in how you went auditing commercial real estate and all the rest. So we had access to lots of material in terms of the kind of risk you looked at, for the kind of audit procedures to apply, they would have been absolutely ... I'm sure our people are fully competent and fully expert in that.
Michael D'Arcy (Fine Gael)
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Were they experienced enough?
Michael D'Arcy (Fine Gael)
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In terms of, of IAS 39, you spoke about it earlier, Mr. Dobey, can I just read some quotations from, from evidence that has been presented to us previously? And I'm going to make a statement and I'm going to ask you to comment upon that afterwards. In terms of IAS 39, does that mean that the "audited financial statements no longer had to comply with the true and fair view standard" and the previously accepted standard-----
Ciarán Lynch (Cork South Central, Labour)
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You made a statement, Senator.
Michael D'Arcy (Fine Gael)
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Yes. I'm going to qualify that now, Chairman. In evidence, Mr. Donal Forde, when asked, "Did you understand the flaw in [the] standard when it was introduced?", he replied, "I had a view that it wasn't an appropriate formula". That view was held by all the senior people in AIB. Subsequently, in Mr. Eugene Sheehy's evidence, he stated, "It's a totally nonsensical accounting standard from a banking point of view", and "We discussed whether we should go to the regulator with our concerns". Could you offer your view, for both gentleman, in relation to those statements from those very senior banking officials within AIB?
Mr. Paul Dobey:
The first thing to say is I don't believe that AIB senior management held a view that the accounts reflecting IAS 39 didn't give a true and fair view, and that's very important to me because the primary responsibility for the true and fair view, given by the accounts, rests with the directors. And indeed, the directors, including the chairman, and the directors, signed the financial statements and approved them in the belief, I believe, that they gave a true and fair view. So, the first part of your question, I don't believe that the application of IFRS negated the true and fair view. In actual fact I believe the true and fair view was informed by IFRS, and our opinions state that the accounts give a true and fair view in accordance with IFRS, which is an explanation of what the true and fair view is. The true and fair view must be informed by some rules because, your true and fair view and my true and fair view ... they'd be a different true and fair view by individuals, it's a pretty broad term. So it's ... it's explained by reference to accounting standards. So that's the first and very important, point. And ... and if I believed that AIB were saying that they didn't believe the accounts gave ... gave a true and fair view that would be something, that would be significant. I don't believe that's the case. I'm aware, though, of the views of AIB in relation to IFRS, and I was aware at the time. There was an extensive dialogue in AIB around the application of IFRS. One of the issues in IFRS ... the reason why IAS 39 was introduced in relation to loan loss provision was to stop income smoothing. And there was a very significant debate around income smoothing in, in the US actually, in 1998, when chairman Levitt of the SEC outlawed earnings management. And there was a very significant dialogue between the SEC and the Fed in the US, that went on for ... for three years until it eventually resolved in 2001, what, yes, 2001, that the incurred loss model prevailed. And the issue here was, that the Federal Reserve, like regulators, for example, would like to have significant buffers in their general provisions, by general provisions to enable banks, maybe, to report less volatile earnings. The Fed might like that there would be more buffers and provisions to smooth earnings, because that encouraged confidence, it avoided volatility. What the SEC were very focused on was to make sure there wasn't earnings management.
Michael D'Arcy (Fine Gael)
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Okay. Mr. O'Rourke, in your opinion, did KPMG feel it was the right standard to adopt, IAS 39?
Mr. Terence O'Rourke:
I certainly understood the reasons why it was introduced. The benefits of accounting standards is that they are objective and what .... IAS 39 was certainly a very objective standard. It tried to remove any subjectivity, in other words, people deciding, well, it's ... we'll put away this amount this year, and this amount another year. And the problem beforehand was that people were putting away different amounts in different places, so analysts, in trying, and investors trying to understand the financial statements of banks were coming up with different answers. When IAS 39 came along, the benefit was you knew that the only things that were provided for were incurred losses. Now, there is , I mean, there is, we grew up with the concept of prudence in banking and prudence was this concept of putting away more money but there is another side to the coin, which is the objective, and it's good to have objectivity as well. I think what ... this debate has now moved on, the IASB are moving towards an expected loss model. But it was one of the things about an expected loss model, is you only provide for expected losses, you don't provide for unexpected losses. It's still got to be done on the basis of evidence of credit deterioration. So, expected loss is not providing for unexpected loss then, it's not back to the old general provisioning, we just put away whatever we think we should put away. And, therefore, I think there, there was definitely merit in IAS 39 and I think where we're getting to now is probably a more sensible situation.
Michael D'Arcy (Fine Gael)
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In Donal Forde's evidence, also, previously, when he was asked, "Did you express that view to anybody?", about the standard, he replied, "It would have been a point of discussion with our external auditors", and I continue, in Michael's Buckley's evidence, when asked did he recall expressing these concerns to the regulator he stated, "A lot of these discussions we would have had with the auditor". Mr. Dobey?
Mr. Paul Dobey:
Yes, there was some dialogue in ... on the transition to IAS 39, sorry, IAS generally, with AIB. As I recall it, AIB wrote a letter to the EU, I think it went in Michael Buckley's name, I couldn't find it actually when I went looking for it over the last couple of days, but I recalled that they did actually write a letter to the EU making a submission as to-----
Michael D'Arcy (Fine Gael)
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Mr. Buckley, did you have any contact with the Financial Regulator about the implementation of ... of the standards?
Mr. Terence O'Rourke:
No, not ... previous in my life I had been involved in the Institute of Chartered Accountants and we would have had discussions about bringing in IFRS and we would've probably been in discussions with the Financial Regulator at that stage and it was one of the issues that we would be coming to that but financial statements can only provide ... I mean, the financial statements tell the story of numbers based on certain rules but there are other things to be taken into account and the Financial Regulator has other weapons and other methods of assuring and I mean, banks have a way of making sure that they have enough capital. I mean, putting aside additional audit provisions is one way of doing it but there are other ways of doing it as well. So the fact that IAS 39 came along didn't mean that suddenly all the accounts were on that.
Michael D'Arcy (Fine Gael)
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One of the other issues that you touched upon, I'm not sure which of you touched upon the going concern that the business would be trading in 12 months. Was there any time that any of the firms that you were auditing were not going to meet that going concern threshold?
Mr. Paul Dobey:
If we were concerned about going concern on any of our banks and we were concerned in relation to AIB and a number of our other banks, we took certain steps. In 2008, we took steps to obtain assurances from the Financial Regulator and that was to address just what ... make sure they were aware of what the Financial Regulator was aware of. We spoke to the Central Bank because we wanted to understand ELA and the information ... what dialogue was going on between the Central Bank and the euro system. And we did that in 2008 and we got the assurances we need from the deputy governor of the Central Bank of Ireland and we also spoke to the Department in relation to capital. Now, when we came along ... and we, therefore, concluded that those banks were going concerns, that there wasn't a significant ... there wasn't a matter that cast a significant doubt on their ability to continue as a going concern because if we had concluded that there was such a matter, we would have included an emphasis of matter in our reports. When we got out to 2010, we sought ... sorry, in 2009 we got the same assurances, we had the same concerns and when we got out to 2010, I think, maybe we were just after an election ... there wasn't a Minister for Finance in place and we didn't get the assurances that we required and we did put an emphasis of matter paragraph into the accounts for a number of banks ... that we audited.
Michael D'Arcy (Fine Gael)
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And can I ask Mr. O'Rourke, were you satisfied that you had access to accurate information which enabled you to discern the full financial position of the group at all times?
Mr. Terence O'Rourke:
Yes, we were. AIB had extensive risk management processes, extensive internal reporting and I must say we were very happy with the adequacy and the comprehensive nature of the way that matters reported up the chain in AIB and the matter was being reported to the board. We never had a situation where we found things in our audit that hadn't been reported to the board. So, we were happy with the quality of information the AIB board had, yes.
Michael D'Arcy (Fine Gael)
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And in terms of within the financial sector in general, the cross-collateralisation of security and loans, some of the banks didn't know exactly who had what loans where and the securities were mixed up and took quite some time to resolve. If they didn't know, how did you know?
Mr. Paul Dobey:
In the case of AIB, we knew AIB would have some sense of the securities they had. They would have other security that they might have liked to have. When the downturn hit, there was that issue that you've referred to of multiple borrowers having borrowed from multiple banks and that was very, very difficult for the banks to resolve because each bank then was scrambling to strengthen its security position and, actually, I think, in that regard, NAMA was very helpful because NAMA could get all of those borrowers under one roof and resolve the security package together. So, there was that issue in relation to resolving the position in relation to borrowers but AIB would have known exactly what securities it had, it just mightn't ... might have liked to have more ... as the position in the economy deteriorated and there was a scramble for security.
Michael D'Arcy (Fine Gael)
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Tell me, within your firm did ... KPMG were the auditors for some of the 30 major developers. Was there a potential conflict of interest?
Michael D'Arcy (Fine Gael)
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In terms of what changes, if any, to the auditing process should be taken to enhance the current approach, what would you recommend?
Mr. Terence O'Rourke:
Well, a couple of things have already happened. I mean, one of the things, I think, more dialogue with the regulator along the way through. I mean, we did report every year to the regulator as required but the new protocols now of the regulator are to meet more regularly to have dialogue with the regulator and to discuss ... make sure each side knew the other. The regulator is also constrained. In some meetings we did have with the regulator, the regulator was unable to tell us things. We'd tell the regulator something and they said, "We can't tell you anything back because we're constrained by confidentiality". Now some of those confidentiality rules have been lifted, so there's a more open dialogue now between regulator and auditor which, I think, is important.
A couple of other things, one is the going concern basis and the basis on which banks decide that they are a going concern, there is now agreement there should be extensive disclosures of what the issues the directors took into consideration when they're making those things. The guidance, for example, previously would have focused on liquidity and now it's very clear that going concern decisions should be based both on liquidity and solvency. Also, the previous guidance on going concern was more about a point-in-time, intermittent, "Are we a going concern today when we do our accounts?". And now the view is that this should be a matter of constant ... under constant attention by a company and they should be looking to make sure they're a going concern at all times. So, those things are helpful.
And finally, I would say in audit reporting, we now see that audit reports which are boilerplate ... they were beforehand, there was a lot of things we had to say but they were pretty much the same things we said to everybody. Now, auditors are required to identify the major risks that they have identified, so that in their published audit report to shareholders to say, "These are the things that we think could give rise to most risk of the accounts being wrong and this is why we think those things are the biggest risks." We also ... Auditors also use materiality, in other words, we don't audit every last penny because we'd be there forever if we .... so we take a material ... and make sure everything is materially right, whether the balance sheet is €100 million or €99.9 million, it doesn't make much difference but if it was €90 million it would be a big difference, so there's a materiality aspect and auditors now have got to disclose in their audit report what materiality judgments they use. And, finally, auditors have got to now to say in their audit report in a bespoke way what they've done in terms of the major risks they identified - so, what audit work have they done to work on the major risks. So, those are now published and are in the audit reports of public interest entities and are a new feature which was not there in the crisis. So, all those are helpful, I think, for readers----
Michael D'Arcy (Fine Gael)
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And finally, you said KPMG audited PostBank, HSBC, Defpa, INBS, AIB, EBS at one stage or now ... sorry ... currently, PTSB and BOSI at one stage also. Did you always ensure that there was no crossover in teams? And then if somebody was moving from one bank to another bank, was there a cooling-off period before they went in or not?
Michael D'Arcy (Fine Gael)
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But had a lot of banks?
Michael D'Arcy (Fine Gael)
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And is that appropriate?
Michael D'Arcy (Fine Gael)
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And would that person have been senior or perhaps more junior?
Michael D'Arcy (Fine Gael)
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All right, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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I just have a few moments there if you want take ... I think it's No. 14, okay. I'll just take one question in that regard. It's did KPMG ever review loans that were outside the lending policy? This would be kind of the exceptions to loans or lending policy loans. Did it ever, in its engagement with AIB, find itself in that space?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Okay. So what I'm simply asking there is as part of your audit process, did you ever end up in a position where you were reviewing loans that were outside lending policy? These are the exceptions to lending policy.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And did you have any concerns with these exceptions to lending policies and the level of exceptions?
Mr. Paul Dobey:
We had ... our concern in relation to the exceptions of lending policies was to make sure that the AIB processes were adhered to so that they got elevated appropriately up to the board, if need be. We also would have made sure in our auditing approach ... in looking at the audit of those loans, that they were recoverable and, in 2009, some of those large loans would have been-----
Ciarán Lynch (Cork South Central, Labour)
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So, who were they reported to and how where they then addressed?
Mr. Paul Dobey:
Within the bank ... there was detailed sanctioning limits within the bank. AIB was organised on a divisional basis. There would have been a credit committee at a divisional basis if ... there would have been a sanctioning limit for individuals, there would have been a sanctioning limit for credit committees, divisional credit committees and then the group credit committee and certain decisions beyond those sanctions would have gone up the board. And that process happened and we wouldn't have seen exceptions to that process, if I can put it that way. We were satisfied that all of the matters reserved for the board went to the board.
Ciarán Lynch (Cork South Central, Labour)
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Were the exceptions in a particular area? Were they in construction or were they in business investment or where were they?
Ciarán Lynch (Cork South Central, Labour)
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So, it would have been a broad construction, property sectoral area?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you.
Michael D'Arcy (Fine Gael)
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Senator MacSharry had asked that previously.
Ciarán Lynch (Cork South Central, Labour)
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Oh sorry, I missed it. Can I take in Deputy John Paul Phelan please?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. You've caught me by surprise there. Gentlemen, I've a general question at the start about risk assessment and maybe it's more appropriate for Mr. Dobey, but feel free to answer, Mr. O'Rourke, if you wish. With regards to the preparation of the firm's annual audit plan, and the risk assessment underpinning it, did the risk assessment approach adopted change to meet the prevailing, challenging environment in the period which we're discussing and if you can maybe outline if it did change and how it did change? And, furthermore, did the firm conduct their own independent assessment of the bank's credit risk methodology to satisfy themselves that the principles and processes adopted by AIB were appropriate?
Mr. Paul Dobey:
Maybe to answer the second question first, we did look at the processes and methodologies and we were satisfied that they were appropriate in terms of processes. I think, as I've mentioned in my opening statement, what was underestimated by AIB was the extent and scale of the downturn and the implications it would have, but we didn't have the concern about their detailed processes. As I mentioned also there was a very detailed risk assessment process within AIB that identified all of the risks. They were aware of all of the risks. They may have underestimated the consequences of some of those risks but they were aware of them. Maybe to answer the first part of your question if I may, and I don't wish to go on for too long, but we did a very detailed assessment and I can take you through, if you wish, some of the comments that we would have been making-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Briefly.
Mr. Paul Dobey:
----- in ... I'll try. So, in 2004, we would have been talking about strong credit in the economy. We would have been talking about economic conditions and competitive pressures that could exacerbate profitability caused by increased competition and falling margins.
In 2005, we talked about continued credit growth and demand in AIB's markets, particularly in Ireland. We talked about a risk that credits might deteriorate post-approval and policies are not reviewed to reflect the changes in economic environment which could adversely affect credit quality. Also in 2005, we highlighted the level of exposure to different economies and sectors.
In 2006, we highlighted significant and continued growth in the new business volumes and increased credit concentrations in the property sector. At that time, there was increasing ECB interest rates and we were concerned about its impact on the Irish economy; that didn't end up being a big issue. We talked about the competitive environment and we made a comment on the aggressive new entrants to the local market with an established infrastructure. We talked about competition to secure long-term capital funding and we talked about the integrity of management information and financial reporting which was dependent on the effectiveness of internal control systems and the tension between that and the drive to maintain EPS momentum and control costs.
In 2007, things were getting a little more difficult. We talked about the provisioning assumptions will require continuous monitoring and appropriate revision as credit grading policies and procedures develop. The favourable credit environment in AIB's markets is reflected in the current provisioning levels. However, as interest rate rises take effect and additional information becomes available, the provisioning may need to be updated to take account of the impact of any deterioration in the credit environment. That was in late 2006, in the context of our 2007 audit. We talked about underwriting in the current environment and breaches of underwriting limits. We talked about the deterioration of credits post-underwriting approval, including the impact of current market turmoil. We talked about credit rating and liquidity positions to support growth aspirations, the significance of the Irish economy to the group and its impact on generating sustainable growth, and we talked about the natural tension between maintaining the integrity of management information versus the ongoing drive to maintain EPS momentum.
And I can continue, if you wish.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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No, no, and I'm not wishing to cut you short, but I only have limited time and I've a whole series of questions that I wish to ask. Did you see the evidence from your counterparts yesterday from Deloitte and Touche?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I want to put a quote to you from Mr. Fitzpatrick from yesterday. I asked him whether ... he's the head of audit in Deloitte ... whether they do bank auditing differently now than they did when they were auditing Ulster Bank prior to the collapse and in light of the findings of the Nyberg report. His response was:
I wouldn't ... I wouldn't say we've done it differently. I think that ... that the emphasis around our whole organisation about the importance of scepticism is reinforced and maybe more so reinforced which is that idea of constantly reinforcing that view of the sceptical mind.
Do you do your bank auditing differently as a result of what you've learned from the crash or, indeed, in light of the findings of the Nyberg report?
Mr. Paul Dobey:
Well, firstly I would say you are always sceptical in relation to our bank audits and that's a state of mind. I've given you some examples, as we've talked ... I've just given you some and I've talked to you about the going concern assessment that we ... and steps we had to take in 2007 and 2008 and we were quite concerned about AIB in 2008 and for us to take those steps and talk to the Government was unprecedented actually, so that reflected the scepticism. What I can say is that bank audits ... auditing has changed. The engagement with the regulator has changed, that's a change for the better. There's much more active dialogue now and-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Is the physical way that an audit is conducted different in any respect?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In any substantial way.
Mr. Paul Dobey:
Yes. I suppose what we would say in relation to the AIB audits is we were very thorough. We did a very thorough review of all of the loans' exposures when the downturn happened. We were looking at those beforehand, but we weren't overly concerned about the recoverability because of the strength of the economy and the elevated property prices. We need to be sceptical, and maintaining that scepticism is important and having that expertise within our firm is important. Having the international ... the dialogue with our international colleagues is important. We were doing that in 2007, we've continued to do it. Obviously, audits need to evolve to reflect the changing environment. I would say our bank audits ... there's much more dialogue with Government and regulators now and that's important.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I ask, in relation to the auditing of AIB, how many people are involved in the team in total? I don't want to know particularly about individuals, but what sorts of grades of staff are we talking about?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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How many in total then? Twenty-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Twenty.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. And typically then would the ... and the phrase I used yesterday was the "grunt work" of the audit be carried out by more junior members of staff, with senior partners supervising their work or-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So most of the 200 would be pretty junior?
Mr. Paul Dobey:
No. I was just making the point that the junior staff on our audits are very important. They bring a fresh perspective and they do a very important role and they are the lifeblood of our firm. I would say, on AIB, it would be ... certainly in ... if I go back to 2008, where we allocated ... we had a very challenging audit, as I mentioned in my opening statement. We would have brought in additional partners and directors to review the loans in late 2008, early 2009. I would say we probably had ... and I'm sorry, I am guessing, but I would say it was half of that 200-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, that's grand.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I want to turn to the Nyberg report, page 56, paragraph 3.6.2 - you'll be familiar with it, I would think, anyway, gentlemen - where he says, "The commission would have expected a bank auditor exercising necessary professional scepticism to have concerns where there were growing property and funding exposures, combined with material governance failings." Do you accept that finding of the Nyberg report in relation to your audit of AIB?
Mr. Paul Dobey:
I presented to Mr. Nyberg, to the commission. I pointed out to him, as I have pointed out to you, the steps that we took in all of the relevant years. I think Nyberg's primary criticism of auditors is that we didn't point out the implications. So, we pointed out the risks and he would have expected us to point out the implications. I think, if you look at some of the documents that we've presented, maybe they were presented in a particular way. We were making ... we were dealing with the very senior members of the audit committee and if you look at ... there's a document we referenced earlier, Mr.-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I only have 40 seconds left.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In relation to that comment, does it apply to your auditing of AIB?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Finally, earlier, very early, much earlier in our inquiry, Professor William Black was here. He was an American ex-regulator and under questioning from me he made the following quote, he ... in relation to auditors:
The straightforward answer is not to allow the bankers to pick the auditors. There should instead be a panel of qualified auditors that are assigned to them, and we should track the performance of those auditors. It would be like relegation. If someone had a record of screwing up, they get yanked from the panel, assuming what they did was not criminal. If it was criminal, they are driven out of business, but if it was just inept, they get relegated.
Firstly, and to use his phrase, do you regard any of the audit practices of KPMG in relation to AIB as being "inept"? And that's his ... his word, not mine. And, secondly, would you care to comment on his view that banks shouldn't be choosing their own auditors, and that such a system of relegation would apply for auditors who are shown, maybe, to have not performed their duties correctly?
Mr. Terence O'Rourke:
Well, first of all, absolutely, we were not inept. We did very high quality audit on the AIB, I'm quite sure of that. Secondly, in relation to the other matter, the auditors are chosen by, these days, the non-executive directors. The audit committee are the people who choose it on behalf of shareholders. We are the shareholders' auditors and they're chosen by representatives of the shareholders, who are the non-executive directors. Also, our work is reviewed by regulators, so if we were, you know, inept, or if there was auditors who weren't doing what they're doing, the regulators would be calling them out. And that's the way, I think, that the system should work.
Mr. Paul Dobey:
You probably won't be surprised to hear that I wasn't keen on what Mr. Black had to say. I thought he questioned the integrity of auditors generally, and there was a generalisation made that I didn't recognise in his evidence, particularly in so far as it relates to Ireland. I'm not sure what experience he had in the savings and loans process in the US. And maybe ... I think if there was ... somebody was doing inept ... an inept job in our firm - that very rarely happens - but we would be absolutely comfortable that person should be yanked from whatever role they were fulfilling.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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With that said, I now propose that we take a break. The witnesses are reminded that, once again, once they begin giving evidence they should not confer with any person other than their legal team in relation to their evidence or matters that are being discussed before the committee. And with that in mind, I now suspend the meeting until 4:35 p.m. and remind the witnesses that they're still under oath until we resume. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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I'll propose that we go back into public session. Is that agreed? Agreed. Okay, so with that said, I call on Deputy Eoghan Murphy. Deputy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman. And you're both very welcome, gentlemen. I just want to return to a question that Senator D'Arcy asked you earlier on, Mr. Dobey. He asked if you were satisfied that you had access to accurate information which enabled you to discern the full financial position of the group at all times in relation to AIB and I think you said that you were satisfied.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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And you came into auditing AIB in around ... is it 2002?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. If we could just look at a board minute, and it's in the document on page 4 of the KPMG core document. It's a board minute from December 2001, if you have it in front of you.
Eoghan Murphy (Dublin South East, Fine Gael)
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The page is mostly redacted but at the top we've the group chief executive's report and in that main paragraph, Mr. Buckley talks at the bottom of the paragraph, about the need to make a significant capital investment in the development of a "single information management architecture." So would you have come across this problem when you were then auditing - in 2002 - the year 2001?
Mr. Paul Dobey:
AIB had a lot of legacy systems and there was a lot of workarounds required to gather information but it had those workarounds in place. There was a very extensive programme put in place between 2002 and 2007, particularly in relation to the ROI division. We called it Project Alpha. And that was designed to facilitate better information flows and particularly in relation to customer information. And would have also facilitated things like credit provisioning But AIB had a lot of manual processes, this was a suggestion that their needed to be more ... better systems and more systemised processes. There was also a very active dialogue in AIB... well, sorry, this predated the Rusnak fraud, which was before our time. But post-Rusnak, there was very detailed work done in AIB to change all of its processes. I think they talked ... the AIB people who came before you talked about the very extensive processes they went through. John Hyman did some work with them, Deloittes did a review of all their credit processes and there was also, in that time, some change to their risk infrastructure. They were a very decentralised organisation prior to the Rusnak crisis, post that they put in certain ... they centralised risk and they centralised finance over time. And I think that was what ... this was the genesis of that.
Eoghan Murphy (Dublin South East, Fine Gael)
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And you said that it took until 2007 to bring in that single information management architecture?
Eoghan Murphy (Dublin South East, Fine Gael)
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Without the implementation then of such a management system for information ... I mean, could you be confident that you had a full picture?
Mr. Paul Dobey:
AIB had legacy systems that were inefficient and it was harder to extract information but they had data warehouses and other processes to gather information that we were then able to use in conducting our audit. But it was a change process and this was about streamlining the processes, reducing the number of people and having a more automated process.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, if we could turn then to page 9 in the same document please. And you talked, Mr. Dobey, in your opening statement about the effective communications of risks between KPMG and AIB. And here we have, in relation to credit control and credit provisioning, an observation in the second paragraph on the left hand side, "During the course of our audit, we noticed 11 significant provisions raised in December 2004, nine of which were without the prior approval of the relevant credit committee." So, is that an example of you as auditors catching something that AIB itself weren't aware of?
Mr. Paul Dobey:
I'm not sure if AIB weren't aware of it, but there was a process in AIB where, towards the end of the year, they would process their loan loss provisions. We would've preferred that they did it throughout the year, but it was done towards the end of the year. There was a number of reasons why this was a practice we didn't ... we weren't particularly keen on. Firstly, as I've mentioned earlier, in a bank, the closer the relationship manager is to the loan, the greater the risk. So, in this instance, and the way ... the way banks manage that is by having approval processes and credit committees. In this case, we would have liked to have seen where loans were being written off, and I'm not saying there was a fraud, but there is an increased risk of fraud between the borrower and the lender ... the lending ... the relationship manager ... and the bank's controls on that was to have all write-offs or provisions go through a credit committee. There was obviously, I would say, a lot of work done towards the end of this particular year and credit provisions were processed. We would've been happy that they were processed timely but we would have preferred if they'd gone through the credit provisioning process ... the credit committee process. And one of the key... it's on the right hand side of that page ... one of the key matters ... what's really important about when credit provisions are taken is that there is learnings from that loan loss. So, if you advance a loan and then you have to take a provision against it, the most critical thing from the bank's perspective is that you learn the lessons from that loan. What was the problem? Why did this loan go bad? Was it the underwriting decision that was wrong? Was it the management of the loan over the period or whatever, right? So, as I said, the main purpose of the markup is to analyse the cause of the loss and to learn from our loss experience, in addition to confirming the appropriates of the provision. So it was those two things that we were pointing out. So you're absolutely right, this was something that we were, sort of, picking up and ... and improvements that we thought AIB could make.
Eoghan Murphy (Dublin South East, Fine Gael)
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And in the management response then on the right hand side, that's AIB accepting your observation and recommendation?
Eoghan Murphy (Dublin South East, Fine Gael)
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And is that then case closed?
Mr. Paul Dobey:
No, no, the next year you would have looked at it again and we would have expected them to do it differently and to follow through on this recommendation. And in our management letters, when we raise management letter points, we'd raise them in one year, the following year we'd look, if the matter came up again we'd highlight it again. If there was an action from the previous year that wasn't dealt with, we'd capture that as an action that wasn't dealt with, and the chairman of the AIB audit committee at the time was very focused on items getting resolved on a timely basis. So one of his key metrics as chair of the audit committee was; how many items did internal audit raise, how many items did external audit raise ... and is management dealing with those matters on a timely basis? And that would have been, you know, about an appropriate control environment.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you. I want to just move into another area there in relation to IAS 39. KPMG is an international company.
Eoghan Murphy (Dublin South East, Fine Gael)
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KPMG operates in Spain?
Eoghan Murphy (Dublin South East, Fine Gael)
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Do you audit banks in Spain?
Eoghan Murphy (Dublin South East, Fine Gael)
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So what are the recommendations that came out of the Nyberg report on page 20? He talked about the big auditing institutions having access to warning signs, and it was unexpected, he said, that the international experience that big auditing firms had was not used more. Would KPMG in Ireland have been aware that the Spanish banks and the Spanish regulator were not implementing IAS 39 fully?
Mr. Paul Dobey:
Absolutely we would have, I mean we would get together as banking financial services partners regularly and discuss various best practice. One of the things, I'm not an expert in Spanish law, but it's different than Irish law. So when the EU ... IFRS regulation was brought into Irish law it was brought in fully with no carve-outs, and we didn't have the option of having that carve-out that was available in Irish law, sorry, that was available in Spanish law, and I have to say I don't understand all the details around Spanish law. I can say that the audit firms in Spain qualified the accounts of the Spanish banks to say that they were not in compliance with IFRS. Now for AIB, given that it had access to ... European capital markets and US capital markets, it wanted to apply IFRS and wanted that opinion from its auditors and the market would have demanded its opinion from its auditors in relation to IFRS.
The other thing I can say is while what was called dynamic provisioning was operated in Spain, it was only operated in relation to a small portion of its book and it was there for a particular reason, which I think was to do with holdings that Spanish banks held in Spanish companies. And,all I can say as an observation is that the additional provisions that were set aside as a result of that were, were not sufficient to save the Spanish banks from the, the, the ... very significant issues that they faced.
Eoghan Murphy (Dublin South East, Fine Gael)
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Was the Spanish approach, or the carve-out as you described it, was that better practice?
Mr. Paul Dobey:
Well, I have to take you back to the comments I made in my opening statements. If a bank thinks it needs more capital, it can hold capital. It can decide not to pay dividends, we had that discussion earlier on. It can decide to raise capital in the markets. If the regulator thinks there's greater risk in the banks than they would like to see, they can specify that greater capital should be held against those risks. So IFRS accounting is only one small piece in the picture here, and the other thing I should say to you; when general provisions are set aside by banks, they're not necessarily a buffer against capital because the capital adequacy rules, under the CRD are such that those loan loss general provisions get added back to capital. So they're not available always as buffer. Now they get ... it's technical but they get added back to tier 2 capital. But they do get added back to capital and it's not necessarily a buffer against loss in that circumstance.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you and just then to conclude on that point. I mean did you discuss this issue about what was happening in Spain or the discussions that you'd had with AIB about this accounting standard? Did you discuss them with the Financial Regulator?
Mr. Paul Dobey:
No, but we would have been aware. I mean, the regulators do various different things in different countries and we would look at, you know, in Canada they did something different.
In Germany they do something different and there is a college of regulators that gets together across the EU where they would discuss those matters and I assume they were aware of what other regulators are doing; there is a forum for them to do that. But we wouldn't have discussed this with the regulator and we wouldn't have viewed it as our role to set the capital for the banks. That was the role of the regulator.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy Murphy. Just in follow up to Deputy Murphy and either Mr. Dobey or Mr. O'Rourke can answer this. Do you feel that due to the lack of one system as we have just been discussing that there was any material information gaps that might have helped you as an auditor to get a clearer picture of the AIB accounts?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. Paul Dobey:
What I can say is that when the crisis hit AIB in 2008, and I mentioned earlier on that the 2008 audit of AIB was the most difficult audit that we did to that time. There were difficult audits subsequently also. It was great difficulty in gathering the information that we needed to assess the loan loss provisions, and we allocated a huge amount of man hours to that. AIB allocated huge amounts of man hours to it. We got to the right answer in February but it was very very difficult, and very expensive and costly.
Ciarán Lynch (Cork South Central, Labour)
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In an earlier response to Senator D'Arcy, Mr. Dobey, you stated that AIB knew what securities they had. Did they know what securities they had that would not register for more than 90 days from your examination?
Ciarán Lynch (Cork South Central, Labour)
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Was KPMG aware of this?
Ciarán Lynch (Cork South Central, Labour)
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In relation to the loan concentrations, Mr. Dobey, you stated that in 2008 it was considered as an issue re the going concern concept, in response to Deputy Phelan that in 2006 you revised your audit schedule to address the increase in concentration of property lending. Should this not have been a concern in the going concern concept as well? We were talking about 2008 but in 2006 these issues were on the table also.
Mr. Paul Dobey:
They were on the table for AIB as a significant risk and I mentioned the semi-annual risk reports that were presented by the chief risk officer to the board and the audit committee. At that point, property prices were elevated. We now know that they were inappropriately elevated if I can put it that way, but there were transactions happening at very high levels and those loans were recoverable and could have been recovered at that time.
Ciarán Lynch (Cork South Central, Labour)
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That would have been the view held by both the auditor and the bank, yes, at the time?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Michael McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. You are very welcome, Mr. Dobey and Mr. O'Rourke. Just for disclosure purposes, Chair, I worked with KPMG in Cork from 1997 to 2001 where I trained and qualified but did not work in any financial services audits, just to put it on the record. Can I start by asking Mr. O'Rourke if any legal action was taken or threatened against KPMG in respect of your audits of AIB over the last number of years?
Michael McGrath (Cork South Central, Fianna Fail)
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Not that you are aware of. Would it be correct to state that as partners you do not have limited liability in the legal sense?
Mr. Terence O'Rourke:
Correct. We operate as an unlimited liability. We have unlimited liabilities. Not like a limited company, the partnership is an entity whereby if there are any liabilities incurred or obligations incurred, those obligations go back to the individuals, they do not stop at the corporate level.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. Could there be significant implications for partners and for the firm if any statement was made, for example, that the financial statements during the years which are under review were not prepared, did not give a true and fair view in accordance with the international financial reporting standards or did not contain the sufficient disclosures and property risk? Could there be implications?
Michael McGrath (Cork South Central, Fianna Fail)
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If somebody relied on the financial statements and if you had made a statement of that kind, but you certainly hadn't, just to be clear.
Michael McGrath (Cork South Central, Fianna Fail)
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Auditors would have professional indemnity insurance?
Michael McGrath (Cork South Central, Fianna Fail)
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Can I just raise the issue of fees? If my calculations are correct, then KPMG earned over €60 million from 2003 to 2013, between audit and non-audit fee income.
Michael McGrath (Cork South Central, Fianna Fail)
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Over that period or for any given year, what percentage of KPMG's total income would the income stream from AIB have represented?
Michael McGrath (Cork South Central, Fianna Fail)
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2.5%?
Michael McGrath (Cork South Central, Fianna Fail)
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Would it have been one of your largest clients?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Do you believe there was an excessive dependence on the part of KPMG on the fee income that you were deriving from that work?
Mr. Terence O'Rourke:
No, 2.5% is not particularly large. It's a number but it's small part of our total audit ... total revenues. And the ethical guidance of auditors that was set by international standards is that, if you get more than 10% of your audit fees from a client, then you begin to get risk situations and you get to get questions about auditor's independence, but the levels at AIB was far below that.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, but would you accept that 2.5% is still a significant element of your fee income?
Michael McGrath (Cork South Central, Fianna Fail)
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It was a valuable fee income.
Michael McGrath (Cork South Central, Fianna Fail)
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Just from looking at the financial statements of AIB which were audited by KPMG and I was looking through 2007, for example. And there are 18 pages dealing with risk management and there isn't a single reference to property and construction. And if I can just put the question in some context, I suppose, for Mr. Dobey, for example, in that year, total loans and receivables to customers were €127.6 billion, of which construction and property, which we can see on ... in one of the notes of the accounts, was €46.4 billion, so about 36% of the total loans and receivables. And if you stripped out home mortgages, which were just over €30 billion, then construction and property accounted for 48% of the loans which were due to AIB. Now, do you believe it is appropriate that, in 18 pages dealing with risk management, that there wouldn't be a reference to the exposure of the bank to the construction and property sector?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Mr. Paul Dobey:
-----setting out the growth in that sectoral exposure. And I believe in the note in the accounts that addresses concentrations of credit risk would've highlighted property and related construction lending. In addition, and I have an extract from the 2006 accounts ... I didn't bring 2007 as I've said ... which said:
The Irish and UK economies in particular have a significant growth in property prices and property-related lending in recent years and, while management believes this is a sensible approach to property lending and the management of related risks, any significant deterioration in Irish and/or UK property prices, could adversely affect the financial position of the group.
So I-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. Is that in the directors' statements-----
Michael McGrath (Cork South Central, Fianna Fail)
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No, no, that's fine. And the last excerpt you read out there from 2006, where is that presented in the financial statements? Is that in the directors' report?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. I mean, the 2008 financial statements would've been agreed and published in early 2009, so that would've been after the bank guarantee and after the crash, for want of a better phrase, in September 2008. The issue I'm raising is, you know, people who would've been relying on financial statements for 2005, 2006, 2007 ... yes, in the note dealing with loans owed to the bank, there is a breakdown by sector and you can see construction and property is there, but there is no commentary around it. And certainly on the question of risk, there isn't the reference to a specific risk that the bank faced in terms of exposure to property and construction.
Mr. Paul Dobey:
Yes. I'm sorry, I can't disagree with you, but I ... because I don't have the accounts here, but I'm surprised at that. I would've believed that there was disclosures in the accounts setting out the property in relation to disclosures. But, I think the issue ... the big issue that AIB faced in 2007 was the valuation around its securities. Property was obviously an issue but property prices were reasonably elevated at that point also.
Michael McGrath (Cork South Central, Fianna Fail)
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Can you just talk us through, during the course of an audit, if you as the lead auditor felt very strongly that there should be a note in the accounts?
Obviously, the accounts are the preserve of the directors, but if you as the auditor felt strongly that there should be a note, what typically would happen in that situation?
Mr. Paul Dobey:
As I mentioned, AIB were very open with us through the process. When AIB issued its interim management statement, it would send it to us. We would comment on it, that would be when it did its half-year accounts, they would send it to us, we would comment on it, we would add disclosures, if we thought they were necessary. In 2008, we added very significant going concern disclosures, so while the accounts are the preserve of the directors, our opinion is on the financial statements, and if there's something that should be in the accounts that we think is not, we will put it in. Or ask AIB to put it in.
Michael McGrath (Cork South Central, Fianna Fail)
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Ask AIB to put it in, yes. And was there ever a situation where you as the auditor desired additional disclosure by way of a note or a statement in the accounts, but that was denied by the bank?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Mr. Paul Dobey:
-----disclosure that's set out in detail in the financial statements. And it's mentioned in a number of places, but the most significant is on page 119 of those financial statements. As I mentioned to you, we had a dialogue with the Government, and with the Financial Regulator, and with the Central Bank of Ireland. Following those meetings, we input, I remember I sent a draft of a disclosure I thought I would like to go into the financial statements in relation to the going concern basic preparation, there was some discussion with AIB as to how fulsome that disclosure would be, and there was a dialogue with the Department of Finance as to how fulsome that would be, and we were satisfied in the end. We might have liked a different form of words, but we were satisfied after extensive discussions with AIB that the form of words were appropriate and set out the position and confirmed the position that had been confirmed by the Minister for Finance at the time.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. But prior to 2008, there weren't any examples where you wanted something in the financial statements, but-----
Mr. Paul Dobey:
Oh no, there was ... we would have, in 2007, as I mentioned, the big issue facing AIB was the liquidity in relation to its traded credit book, and we had extensive discussions with AIB in relation to that book. And ... the credit markets froze in August 2007, as you're probably aware, and some of these securities that AIB held that were used previously as part of its liquidity now became very difficult to value. Again, we spoke to the regulator about that in late 200... sorry, early 2008, and we looked for additional disclosures in the AIB financial statements, and they were put in. I can think, going back to, on transition to IFRS, we were very involved in the dialogue around what additional disclosures should go in the financial statements, and we would have been looking at, I remember at the time we would look at the RBS financial statements, the National Australia Bank financial statements, the HBOS financial statements, and make sure that best practice was being applied by AIB -so there was an iterative process. And it isn't a case of just, we take the financial statements, we do a two-page audit opinion and we move on. There's a very detailed dialogue around what we believe should go into the financial statements, and our audit findings document with the audit committee would set out those views also.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and just to clarify, there was never a situation where an issue was of such seriousness that you felt it might warrant a qualification in the report?
Michael McGrath (Cork South Central, Fianna Fail)
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Another question, Chair, if I may? In terms of your communications with the AIB audit committee, and you referred to this in your opening, your witness statement, page 7, that between 2004 and 2007, those communications would have included the identification of risks relating to, or arising from, property funding and liquidity, and I assume that the extracts you read out there to Deputy Phelan a few moments ago were from those communications to the audit committee. When was the first reference made by KPMG to the AIB audit committee in respect of the concentration risk relating to exposure to property and construction? In your commentary a while ago, it appeared to be 2006 that the first specific reference to that risk, concentration risk, in property and construction.
Michael McGrath (Cork South Central, Fianna Fail)
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It is general in nature.
Mr. Paul Dobey:
It is general nature, I agree. And I didn't read out ... I just have some extracts here. I would expect we were talking about concentrations of credit risk in 2005 also.
But obviously the one ... I ... well, yes, the level of exposure to different economies and sectors, so I believe there was probably a reference to property concentrations at that time also.
Michael McGrath (Cork South Central, Fianna Fail)
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And you were satisfied with the response of the ... the audit committee and the board, subsequently, in the presentation of the financial statements?
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Deputy McGrath. And, just, Mr. Dobey, in relation to your engagement with Deputy McGrath around the 2007 accounts, there does seem to be a ... maybe a divergent view there. I would invite you with the choice to come back to the committee if you want to further examine that with further information.
Michael McGrath (Cork South Central, Fianna Fail)
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Or the issue of disclosure of property-related risks, yes.
Ciarán Lynch (Cork South Central, Labour)
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So, in that, I now invite Deputy Kieran O'Donnell. Deputy, you've ten minutes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman. I want to refer to Vol. 1, page 54 ... 53 and 54. Either of you can just advise ... the disclosure under section 27B of the Central Bank Act 1997 ... what exactly ... what are the circumstances in which ye're required to report to the ... the Financial Services Regulatory Authority on that? What are the circumstances?
Kieran O'Donnell (Limerick City, Fine Gael)
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Now, you reported, in respect of the '08 accounts, which is this letter here. Did you report in respect of the '07 accounts?
Kieran O'Donnell (Limerick City, Fine Gael)
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But when you're ... in 2007 you had issues with going concern-----
Kieran O'Donnell (Limerick City, Fine Gael)
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So would you have ... when you wrote to the ... to the financial services ... the regulator, would you have highlighted that you had to have going concerns? Obviously a letter would have gone in early in 2008. Did you highlight that you had going concerns in respect of the '07 accounts?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, then, did you highlight ... did you highlight your concerns in respect of ... of liquidity?
Mr. Paul Dobey:
The steps ... the steps that we took in 2007 was we asked AIB to prepared a detailed paper setting out what liquidity it had available to it. The conclusion from that paper was that AIB had some €30 billion of liquidity available to it, therefore, we got satisfied that we didn't need to go any further and we didn't.
Kieran O'Donnell (Limerick City, Fine Gael)
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No, I suppose, I accept that, I am just making ... the point, really, I ... I want to ... to clarify, is, did you report to the Financial Regulator in respect of the '07 accounts in early '08, and if you did report, did you make reference to the problems with ... with your concerns with liquidity?
Kieran O'Donnell (Limerick City, Fine Gael)
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So, therefore, when you ... when you sent in your ... your letter to the Financial Services Regulatory Authority you would have said "We've no issues"?
Kieran O'Donnell (Limerick City, Fine Gael)
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You would have drawn ... you would have drawn attention, Mr. Dobey, to the concerns you had over liquidity, even ... even though ... even though you were satisfied with the ... with the explanations given by AIB?
Mr. Terence O'Rourke:
The regulator ... the regulator had been aware of the issues we debated with the audit committee, including liquidity, so that would have been included in the communications we shared with the regulator, so in terms of the ... while also reporting to the regulator we should have shared-----
Kieran O'Donnell (Limerick City, Fine Gael)
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So your concerns in respect of liquidity and respect of the '07 accounts, the regulator would have been made aware of that in early '08?
Mr. Paul Dobey:
Yes. We actually, we ... you raise an interesting point because we were concerned, generally, as a firm, in relation to the matters ... the financial stability matters in 2007, and in early ... on 10 January 2008 we met with the Financial Regulator. That meeting was initiated by me, through the institute-----
Kieran O'Donnell (Limerick City, Fine Gael)
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For what reason, Mr. Dobey?
Kieran O'Donnell (Limerick City, Fine Gael)
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And was that specifically to do with AIB?
Kieran O'Donnell (Limerick City, Fine Gael)
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And was it around liquidity?
Kieran O'Donnell (Limerick City, Fine Gael)
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Who did you meet, Mr. Dobey?
Ciarán Lynch (Cork South Central, Labour)
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I need to allow a bit of time for answering, Mr. Dobey?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Fine, you might just give us just a brief indication of what you discussed.
Mr. Paul Dobey:
We talked about opinions, going concern and valuation issues; we talked about hard to value securities; we talked about risk management and the bank's ICAAP; we talked about what was going in relation to liquidity in the system generally; we talked about the communication of ... should be two-way if there was supervisory action being taken, so we wanted to be notified-----
Kieran O'Donnell (Limerick City, Fine Gael)
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In the limited time, would you provide a copy of that to the committee, Mr. Dobey?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. And can I ask a very quick question? So can I take it that the auditing firms had concerns around the audit of banks and, more particularly, around liquidity at the time in respect to the banks?
Mr. Paul Dobey:
Markets were extremely uncertain. Credit markets ... the first Bear Stearns fund went down in June 2007, the capital markets froze in August 2007 for certain securities. I believe Bear Stearns was taken over by JP Morgan in late 2007. There were certain securities that were held in AIB's traded credit book that were difficult to value. We had concerns, as I've mentioned. We raised those concerns with AIB. They did the work they needed to do to get us satisfied and we were happy.
Kieran O'Donnell (Limerick City, Fine Gael)
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But in terms of your discussions with the regulator, you would have highlighted you had concerns, collectively the auditing firms with liquidity and the environment in which the banks were operating in at that time?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, the second question is: if the guarantee wasn't in place in relation to 54, would you have qualified on a going concern basis your audit opinion of in respect of the 2008 accounts?
Mr. Paul Dobey:
If I can ... I need to answer that question with a little bit more context. If we hadn't got the assurances we looked for from the Department of Finance in relation to capital, the Central Bank in relation to availability of ELA when we met them in February 2009, we would have had an emphasis of matter ... sorry, we could have because I don't know what else we would have done.
Kieran O'Donnell (Limerick City, Fine Gael)
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You gave an emphasis of matter in respect of 2010 accounts when the guarantee was lapsed-----
Kieran O'Donnell (Limerick City, Fine Gael)
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No, but you gave an emphasis of matter in respect of the 2010 accounts because the guarantee had lapsed, so the question I'm going back: in the 2008 accounts, would you have qualified the accounts on a going concern basis if the taxpayers' guarantee in respect of the banks was not in place?
Mr. Paul Dobey:
Well, I need to clarify a little bit. The reason why we qualified, sorry, gave an emphasis of matter I should say, in 2010 was not because the guarantee had lapsed but because we were unable to get assurances from the Department in relation to ... that we were looking for in relation to support for the banks.
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, I'm reading from Mr. Terence O'Rourke's witness statement, "In respect to financial statements for 2007, when the general bank guarantee had expired and all the previous assurances from Central Bank" - you gave an emphasis of matter.
Kieran O'Donnell (Limerick City, Fine Gael)
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But, ultimately, from a going concern basis, do you think, looking back now, that you would have qualified these statements on a going concern basis for the '08 accounts?
Kieran O'Donnell (Limerick City, Fine Gael)
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If the guarantee wasn't in place?
Mr. Paul Dobey:
Well, I have to consider both, right. Because what ultimately ... the availability of emergency liquidity access from ... emergency liquidity assistance from the Central Bank of Ireland and the euro system was critically important to us. My understanding, and I don't have a perfect understanding because I didn't talk to the Government at the time, was when the guarantee was given, there was a desire on the part of the various parties to avoid Ireland using emergency liquidity access ... assistance rather. When we got out to 200-----
Kieran O'Donnell (Limerick City, Fine Gael)
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But it would have made your work as an auditor more uncertain ... yes. Can I just go back to IAS 39 and I just want to clarify a point? Is it ... can you just go through the procedure by which ... under IAS 39, am I correct in saying that you measured the value of the loan based on its carrying value measured against the future cash flows coming in towards it? The question I'm asking, how does that .... does that differ from basing it on not taking into account future losses?
Mr. Paul Dobey:
Well, in assessing credit provisions, there are a couple of different steps you need to go through. The first thing you need to have is objective evidence of impairment.
If you have objective evidence of impairment ... and, I'm sorry, this is a bit technical but if you have objective ... as a fellow accountant you understand this, but if you have objective evidence of impairment, you then are required to project future cash flows and reach a conclusion as to what the recoverable amount from the loan.
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose the point really, in the limited time I have, Mr. Dobey, right-----
Ciarán Lynch (Cork South Central, Labour)
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I'll give you a little bit of time but I just need-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Thank you, okay.
Ciarán Lynch (Cork South Central, Labour)
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Have you concluded your point?
Kieran O'Donnell (Limerick City, Fine Gael)
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Sorry, I made ... yes.
Ciarán Lynch (Cork South Central, Labour)
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Yes, sure, yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Okay, do you need-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Just really what I want-----
Ciarán Lynch (Cork South Central, Labour)
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No, no. I'll give you a bit of time there. Are you concluded on that point, Mr. Dobey, before I bring Deputy O'Donnell back in?
Ciarán Lynch (Cork South Central, Labour)
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Okay, sure.
Kieran O'Donnell (Limerick City, Fine Gael)
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The question really I suppose I want to clarify is that IAS 39 is being put out that it's about ... that you could not reflect potential ... possible future losses and that there was a weakness in IAS 39. The question is, by the measurement of looking at future cash flows coming in against the carrying value of the loan and using the future cash flows based on net present value, would that not capture future losses?
Kieran O'Donnell (Limerick City, Fine Gael)
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And what would determine ... what would be the circumstances in which ... define when a loan ... when you would regard a loan as impaired under IAS 39.
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, just in layman's terms.
Kieran O'Donnell (Limerick City, Fine Gael)
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And what would you classify as a default?
Kieran O'Donnell (Limerick City, Fine Gael)
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So, if you were to look into the future, we'll say, and you'd a particular loan and they were servicing the loan at that moment in time, but when you looked into the future you took the perspective, based on the environment that was coming down the tracks, that they would not be able to make the payments in a year's time-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----under IAS 39, could you reflect that as an impairment?
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Kieran O'Donnell (Limerick City, Fine Gael)
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What's IBNR?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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He is in default.
Mr. Paul Dobey:
-----and is in default. In ... and we had huge dialogue in relation to this matter with AIB in 2008 and early 2009, as you can imagine. We were absolutely ... it was absolutely clear that the environment was becoming increasingly difficult, that there would be a further deterioration in the environment and we understand and the account ... the IAS 39 specifies that you should make an IBNR for loans that are already impaired but you don't know about it yet and IBNR is incurred but not reported, or recognised, whichever ... reported is the word. And if you have matters where somebody is about to default and I give this-----
Kieran O'Donnell (Limerick City, Fine Gael)
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You haven't technically defaulted.
Ciarán Lynch (Cork South Central, Labour)
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Yes-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Sorry, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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I'll bring you in once more. I need to have Mr. Dobey finish.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, yes.
Ciarán Lynch (Cork South Central, Labour)
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One brief supplementary.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, thanks, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Without ... Mr. Dobey without interruption, please.
Mr. Paul Dobey:
And it's hard to give this example in relation to a property, but I'll give it in relation to a business or a company, right? So, if a company is ... has borrowed from the bank and it is trading fine for a while and then it loses its biggest customer, right, the event ... that ... and the cash flows dry up, the event that drives a loss for the bank is that ... the loss is that customer, right? So, if the company has, for example, cash on its books and it can continue to pay interest and principal, it may take six months for it ... not ... it to default on the loan. That's IBNR and what you've got to work out, in IFRS terms, is what is the period in which losses have been incurred but not reported and over what period do they emerge.
The other thing that's set out in IFRS, and again this is ... IFRS is pretty complicated in this matter ... is if you have ... IFRS asks you to look at historic loss rates in relation to your IBNR, but if you know you're in a more difficult environment now than the history reflects, you're allowed to take account of an adjustment factor. We, and it's in our detailed communications with the audit committee that ... or with the committee, we had a huge debate with AIB in relation to this matter in 2008. As we talked earlier about the paper we did on 3 November which dealt with the specific provisions and we were ... we would have ... we were encouraging AIB to take more IBNR and actually, when they got towards the end of the audit, they did take IBNR, a significant IBNR to deal with that downside risk.
Kieran O'Donnell (Limerick City, Fine Gael)
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So am I-----
Ciarán Lynch (Cork South Central, Labour)
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What, Deputy?
Kieran O'Donnell (Limerick City, Fine Gael)
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So am I correct in saying that ISA 39, contrary to the popular view or the popular belief, that you are actually able to make provisions for future losses? And secondly, in terms of the audits of AIB, what scale of adjustments did they ... did ye put forward and did the bank make on the basis of your audit over the provisions on loan ... on losses on loans they had already made?
Ciarán Lynch (Cork South Central, Labour)
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Answer that please, Mr. Dobey, and then I'm going moving on. Thank you.
Mr. Paul Dobey:
Firstly, on your first point, IFRS does not allow you to take account of future losses. It allows you to take account of losses, events that have already happened which will emerge in the future, if I can put it that way. Right? And there is an emergence period, and AIB had an emergence period of nine months for most of its books, and it had a three-month emergence period for its property and construction books.
Kieran O'Donnell (Limerick City, Fine Gael)
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But you had a financial crash? Surely that was a ... it's a very fundamental point.
Ciarán Lynch (Cork South Central, Labour)
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Don't use the word "surely".
Kieran O'Donnell (Limerick City, Fine Gael)
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No, no-----
Ciarán Lynch (Cork South Central, Labour)
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Shirley's in Airplane, Shirley's a woman.
Kieran O'Donnell (Limerick City, Fine Gael)
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But ... but you had a financial crash of monumental proportions, never happened before.
Kieran O'Donnell (Limerick City, Fine Gael)
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Sure ... sorry. Without ... that ... there's, did that not constitute a defining event for providing these losses provisions under ... you call it I ... I'm going to call it-----
Kieran O'Donnell (Limerick City, Fine Gael)
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IBNR, but in essence it's losses ... a provision for losses into the future?
Ciarán Lynch (Cork South Central, Labour)
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Now, Deputy.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, I just-----
Ciarán Lynch (Cork South Central, Labour)
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Mr. Dobey, and then I'm moving on. You've been more than preferable. Mr. Dobey?
Mr. Terence O'Rourke:
And one example of that would be in 2008, AIB made provisions, they substantially increased the provisions, but they also said, "We know we're going to face more losses this cycle." So in 2000 and 2009 and 2010 we expected to incur further losses, so they identified the further losses, they estimated them, the estimates turned out to be understated, but they did estimate future additional losses, which are not reflected under IAS 39 in the 2008 accounts.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy Joe Higgins, ten minutes. Or a bit more.
Joe Higgins (Dublin West, Socialist Party)
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Yes. Mr. Dobey, I understood you to say that auditors, and you've said it a number of times, as in my words, have no questions to answer whatsoever in relation to responsibility for the bubble and crash in Irish society?
Mr. Paul Dobey:
Our responsibility under Irish law is to determine whether the accounts in relation to AIB gave a true and fair view. That was our responsibility and that duty is very clearly set out in law. As I've explained a number of times, we believe the AIB accounts ... excuse me ... gave a true and fair view and in that regard, we believe we've fulfilled that duty.
Joe Higgins (Dublin West, Socialist Party)
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Are you aware, Mr. Dobey, that there is a view, another view, that auditors failed to alert the system to serious risks that some people felt they should have seen because of your close insight into the banks? And that that alleged failure was all the more dramatic because it cost the Irish people €64 billion, seven years of austerity, and was caused by a bubble that gave rise to unprecedented levels of lending, spending, profits in property and in speculation, etc.? There is a view that you should have seen that and you should have waved a very, very big flag years before the crash.
Ciarán Lynch (Cork South Central, Labour)
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This is your own view now, Deputy Higgins, is it? Or are you proposing that this is-----
Joe Higgins (Dublin West, Socialist Party)
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No, no, I said-----
Ciarán Lynch (Cork South Central, Labour)
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-----a proposition to be tested?
Joe Higgins (Dublin West, Socialist Party)
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No, I'm putting this view to Mr. Dobey. I'm not saying what my view on it is.
Ciarán Lynch (Cork South Central, Labour)
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It's a proposition to be looked at.
Joe Higgins (Dublin West, Socialist Party)
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Okay. And what do you think of that view?
Joe Higgins (Dublin West, Socialist Party)
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Okay.
Mr. Paul Dobey:
Because our role relates to a point-in-time view of financial statements. I also would point you to some of the comments we've made earlier on in relation to the risks we were highlighting over the period and also the dialogue we were having with the Financial Regulator, particularly in 2007 and 2008. And if you're asking me did I have a crystal ball in 2004, I'm afraid I didn't.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Well, let's pursue it a little bit. Maybe Mr. O'Rourke, with yourself. In your opening written statement, or ... that you provided us, you said: "One of the key steps in an audit is to assess the risks arising from the business model and strategies followed." Right? An audit is to assess the risks arising from the business model and strategies followed.
You then went on and you said, ''[The auditor] is required to form an opinion as to whether the consequences of those strategies and models are properly reflected in the financial statements in accordance with [regulations, essentially]. Now, you go on, "While it is now clear that the business models and property-related lending strategies of the Irish institutions led to large losses being incurred, it was only when it became likely that property prices would decrease and that the economy would contract that the consequences of these were permitted to be reflected in the financial statements." Now, does that suggest, Mr. O'Rourke, that you would ... you could have seen, and perhaps you did see, risks arising from the business models and strategies that you could have had perhaps serious concerns about those but that there was no mechanism for reporting that in a significant way?
Mr. Terence O'Rourke:
The risks we identified in our audit of banks were ... we identified them, we talked to the audit committee about them, we evaluated them. I mean risk has got two issues. One of the elements you have to understand is what is likelihood of the risk occurring and then, secondly, what the impact of the risk occurring would be. And the risks that turned out to be occurred, as we now know from the losses which you have described, they were not seen to be as likely risks. They were seen as remote risks ... in the terms of it.
Well, the issue for me ... for us, as auditors is to make sure the banks very clearly assess those risks professionally, thoroughly, getting best information that they could as to whether ... what the likelihood of the risks occurring ... in arising out of things like property loans about concentration. All of those things were on the table. They were debated and discussed at the banks. They got the best information that they could and then we stood back and we took our independent view of whether those risks were properly evaluated and whether they took into account the likelihood of those risks occurring and whether, in terms of the financial statements whether they reflected the likelihood of the risks occurring. And we were happy with that process and happy that the likelihood was properly assessed, based on the best information. And it turns out that best information did not accurately predict the future. We had a very extreme event occurring which nobody foresaw, virtually nobody foresaw.
Joe Higgins (Dublin West, Socialist Party)
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Well, I think that many people would struggle to understand the complexities here of the reporting. I was trying to come up with an analogy, perhaps. It's ... if I just put this to you and ask you to comment. That you were asked to do a mechanical audit on a juggernaut. So the engine is okay, the wheels are fine, the suspension and body work okay. The truck is overloaded a bit but the ... you tell the driver that. And the driver knows this. So you pass the vehicle. Now, you know the road ahead goes downhill, that it has precipices on each side, that the brake won't be able to check the extra weight. But you're not allowed to flag that in a significant way until the truck goes over the precipice. Is that any way of relating to the rules that you are bound by?
Mr. Terence O'Rourke:
Well, I'm saying that our job is to make sure ... in the case of your analogy that the truck being a bit overloaded, that those issues are well known to people who are looking at that truck. So our job is in relation to financial statements - do the financial statements accurately portray the way that that ... the way the financial position of that entity? So in terms of the audit of the banks, the audit of AIB, do people reading those accounts do hey understand how much money they have lent to the property sector? Do they understand how much the loan book has grown? Do they understand how that's financed? Are all those issues clear on the accounts? The answer is "Yes".
So that's the main issue that those issues were clearly reported in the accounts and that everybody to make their own judgments on that. Our judgment was - have management made the right decision in terms of financial reporting as a consequence of those risks, as a consequence of the way the balance sheet is? And the management did make the right decision at the time, based on the best information they could get.
Joe Higgins (Dublin West, Socialist Party)
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But, but why didn't they stop the truck before it went over the precipice then?
Joe Higgins (Dublin West, Socialist Party)
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And that's the question I would like to put to both of you, gentlemen, why it wasn't foreseeable. Now your organisation, for example, exists in the United States -----
Joe Higgins (Dublin West, Socialist Party)
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Correct?
Joe Higgins (Dublin West, Socialist Party)
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In Sweden -----
Joe Higgins (Dublin West, Socialist Party)
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In Norway.
Joe Higgins (Dublin West, Socialist Party)
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And in many other countries.
Joe Higgins (Dublin West, Socialist Party)
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But those three are modern, capitalist economies -----
Joe Higgins (Dublin West, Socialist Party)
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----- where in the 80s and 90s very, very significant bank crises, property bubbles, followed by bank crashes and disaster for the economy happened. Why did your organisation not, and other organisations, indeed, not learn from those and understand it was eminently repeatable when the same circumstances were being created in Ireland?
Mr. Terence O'Rourke:
Well, first of all, as Mr. Dobey said before, we are very much plugged in to the global learnings of KPMG, so we were a very important part of the financial services network. In terms of the audit work, what the auditors have got to do in terms of the risk, they've got to look out for ... that was very clear. We've got the training in it on all the kind of things that can go wrong in banks. But you know ... for every a hundred times people ... and one person says this is going to happen, and 99 people say that's going to happen - you go with the 99 people, not the one, because at the end of the day you've got to go with objective evidence of what's most likely to happen. And the evidence overwhelmingly - from ESRI, from IMF, from the financial stability report Central Bank - was that the Irish economy was facing into a soft landing. So that was the basis on which we made our judgments.
Joe Higgins (Dublin West, Socialist Party)
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But if I could put it to you, Mr. O'Rourke, just to challenge what those institutions may have thought, the objective evidence from the likes of Finland, from the likes of Sweden was that these factors that were now happening with a vengeance in Ireland in the 2000s inevitably lead to a crash. Why wasn't a red flag flown high?
Mr. Terence O'Rourke:
That's a very good question, but that very point, that those things do lead to crashes, is not ... was one that was not seen by the IMF, by the OECD, by the ESRI, by the Central Bank and by the auditors. None of us saw that. And why is it? One of the other issues of bubbles is that people always are able to rationalise it. I went to many discussions by prominent and eminent economists who told us why the Irish economy was going to go to a soft landing and would not be heading into crash because there were demographics, because of our FDI and for lots of other reasons why the Irish economy would be okay. And that was ... we looked for the best evidence, and that's our job, as auditors, to get the best evidence we can with the experts. We're not economists, we're auditors, we're are applying rules and we need to take the best evidence we can and the best evidence we can was that ... that there was a risk, and everybody ... we identified the risk - if property prices decline there will be big loss in the banks. We said that and the issue for us was ... for management, have they assessed whether that risk is likely or not and, for us, have they properly reflected the likelihood of that risk. And the best evidence we had was that they had properly assessed the likelihood of that risk.
Joe Higgins (Dublin West, Socialist Party)
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David McWilliams, in evidence here said: "I think the Irish property crash and the banking crash were both incredibly predictable and absolutely preventable." I haven't time to give a quote in detail, but he referred to what he himself said in October 2003, which was early enough in the process. He is referring to property but particularly to housing. "The Irish housing market is a scam ... [a] financial swindle that could potentially confine an entire generation of young Irish workers to years of bad debt ... [and it's a] confidence trick that has been foisted upon us by an alliance of banks and the landowners."
Ciarán Lynch (Cork South Central, Labour)
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A question, Deputy?
Joe Higgins (Dublin West, Socialist Party)
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Yes. Alan Ahearne, in evidence told us of a study in 2005 - that he published - about 44 booms and busts internationally in many countries where you operate I've no doubt. So a view could be put that really it should have been seen and it should have been stopped in advance. And just ... my very last question, Chairman, is this. In relation to Allied Irish Banks in particular, you made the point, I think, Mr. Dobey, it was yourself, that it was very difficult to get in accurate information the extent of the exposure, etc., when you were trying to do that ... let me just finish the question because he's going to cut me off here. In your opinion, did the bank's management and board structure ... in Allied Irish Banks, impede the provision of good governance within the bank or what impact did that have, if any?
Mr. Paul Dobey:
I think I'm ... I'm not sure if I was incorrect earlier but what I was trying to say was that trying to get a grip on the losses in 2008 was extremely difficult. I think I said in my opening statement we worked tirelessly until we got to the bottom of that and we got to the bottom of that and we were very comfortable with the loan loss provisions when we got to the end of our audit process. But it was very challenging-----
Joe Higgins (Dublin West, Socialist Party)
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Was it difficult to get that information?
Mr. Paul Dobey:
-----because the environment was contracting. I mean if you look at what happened in late 2008 and early 2009, there was a huge contraction in the economy. We had Lehman's, we had the TARP, we had the guarantee, we had foreign markets froze, we had secret loans - if I can put it that way - in the UK, we had ... there was bank mergers every ... in Europe and in the US. We were in hugely uncertain times and trying - and I could take you through the economic forecasts that were there at the time and what ultimately transpired - we were trying to assess in a very, very difficult time, the loan loss provisions for AIB.
That involved a huge amount of work, and we kept going until we got to the very end, and we were absolutely comfortable when we got to the end, because if we didn't ... if we weren't absolutely comfortable, we wouldn't have signed the audit opinion.
Joe Higgins (Dublin West, Socialist Party)
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In general, was good governance in any way in Allied Irish Banks affected by the management and board structures?
Joe Higgins (Dublin West, Socialist Party)
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Well, no, I'm just asking you to comment on the question I put, whether the management and board structures, if they - or not - impeded the provision of good governance within the bank.
Mr. Paul Dobey:
I'm not an expert on the overall governance of the bank but I can tell you in relation to getting the financial statements right, the AIB board and directors went through all of the processes that they should go through to get the financial statements right. We did our work to get to a conclusion that those financial statements gave a true and fair view, and that was our role.
Ciarán Lynch (Cork South Central, Labour)
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All right, Deputy, I'll have to move on. Just developing on the analogy of Deputy Higgins and the red flag being waved and all of the rest of it, I don't know who was holding the flag at the time, but can I put the question to you? Are auditors like the NCT, that you go in every 12 months or two years to check out that everything's okay under the bonnet?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Would there be a lot less crashes on the road if the NCT were like auditors or not?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Fair enough. Deputy Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat, a Chathaoirligh, agus fáilte roimh an bheirt. I want to just pick up on where Joe was asking Mr. O'Rourke a question. And you mentioned that you failed to see the property bubble bursting. You went to conferences. Demographics and so on were given as an example of why it would be a soft landing. You're not alone and we've had many witnesses before the committee who also failed to see the property bubble bursting. They took the opportunity here to apologise to the Irish public or maybe in your regard you may want to offer an apology to the shareholders of AIB, or maybe you do not, but do you want this opportunity to apologise or do you believe that you have anything to apologise for on behalf of KPMG?
Mr. Terence O'Rourke:
Deputy, in terms of our audits, looking back on it, and it was said here on a number of occasions, that we asked: what was our job? Did we do our job properly? We did our job properly. The question then is: should the job have been different or something else and should the crash not have occurred? Of course, it's regrettable that the crash occurred. Of course, it is terrible for the Irish people that we face what we into. But I don't think it's believed as a result of our audits or the financial statements that the crash occurred.
Pearse Doherty (Donegal South West, Sinn Fein)
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And I'm not suggesting that it did. I'm just asking-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. And so if you had seen the crash coming, you would still have audited the accounts of AIB in exactly the same way or-----
Mr. Terence O'Rourke:
No, if you'd seen a crash coming there would have been, obviously, implications for financial reporting unless AIB reflected ... and, again, to make changes in accounts, you need objective evidence to make changes, but if some ... if there was evidence there that the crash was coming and you could point to evidence, and we had a basis for our belief there was a crash coming, the ... if AIB did not change their accounts, of course we would have qualified them.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Did the firm perform any stress testing as part of the external audit of the bank to take into account the correlation between different types of property being financed - residential, commercial, development land and speculative land banks?
Mr. Paul Dobey:
AIB performed stress tests in 2007. I've talked earlier about the stress test that they did as part of the ... in early 2009. That did stress the property values and they came up with very significant future provisions that would be required if those stresses came true, and they were ... those were disclosed to the market in February 2009 by AIB with its results.
Pearse Doherty (Donegal South West, Sinn Fein)
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Did the firm ... did your firm carry out any stress tests?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. You didn't feel it necessary to carry out your own stress tests?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. In relation to unenforceable securities, in your audits of AIB, did you notice the fact that there were loans that had unenforceable securities?
Pearse Doherty (Donegal South West, Sinn Fein)
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Did you?
Pearse Doherty (Donegal South West, Sinn Fein)
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How much?
Mr. Paul Dobey:
All I can say is that during the course of our loan review process, we identified certain additional provisions that were required by AIB and they took those provisions.
How much is difficult because, if I can talk about 2008, and this wasn't specifically in relation to loan securities, if I can put, this was generally. AIB reported to the market in its interim management statement on 4 November that it believed there would be €950 million of loan loss provisions for that year. That was ... at that time, AIB was carrying out its work, it had a criticised loan process it was going through, it had allocated... very many people from the front line into assessing the loan loss provisions. And it came up with the €950 million.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, I want to focus on unenforceable securities. You'd be aware in terms of the NAMA test ... NAMA testimony and what's transcribed from the transfer of known loans to NAMA, hat there were €811 million of loans that were transferred to NAMA across the financial institutions that had unenforceable securities. From AIB's point of view, it made up €164.6 million and that was the price that NAMA paid for them, which was an average of 77% reduction. If you were to apply that, what the loan value would be, you'd be well over €400 million. Did KPMG come to any estimation that it was in that region that, for example NAMA, the transfer to loans from AIB to NAMA, for every €57 of loans that were transferred, one loan... €1 had an unenforced security, was not enforceable. Did KPMG recognise that, did KPMG audit those loans, audit the documentation?
Mr. Paul Dobey:
AIB had €127 billion of loans outstanding at the end of 2008. We audited a portion of those loans to get ourselves comfortable with the processes that AIB had gone through. As I mentioned earlier, we found certain issues with those loans. And when we found issues with those loans, we extrapolated that across the whole portfolio and certain additional provisions were taken. We didn't look at every single loan, I can only imagine that that extrapolation would have dealt with some of the issues that you have mentioned but I couldn't specify for sure that it did.
Mr. Terence O'Rourke:
I think the other issue is that a lot of that unenforceable security turned out to be solicitor's undertakings, which turned out to be, you know, not enforceable or when they went to go the solicitor to say, "Give us the perfected security", the solicitor was unable to do that. And I know the Law Society looked at this, and I know that whole system has been reformed. But, at the time, we are saying, as in terms of audit work, we could see that there were solicitor's undertakings there as good security, we relied on those solicitor's undertaking, as AIB's processes were, they had a process of getting ... top tier or second tier law firms to give those undertakings and it turns out that in retrospect that that ... those solicitor's undertakings didn't always come good. But I think it was reasonable for us at the time to say, "Solicitor's undertaking will get us there in terms of the security."
Pearse Doherty (Donegal South West, Sinn Fein)
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Can I just push you on that there, in terms of your reason list. You believed it was reasonable in that case. NAMA paid AIB €9 billion for loans. €164.6 billion was unenforceable or they had a deduction-----
Ciarán Lynch (Cork South Central, Labour)
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Just reference that, where you are coming from.
Pearse Doherty (Donegal South West, Sinn Fein)
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Well it's in the... it's in the NAMA documents. NAMA C4b, page 6 and it's also in the NAMA document, C4b, page 4. And it gives a breakdown of AIB. It gives a breakdown of AIB-----
Ciarán Lynch (Cork South Central, Labour)
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I'd be mindful that the witnesses haven't seen the NAMA core documents that we would be in possession of. But the figures would be NAMA records that would have been provided to this committee. So the Deputy is just testing-----
Pearse Doherty (Donegal South West, Sinn Fein)
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NAMA, for AIB, NAMA applied a deduction of €85 million, when the transfer happened, and afterwards they subsequently found out that €79.6 million additional loans were unenforceable as well. So of the €9 million that were transferred to NAMA, the fact that... €9 billion sorry. The fact that €164 million was unenforceable, that ... is that not a very large percentage of that loan book, and was significant focus put on that in relation to the audit? Or did you audit those loans... those tranches of loans?
Mr. Paul Dobey:
We would have audited some of them, right. As I mentioned earlier in response to Deputy O'Donnell's question, there was a lot of issues in the system at the time. There was, obviously imperfection, imperfect security. We... there was an IBNR taken to deal with those issues in AIB. These are things that might emerge that we didn't know about yet. And that number was in the region of €800 million, so in our view that would have been caught up. These type of issues would have been caught up in that IBNR provision.
Pearse Doherty (Donegal South West, Sinn Fein)
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The fact in 2008 your audited accounts showed AIB as a going concern. At that time, were you aware of quite significant falls in commercial prices, and also in domestic housing prices? And where did you see that it was going to end?
Mr. Paul Dobey:
Yes, some of the documents we provided to the committee in relation to our communications with AIB set out our assessment of the declines in values. In the paper we referred to earlier, the 3 November paper, it set out the fact that there were issues we needed to face, and the loans we needed to deal with in the context of the audit. I mentioned those with Deputy Higgins as well. We looked at those loans, and we got comfortable with the recoverable amount of those loans.
Pearse Doherty (Donegal South West, Sinn Fein)
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In relation to the concerns you had in relation to going concern; you say that you got assurances from, I think, the general secretary of the Department of Finance in relation to additional recapitalisation above the €3.5 billion that was pledged. Can you outline to the committee what ... the nature of that assurance? Was it verbal? The quantity of that assurance - was it an unlimited amount of capital that they were pledging to the bank? And also can you again shed some light on a comment that you made where you said that the 2010 accounts, you weren't able to get the assurances at that time because a Minister was not available to give the assurance?
Mr. Paul Dobey:
Yes ... sorry I'm just looking. Oh, I have it here. The assurances we got from the ... sorry, firstly, I need to go back a bit. We were unsure, as I said in my opening statement, as to whether AIB would need additional capital or not. But there was a lot of uncertainty at the time, and to address part of your question, we were aware of the declines in values and we were estimating that there'd be a 30% or 40% decline in property values in doing our audit. We sought assurances from the Central Bank in relation to liquidity, and from the Department of Finance in relation to potentially would capital be made available. To answer your question, that was a verbal assurance that we got; it wasn't a written assurance and it confirmed the statements of support that had been given by the Minister for Finance.
Pearse Doherty (Donegal South West, Sinn Fein)
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Was it limited?
Mr. Paul Dobey:
No. It was, it was ... just bear with me please. The Secretary General, the assistant Secretary General clearly noted that it was Government policy to support both AIB and Bank of Ireland. He noted that these two banks were of systemic importance to the Irish economy and, inverted commas ...
Ciarán Lynch (Cork South Central, Labour)
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What was the date of that?
Mr. Paul Dobey:
It's a meeting with Kevin Cardiff on 27 February 2009. It's with the committee but it is misdated. It actually has a date on it of 26 February 2008 but, anyway, that's with the committee in the documents we submitted.
I .. I'll just pick up my train of thought there. He noted that these two banks were of systemic importance to the Irish economy, and this is a note, a contemporaneous note done of the meeting, "will not be allowed to fall over". That was one assurance we got.
He also noted the Government would be reluctant to step in with additional investment or to nationalise AIB unless there was force majeure. He noted that the Government had no interest in managing or controlling the banks but the properly functioning banking system was of critical importance to the country. He did note, however, that the Department would seek to influence credit, remuneration, and regulatory and risk policies in the bank, and that some of this was already happening under the Government's bank guarantee scheme.
There was ... I was concerned about M&T, and I had a discussion with him in relation to M&T, because we were carrying goodwill on the financial statements of AIB. And I asked whether AIB could be forced to dispose of M&T, and that would have been one of the ways that AIB could have raised capital, or they could have disposed of Poland:
KC [that's Kevin Cardiff] did note that these business interests [that's Poland and M&T] had generated good diversity and potentially growth of earnings for AIB. He noted that it was unlikely that the Government would support significant growth in AIB's overseas business or emerging businesses at the expense of providing funding to the consumer, mortgage or SME sector in Ireland [which obviously was the priority for the Government].
There was some discussion around the state of the banking system in Ireland, including some positive comments from Kevin Cardiff regarding the Government support for six banks, subject to the Government guarantee. Kevin Cardiff did not give any assurance on the extension of the Government guarantee beyond its two-year end date of September 2010 and noted this was one option open to the Government. And then we had a discussion around emergency liquidity assistance funding from the ECB. So they were the assurances we got from the Department of Finance.
Pearse Doherty (Donegal South West, Sinn Fein)
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Maybe one reason you couldn't get the assurance, you say a Minister was not available in 2010 but there was an election in February 2011, which I presume is when you were preparing your accounts. But was there nobody in the Department that you could meet to give you similar assurances?
Mr. Paul Dobey:
I have said I don't fully understand how the political system works, but I would imagine that in order for Kevin Cardiff to give that assurance, he would have to have had some acknowledgement from the Government, from the Minister. In 2011, as I recall, we looked for those assurances. The Government guarantee was not there any more or was about to expire. We did have the eligible securities guarantee. We looked for assurances around liquidity and we spoke to the deputy governor in the Central Bank at that time and he did give us some assurances. They weren't as fulsome as we would have liked. Then we went and spoke to the then Secretary General of the Department of Finance at the time and she was not in a position to give us the assurance because she did not have a Minister.
Ciarán Lynch (Cork South Central, Labour)
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Can I just return to one section there with your engagement with Deputy Doherty, Mr. Dobey, where you stated that there were unenforceable securities in AIB and that you recommended to AIB to increase the loan provision.
Ciarán Lynch (Cork South Central, Labour)
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Okay, because I was maybe just picking up on an incongruence there that, with your earlier questioning with Deputy O'Donnell, could this have been done under the IAS 39 if the loan was not impaired?
Mr. Paul Dobey:
I explained to Deputy O'Donnell that there was an opportunity. Sorry, firstly, there is always room for professional judgment and for scepticism and we were exercising professional judgement and scepticism at this time. Deputy O'Donnell has quite rightly identified and importantly identified that there is room for an IBNR to be taken, and that judgment can be applied in making that IBNR. I talked about adjustment factors, so that is when the historic loss rates might not be ... that the bank was using to determine its IBNR might no longer be appropriate. That was the conclusion we reached in 2008, and we had extensive discussion with AIB in relation to taking additional provisions. They were looking at it also to deal with that issue.
Mr. Terence O'Rourke:
But the issue is, when we said with AIB, "There is a security missing here, make an actual provision". You only make an actual provision where there is actually a loss or default, so the fact that a security might have been missing on a good loan does not make that loan bad or does not need a provision against it.
Ciarán Lynch (Cork South Central, Labour)
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Senator O'Keeffe.
Susan O'Keeffe (Labour)
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Thanks, Chair. In a note that was provided to us when Mr. Gleeson was here, Mr. Gleeson described the regulator. He said he was a hopeless regulator. What was your view of the regulator?
Mr. Paul Dobey:
We had extensive dialogue with the regulator, particularly in the latter part of the period. I have mentioned already the dialogue we had in January 2008. We had a dialogue with the regulator on 21 November 2008 as well and at that meeting, we were starting to have concerns around uncertainties in the system at that point and we spoke to the deputy governor, the deputy governor attended that meeting actually. We had a good dialogue with the regulator in that period and that dialogue was important, particularly in the latter years, the latter part of that period. However, I would say section 16 of the Central Bank Act 1942 sets out some very clear restrictions in relation to confidentiality requirements for employees of the Central Bank. I do not have all the details as to what their contracts say in relation to confidentiality but it was very difficult at that time for us to have a two-way dialogue. So we tended to go in, have a discussion, raise issues and we weren't really getting much back. Indeed, I think at that meeting, in February 2008, we were ... there seemed to be a little bit of resistance in relation to giving us assurances. Now, I understood why that was later, when we spoke to them in January 2009, because effectively it was the monetary authority we needed to speak to in relation to liquidity and not the regulator.
Susan O'Keeffe (Labour)
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You said earlier, when we were talking about the payment of the dividend, you said, "We didn't have to form a view on the paying of a dividend." You didn't have to, but did you? You may not have had to, but did you actually?
Susan O'Keeffe (Labour)
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On page 25 of your ... of the ... our document ... core document Ernst & Young, there's a note, I think it was written in relation to EBS as it happens, but the sentence under the heading, "Background", says, "We have identified from our market knowledge that there is a potential going concern problem for EBS"-----
Ciarán Lynch (Cork South Central, Labour)
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Just to double check there, would you-----
Susan O'Keeffe (Labour)
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I'm sorry. I beg your pardon.
Ciarán Lynch (Cork South Central, Labour)
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That's okay.
Susan O'Keeffe (Labour)
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I beg your pardon. I'm so sorry, I picked up the wrong document. That's why I'm ahead of us.
Susan O'Keeffe (Labour)
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Before you took over the audit ... I'm very sorry. Thank you for your correction. In fact, on the matter of correction, lots of people have come in here and given evidence and they've said that they have made mistakes and errors have occurred and, you know, we've seen in all the documentation, all kinds of errors. Human error, sometimes. But there's been no errors offered on your part. So, in the case of, what you've described yourself as a very complex audit ... huge team of people obviously working on ... I assume, on a constant basis, you don't finish the audit and go home and start again six months later ... it's been a long process. So, I'm just wondering, have you made any mistakes at all?
Mr. Paul Dobey:
And you've talked earlier about ... was asked about the significance for me or for other individuals if we get those wrong. These require ... the security laws have very serious implications if we get audits wrong and we go through a process to make sure we get them right. I talked about the fact that we had a quality control reviewer from the UK firm, we had an SEC reviewer from the US firm, we did ... to put all of the processes in place to make sure we got these audits right.
Mr. Terence O'Rourke:
-----such a thing as a perfect audit. Though you've heard ... we talked about the CARB review that said that our audit was a good audit but we ... there were some areas of improvement. But we went through those areas of improvement. They're not significant in terms of, you know ... in terms of the truth and fairness of financial statements.
Susan O'Keeffe (Labour)
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It just strikes me to see that every ... that the organisations, including the banks themselves, have acknowledged mistakes that they've made but-----
Susan O'Keeffe (Labour)
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I know, but you've made no mistakes-----
Mr. Terence O'Rourke:
-----whether they properly reported the results of those lendings. And in terms of financial statements, they did report, at the point in time, the right ... So the mistakes were inherent in those balance statements of bad lending, but we weren't responsible for the bad lending.
Susan O'Keeffe (Labour)
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Okay. Mr. Dobey, you used the analogy a moment ago, of being ... of keeping the score.
Susan O'Keeffe (Labour)
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Indeed. So you are keeping the score ... in that 2008-09 time, when things were very difficult, as you've said yourself, it was a very stressful time. And you had many negotiations. You were talking to the Financial Regulator, you were talking to Government, you were talking to all kinds of people. What status were you ... did you have then at that point? Because if you're keeping the score, you're not on the pitch, but I would ... do you see, you were obviously now involved, and you've given us some detail, for which we're grateful, but I-----
Susan O'Keeffe (Labour)
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-----don't understand how you can be-----
Susan O'Keeffe (Labour)
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-----on the one hand keeping the score, and now on the other hand, on the pitch?
Susan O'Keeffe (Labour)
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You did say though, that you weren't on the pitch, and that you couldn't blame the, you know, the performance of the team.
Susan O'Keeffe (Labour)
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No, let's not get hung up on it. I'm merely trying to establish, there was an analogy offered which you turned down, you said you were scorekeepers. But here you were, you were in the heart of those negotiations. Is that a fair and reasonable thing to say, from what you told us?
Mr. Paul Dobey:
Yes, it is our responsibility in relation ... I should've clarified, the analogy was too simple, right. We were keeping the score in relation to historic financial statements and as Mr. O'Rourke said earlier, we also had a responsibility to assess whether the going concern based on preparation of financial statements was appropriate. It was in the context of the going concern based on the financial statements which was a future looking thing and maybe that's not keeping the score, right? That's assessing what the score might be at the end of the game, right? And we're only at half-time. We had to go and make an assessment and get assurances from the system, if I put it that way, the Department, the regulator, the Central Bank, around the going concern basis of preparation.
Susan O'Keeffe (Labour)
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In your lengthy career, was that the first time that you'd had that experience where you'd engaged with so many other people outside of a financial institution, or was that something just, that happened all the time?
Mr. Paul Dobey:
Yes, and it wasn't done lightly. We had huge consultations in our firm. I consulted ... we had a dialogue with the regulator, which was teeing that up, in November. I had a very ... I had a dialogue within our firm, and with the managing partner at the time, which was Terence, as to how we should deal with this issue. We ... there was one very important meeting where we had the partner from the UK firm involved, and we went through the appropriate process; we were concerned, we took the appropriate steps. It was unprecedented.
Susan O'Keeffe (Labour)
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It was unprecedented.
Susan O'Keeffe (Labour)
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And, given that you said, for the earlier accounts, 2007, and you said that you got the contingency liquidity plans given to you by AIB when you asked for them.
Susan O'Keeffe (Labour)
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That was all, that's where that ended. You didn't have to go ... did you go to the Financial Regulator, did you go to Government?
Susan O'Keeffe (Labour)
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You didn't need to.
Susan O'Keeffe (Labour)
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So did you think, in February-March 2008, did you think then that the trend could go anywhere other than downhill, or did you think, "Maybe things are going to recover by the end of 2008", or was it obvious then that they were on a downward trajectory?
Susan O'Keeffe (Labour)
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So you were managing it, you could see then-----
Susan O'Keeffe (Labour)
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I'm sorry, what was the expression you said, managing the downside. I'm sorry, I'm just trying to-----
Mr. Paul Dobey:
Thinking about the downside risk; it hadn't happened yet, but thinking about the downside risk. We made sure that our audit opinion in 2007, we were very comfortable with it, but there were issues in AIB at the time. We talked about it in relation to the traded credit book. However, if you go back, in 2007 the economy grew by 5.7%, right, so I was thinking about, this could ... there could be issues here, they haven't happened yet. I was satisfied with the 2007 financial statements. I was looking forward in relation to going concern. We got happy that AIB had €30 billion of liquidity and could have raised additional capital itself; it was still accessing the capital markets. I was happy.
Susan O'Keeffe (Labour)
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Okay. So you were happy. So, when you, I'm assuming you are familiar with the Atlas report, and you'll know some of the observations that were made there at that time, in September 2008.
Ciarán Lynch (Cork South Central, Labour)
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Can you just cite it there for us in the book, Senator?
Susan O'Keeffe (Labour)
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Yes, sorry it's book AIB - C2C.
Ciarán Lynch (Cork South Central, Labour)
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They may not have that book, now, so I need to be mindful to committee members .... that witnesses have to be given foreknowledge.
Susan O'Keeffe (Labour)
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Are you familiar-----
Susan O'Keeffe (Labour)
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Okay, well, I wasn't proposing to throw everything at ... I was merely going to say that the group's criticised loans, including watch, vulnerable and impaired loans, are graded eight to ten. These are "loans which exhibit weaknesses, where payment is in jeopardy, or where there's objective evidence of impairment. In addition a portion of the group's criticised loans are included in grade seven", and it goes on then to give the detail of how much money, how many of the loans were tied up. So this was at a point, this was well before your January-February conversations with the Financial Regulator. You'd already seen in 2007, 2008, that things were not going well, and that you'd already had to ask for contingency liquidity plans. You were now in a position where you could see this, and whatever else you could see yourselves. I am finally coming to it, so I'm just concerned to know how at that point you would end up in all those negotiations, giving, if you like, the assurance, that as a going concern you could let the bank carry on, you could actually sign off on the going concern, given all the things that had gone on?
Ciarán Lynch (Cork South Central, Labour)
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The question is made. Mr. Dobey or Mr. O'Rourke, or each.
Mr. Terence O'Rourke:
The issue for us was whether AIB said we'll continue in operation or existence for another year; there are lots of uncertainties out there, lots of risks, and at that stage, 2008, looked like there were losses coming down. AIB reported, "We've taken €1.8 billion this year, we've another €6 billion to come in cycle. We've got lots of losses coming, and there was a risk there could be more". That was said as well. So what we did was, we said, well, if those risks come to pass, will AIB be there? And the answer was yes, because the Government had told us they would support the pillar banks. So, on that basis, it was reasonable for AIB to say, "That's our accounts, we will continue in existence". So it was a reasonable judgment for us to make, we felt.
Susan O'Keeffe (Labour)
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With the support of Government?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Susan O'Keeffe (Labour)
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But without that-----
Ciarán Lynch (Cork South Central, Labour)
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Okay. That's it, we're done. I just want to just ... in the opening section there of Senator O'Keeffe's question, she made reference to Mr. Gleeson, and his comments about the regulator. I ... the ... Mr. Gleeson may have written comments with regard to the regulator, but he ... during his hearing with us he actually qualified that, in questioning from Senator D'Arcy, at which time Mr. Gleeson then says, "That was private talk between me and Eugene, an unkind phrase to use, I think, but I felt we had been let down by regulation, but we ourselves had got into trouble, so who am I to speak?" So I just ... in use of that phrase in future engagements, I think the proper context and full qualification needs to be applied. Next and last up is Senator Barrett. Senator, ten minutes.
Sean Barrett (Independent)
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Thank you very much, Chairman, and welcome to our visitors this afternoon. Just, on the regulation of accountants, you mentioned the CARB report. I suppose there'd be two observations, one, it's taken seven years since the ... the need for the guarantee, and two, it's been furnished only to yourselves, and not to the public, who had to pay the €64 billion. I mean, is that the way CARB operates?
Sean Barrett (Independent)
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In the next few months. I'd hope it would be able to assist this committee. The IASA, as far as I can see, has issued no report on this whole issue. Is ... is that correct?
Sean Barrett (Independent)
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Well, we have one watchdog which hasn't barked at all and another watchdog that only ... that only barks in ... in private-----
Ciarán Lynch (Cork South Central, Labour)
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I'll be barking at you now, Senator, if you make a value judgment, so, ask a question.
Sean Barrett (Independent)
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Is the ... is this an appropriate system of regulation where one watchdog is silent and the other just works in private? The public ... who has asked us to investigate €100 million in equity from the Irish Government, then, obviously, shareholders' equity, and inputs from the British Government ... and the two regulatory bodies operate as ... as you've described.
Sean Barrett (Independent)
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But you're a member of these bodies, isn't that right?
Sean Barrett (Independent)
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The going concern basis for the accounts, this is on page 54 of the document you sent us, for the year ended 31 December 2008. Does that correspond at all to a definition of "going concern", knowing that senior people, from the client, were in Government Buildings, you know, looking for money on the 29 September, and that it ended up 98% in public ownership? That's not a going concern, I think in the views of how most people would define "going concern". And as you say, there had to be verbal undertakings and letters of comfort, which the Committee of Public Accounts here isn't very wild about ... it's very ... it's a very elastic definition of "going concern".
Mr. Paul Dobey:
Yes. There needs to be ... I need to put some perspective on this. The ... the reason we look at going concern is because financial statements are prepared on a basis that assumes the company, or the bank, is going to continue as a going concern. If you were assume it wasn't going to continue as a going concern, then you would record the assets at mark to market value, we record addition ... liabilities associated, wind-up ... you'd effectively account for the bank on liquidation basis. So the reason we look at going concern is to assess, one, whether going concern is appropriate, and if it's not, you ... you measure the assets and liabilities on a totally different basis, that's the first point. The second point is, if you believe there to be an uncertainty around going concern, a significant uncertainty, that may cast doubt on that basis of preparation, then you're required to put an emphasis of matter, and if you disagree with the going concern basis of preparation you ... you qualify your opinion. I think your ... I'd make a distinction between is it appropriate to ... that the financial statements be prepared on the going concern basis from ... does this entity need more capital? Which it obvious did need from the Government, but we got assurances around that. But, based on the assurances we got, the, it would not be allowed to fall over assurance, if I can put it that way, we were satisfied that it was appropriate to ... that the accounts would be prepared on a going concern basis.
Sean Barrett (Independent)
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You mentioned your discussions with the regulator. Did he mention to you that he had attempted to have directors' compliance statements brought forward and that there had been opposition by the industry to the Department of Finance and that those would drop and they could ... and those compliance statements could have allowed to prevent excess sectoral concentration? Did you have any discussion of that aspect with the regulator?
Mr. Terence O'Rourke:
I was a member of the auditing review group which recommended directors' compliance statements, so I was aware of the issue and I know the institute would have had dialogue with the Financial Regulator about the format of directors' compliance statement, so that issue was there. But the institute ... profession ... worked out ... said there are things you can do to make the compliance statement work better and the industry ... well the industry of the industry took for themselves but they also made representations to the regulator and to the Department and, I mean, they're now there, they're now in the current legislation. At the time, I think there could have been a possibility of getting ... instead of compliance statements that would have worked but that process did not conclude, it just ran into the sand, as far as I remember.
Sean Barrett (Independent)
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Is it something when we come to do our report going forward, would that be a good idea to revise that-----
Sean Barrett (Independent)
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And the ... when you were looking at the documentation in relation to loans, the CIF were here yesterday and they were requiring that NAMA should honour verbal agreements between banks and their customers. Did you come across undocumented loans when you were doing your audit?
Sean Barrett (Independent)
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And the high discount rate on AIB, I think 56% when it was transferred across to NAMA, was there any indication that was likely to happen when you were doing the audit?
Mr. Paul Dobey:
Towards the end of our audit in 2009 and there was a dialogue between, I think, Government and AIB, around the concept of a NAMA-type entity. And the working assumption at that time was the discounts may be 20%, a little bit later the working assumption was that they may be as much as 35% and, ultimately, they were 56%. When you go back to the statements that AIB made to the market around the declines in value and they announced that to the market in 2009 based on their stress test, it's not terribly surprising that the NAMA losses were at the level that they were at. Because, as I said earlier, AIB would have planned to hold those loans through the cycle if it could have, but it didn't for reasons we all know and, ultimately, they were disposed of to NAMA at what, with the benefit of hindsight, was the bottom of the cycle.
Sean Barrett (Independent)
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Lending without income statements, did that come up in the audit?
Mr. Paul Dobey:
I think it probably did, we were ... particularly in the property construction area ... when we were doing the loan reviews, there wouldn't always have been income statements and you'll understand that in relation to a property loan, it's the cash flow ... the future cash flows that may be available from developing out that property that would give rise to income and there may not have been any income early on.
Sean Barrett (Independent)
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Did you find regulatory compliance reluctance or reluctance to comply with the regulator in relation to sectoral concentration and in relation to loans to deposits, that the regulator's wishes were quite frequently ignored or disputed? Did you find that?
Mr. Paul Dobey:
I didn't find that to be a feature. We've pointed out ... discussed earlier the sectoral exposures that went all the way to the AIB board, it was taken extremely seriously by AIB. It was discussed. There were reasons why they continued to breach those limits ... if I can use those words ... that was to do with their view that Basel II was coming. That was done in good faith, I believe, and I wasn't ... it wasn't a feature of our engagement with AIB that they were non-compliant if I can put it that way. In fact, they believed compliance was an extremely important aspect of what they did.
Sean Barrett (Independent)
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I'm sorry to interrupt you there. And the concerns of Jim O'Leary, who is a very eminent economist, as early as 2004 about the sectoral lending by the bank, was that brought to your attention?
Mr. Paul Dobey:
Yes. We attended all of the AIB audit committee meetings and Jim would have sat on some of those meetings. He raised questions.
I assume those questions went into the boardroom and I presume they got discussed and I don't know if Mr. O'Leary got satisfied in the end, but if he had concerns, it was for him to resolve those concerns with his boardroom colleagues.
Ciarán Lynch (Cork South Central, Labour)
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Okay, final question, Senator.
Sean Barrett (Independent)
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You said you were relying on the ESRI and the IMF, the Central Bank and so on, if you like, the wrong people, as it turned out, so Mr. O'Leary's advice was bypassed in favour of the group that you did rely on.
Ciarán Lynch (Cork South Central, Labour)
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I'm sorry, if you have a document ... just before ... if you've a document there with regard to Mr. O'Leary, put it on the table, please, Senator. We're kind of having an abstract conversation about comments that somebody was actually making and I would not be inviting the witness into a kind of subjective interpretation of that unless we're dealing with direct evidence before the committee.
Sean Barrett (Independent)
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Thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you.
Sean Barrett (Independent)
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That ... its merely in the context he was a board member and I won't raise it any further. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Okay, all right.
Sean Barrett (Independent)
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And I'd like to thank our two visitors and thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Okay, I just want to tidy up with a few matters. I'm going to wrap up and then invite our two lead questioners in to finalise questions today. Just returning to the matter of the regulator and the regulation structure - and Mr. O'Rourke and Mr. Dobey, either of you can answer this - did you feel that the reports issued to the Financial Regulator provided them with enough information to enable them to discern the full regulatory position of the group?
Ciarán Lynch (Cork South Central, Labour)
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By you and by the bank.
Ciarán Lynch (Cork South Central, Labour)
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If you can give a comment on both.
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Mr. Paul Dobey:
-----in a more fulsome way on the information we gave? We prepared very detailed planning documents. We prepared very detailed findings documents from our audits. We prepared very detailed management letters in all of the years. In the more difficult years, we prepared very extensive reports. We would normally report twice a year to the audit committee. In 2008, I think we reported six times, if not seven, and all of those reports went to the regulator and I believe that was a fulsome disclosure to the regulator including ... and we also had dialogue and discussion with the regulator during that period.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. In layperson's terms, maybe you could explain to the committee - because I'm coming to wrap things up now - if the auditors did their job properly, according to the rules, why then did the banks fail without warning?
Mr. Paul Dobey:
I ... at the risk of making another analogy, if ... we audit drug companies and we audit airlines, so we don't tell drug companies what drugs to develop and they don't expect us to tell them what drugs to develop as auditors. We don't have that expertise. We don't tell airlines what airlines ... what aircraft to buy-----
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Ciarán Lynch (Cork South Central, Labour)
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But every bank, practically, in Ireland crashed. If every airplane fell out of the sky that was over Irish jurisdiction, there would be a lot, a lot of questions. Every Irish bank failed to a certain extent, Mr. Dobey, Mr. O'Rourke.
Ciarán Lynch (Cork South Central, Labour)
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Some-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, but-----
Ciarán Lynch (Cork South Central, Labour)
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-----we would be looking at the service engineers and the people that would be-----
Ciarán Lynch (Cork South Central, Labour)
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-----designing the ships and all the rest of it.
Mr. Terence O'Rourke:
Yes. In terms of the crash that happened, go back to what I've said earlier. What happened was ... did the accounts reflect the right numbers and the ... the accounts were accurate. They reflected the loans given, they reflected the sectoral concentration, they reflected the funding make-up. All those items were disclosed. The issue then is whether the accounts should have provided for losses which subsequently happened and the answer is the accounts, obviously, didn't provide for those losses because they were not foreseen and the answer is because to make provisions for losses you need to be able on an objective basis for saying these losses are going to occur and there was no objective evidence, in any time we did our audits before the crash happened, that those losses were going to occur.
Ciarán Lynch (Cork South Central, Labour)
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So, in that regard, was the bank failure a surprise to you, as auditors?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And would you concur with that view, Mr. Dobey?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So, maybe if ... to wrap that up again, has ... what has actually changed since the crisis period and can bank audit accounts now predict the risk of bank failure, in your opinion?
Mr. Terence O'Rourke:
Well, there'd be a number of things, a lot of things done internationally, because it wasn't just in Ireland that banks failed, that is a global issue and there's been a lot of work done by a number of groups saying, "How can we enhance corporate reporting?" And one of the issues I said earlier that the chairman of the IASB said is that financial numbers only tell so much about a company. There's other things you need about a company, other than what its assets and liabilities are, what its income and expenditure are.
You need to know its business models more, you need to know its risks. You need to be able in some way to measure the environmental impact of a company. You need to be able to measure the social impact of a company. And therefore there's a lot of work being done on can we develop corporate reporting on top of a very sound basis of the numbers being done in a certain way, can we give other information to people that'll help them better understand a business and the risks it face? That work is being done by the international integrated reporting council I talked about. It's being done by the financial stability board of the bank of international ... or the BIS in Basel, which are coming out, enhanced disclosure task force, which again has got a lot of work done on the additional disclosures that banks should make of the risks they're running. And there's now a fairly broad set of additional risk disclosures which are being developed and are being trialled with banks to see can they produce this information in an understandable and consistent manner. And that work is going ahead very well. I think in the future you'll see that banks will report a wider range of things, more than just the numbers. So that looking back on the crisis you'll say, "We believe the numbers were properly prepared in accordance with the rules that were there. The issue was: that was not enough for people to understand what was going on." We need a wider picture, which can't all be captured in numbers. They need to be captured in more narrative, telling the story in a broader sense. And what ... to have that consistent so we compare Bank A with Bank B in different countries and different situations, there needs to be a fairly comprehensive set of things that banks can and can't do, and that work is ongoing at the moment.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Just a final question to both of you so, in your opinion, or in the firm's opinion, did the external audit fulfil its role or not?
Mr. Terence O'Rourke:
We fulfilled our role in terms of the job that we were given. In terms of the reasonable question, which has been put to me a number of times today, should we not have foreseen it coming? Did Irish people not expect? And that goes back to that issue. I think that the information that's contained in accounts, people expect the accounts to tell the whole story, and there's probably more stories to be told than are ... than can be told in a set of financial numbers. And, therefore, the financial numbers, about which the auditors are saying, "These were properly prepared in accordance with the rules," that story, as being told by the financial numbers, was not sufficient to understand what was going on.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Mr. Dobey?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. I'm going to move to wrap up. So, Senator MacSharry?
Marc MacSharry (Fianna Fail)
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Nothing further.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Senator D'Arcy? Okay. With that said, I ... if there's anything further you would like to add, Mr. O'Rourke or Mr. Dobey, before matters could be closed?
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. So with that said, if members can just ... in doing this I would like to thank Mr. O'Rourke and Mr. Dobey for their participation today and for their engagement with the inquiry and now to formally excuse you and also to thank you for your engagement today. With that said, I now propose that the meeting is adjourned until 2.30 p.m. on Tuesday, 19 May 2015. Is that agreed? Agreed.