Oireachtas Joint and Select Committees
Wednesday, 27 May 2015
Committee of Inquiry into the Banking Crisis
Nexus Phase
Ciarán Lynch (Cork South Central, Labour)
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We have a quorum. I call the meeting into public session. Is that agreed? Agreed. We have a quorum, the Committee of Inquiry into the Banking Crisis is now in public session. Can I ask members and those in the public gallery to ensure that their mobile devices are switched off? We begin today's session, and series of sessions and public hearings, with Mr. Tony Grimes, former director general of the Central Bank of Ireland. In doing so, I would like to welcome everyone to the 29th public hearing of the Joint Committee of Inquiry into the Banking Crisis. Today we continue our hearings with witnesses from the Central Bank of Ireland and the Financial Regulator. At this morning's session we will hear from Mr. Tony Grimes, former director general at the Central Bank. Mr. Tony Grimes held senior management positions in the Central Bank in the area of economics, international relations, markets and payments. He was appointed assistant director general in 2004 and oversaw the financial markets and payments of securities, settlements divisions. In August 2007, he was appointed to the role of director general at the Central Bank and Financial Services Authority of Ireland, a position he held until his retirement in 2011. During his time as director general, he was also appointed acting Governor from 19 July 2008 until 19 September 2008, in the absence of Governor Hurley due to illness. Mr. Grimes, you are very welcome before the committee this morning.
Before hearing from the witness today, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect to their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to 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. In addition, there are particular obligations of professional secrecy on officers of the Central Bank in respect of confidential information they have come across in the course of their duties. This stems from European and Irish law including section 33AK of the Central Bank Act 1942. The banking inquiry also has obligations of professional secrecy in terms of some of the information which has been provided to it by the Central Bank. These obligations have been taken into account by the committee and will affect the questions asked and the answers which can be lawfully given in today's proceedings. In particular, it will mean that some information can be dealt with in a summary or aggregate basis only, so that individual institutions will not be identified. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room.
For those sitting in the gallery, these documents will be displayed on the screens to your left and right and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witness has been directed to attend this 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, with that said, if I can now ask the clerk to administer the oath to Mr. Grimes this morning.
Ciarán Lynch (Cork South Central, Labour)
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Once again to welcome Mr. Grimes before the inquiry this morning and I understand, Mr. Grimes, that you're proposing that your opening statement would be taken as read. Is that agreed?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much, Mr. Grimes. So, just to inform as well that the opening statement will be published on the committee website also today. So, with that said, if I can begin with the first questioner this morning and invite Deputy Joe Higgins. Deputy, you've 25 minutes.
Joe Higgins (Dublin West, Socialist Party)
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Thanks, Chairman. Thanks, Mr. Grimes. Mr. Grimes, can I ask you, in, say, the second half of 2007 and then into 2008, up to and including September 2008, were there concerns at senior levels of the Central Bank that one or more Irish financial institutions might be insolvent?
Mr. Tony Grimes:
Deputy, yes. At that time there were concerns. Obviously, we read the papers; we were in receipt of reports from various sources; there was interaction with the markets; obviously we looked at share prices and so on, so it's absolutely true to say that we had concerns. Now, it's not the same thing as saying the concerns extended into us having a clear view of the insolvency of particular institutions but certainly I would say, from the spring onwards, you know, of 2008, there were concerns, but they were just concerns at that stage, as I said.
Joe Higgins (Dublin West, Socialist Party)
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Well, can I take you through some of the evidence in relation to these concerns and tease things out a bit? So, Vol. 2, page 3 of the core documents and we have an e-mail here in which you are included, Mr. Grimes. This should come up shortly-----
Ciarán Lynch (Cork South Central, Labour)
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It's section 33AK so it'll be taken from the booklet, Joe.
Joe Higgins (Dublin West, Socialist Party)
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Right.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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In your booklet then, Vol. 2, page 3, you see ... you see an e-mail there towards the end of 2007 in which you are included and the subject is a list of issues for the domestic standing group, again a meeting that's to be held very shortly, and if I just quote from the e-mail, it says, "Please find attached a list of issues that need further examination / clarification in order to facilitate actions the Dept or the [Central Bank] may need to take should a financial institution in Ireland find itself in difficulties, or systemic problems arise in the financial system", and this list has been prepared for a discussion at the domestic standing group.
So then, if we just turn the page to page 4, Mr. Grimes and, under "Ministerial and CBFSAI powers", which is the Central Bank and regulatory authority powers, and down one, two, three, the fourth bullet point:
The legal position regarding a number of potential policy options for the State to provide support to financial institutions in difficulty requires further examination. These include:
- the legal scope for a "letter of comfort" to be given to the Central Bank in an emergency situation confirming the Minister's intention to approach Dáil Eireann for legislative authority to enable the issuance of a financial guarantee to the Central Bank.
And if you turn to page, just once more Mr. Grimes, to page 7. We have, "Three scenarios for institutions having difficulties ... 1) illiquid but solvent ... 2) nearing insolvency ... [and] 3) insolvent". You're following me there, yes?
Joe Higgins (Dublin West, Socialist Party)
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And then to quote that paragraph 3:
Once an institution is insolvent the Central Bank cannot provide [emergency liquidity assistance] to the institution. In order for the institution to be assisted [Central Bank] would require ... some form of guarantee from the Government eg a letter of comfort. This would allow the [Central Bank] to treat the institution as illiquid, but solvent.
So, can I ask you to maybe comment on that? What's this all about?
Mr. Tony Grimes:
Yes, if we go back to the date of this, it is October 2007. I suppose it was the very start of the contingency planning that was taking place both within the bank and as part of DSG. And ... I think this would have been one of the first documents to have been used in the committee. And what it's actually trying to do is set out the options. At that stage, it was no more than setting out the options. But just the context of course is, it was following on the Northern Rock episode which occurred in September 2007. So, authorities everywhere were on I think higher alert I think following that incident. So, this is the contingency planning episode that followed that. So, it's setting out the options which were there. I think it shows that contingency planning by the authorities begun as early as, you know, autumn of 2007.
Joe Higgins (Dublin West, Socialist Party)
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But-----
Joe Higgins (Dublin West, Socialist Party)
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I think ... I'll put it to you Mr. Grimes, that any observer would see a situation being set up here by the Central Bank and the Department of Finance for a clear situation where a bank or a financial institution might be declared insolvent. Could you comment then on the emphasis that is given and I'll just give one more quote Chair ... going forward Vol. 1, page 101 and a scoping paper from the Department. And I just quote the Central Bank role in-----
Ciarán Lynch (Cork South Central, Labour)
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What page, Deputy?
Joe Higgins (Dublin West, Socialist Party)
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It's Vol. 1, page 101. I'll just quote as clearly as I can:
It is very important to note that the CBFSAI [the Central Bank] is prohibited from providing [emergency liquidity assistance] to an insolvent institution. Therefore if there is any concern that a financial institution seeking ELA as insolvent, the [Central Bank] would not be in a position to provide liquidity support without the question of some guarantee arising from the Exchequer.
A theme that keeps coming up, Mr. Grimes, is emergency liquidity for an institution that might be insolvent but legally could not be funded by the Central Bank unless there was a Government guarantee. Why does this theme keep recurring?
Mr. Tony Grimes:
Well, it's absolutely clear that if the institution is insolvent the Central Bank could not lend without a formal guarantee of the Government. Now ... and yes ... that's absolutely clear. In the situation in which the authorities think that the institution is solvent but illiquid, it has been the practice also to require a guarantee of the Government, even if the institution is not formerly insolvent. But ... and that's the way it has been in practice.
Joe Higgins (Dublin West, Socialist Party)
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Yes, I mean, that's clear ... that funding can be given to an institution that has liquidity problems but it's absolutely prohibited that funding would be given to an institution that's deemed to be insolvent.
Joe Higgins (Dublin West, Socialist Party)
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Without a Government guarantee. But the question I put to you is: why does this theme keep emerging? Is ... would you ... is there a preparation here for a suspected insolvency that might be looming or might be seen to be in the pipeline?
Mr. Tony Grimes:
No, I'd like to be very clear here. I mean, when we're talking about the time period here, which is the autumn of 2007, it is purely contingency planning. Even in the marketplace, I think, there were not many doubts about solvency of any institution at that time. So I'll get back to what I say. We certainly, in my experience, had no particular institution in mind at that stage. It was contingency planning, as was being done elsewhere in Europe and globally, I guess, at the same time.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Well, let's go forward then, if I may, to the ... September 2008. And I refer to Vol. 2, page 45, Chairman.
Joe Higgins (Dublin West, Socialist Party)
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Vol. 2 of the core document, Tony Grimes, core documents, yes. Vol. 2, page 45.
Joe Higgins (Dublin West, Socialist Party)
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Yes. And then you will see in page 46 and 47 handwritten minutes of a meeting, which is transcribed on page 45. Yes?
Joe Higgins (Dublin West, Socialist Party)
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Can you tell us ... and you were an attendee at that meeting, which was in the period not too long before the actual guarantee was given. Can you tell us, what is the nature of that meeting, Mr. Grimes? One thing that would strike me on reading it is that it's ... seems to be a very, very high level ... the Taoiseach is in attendance, the Minister for Finance, the Secretary of the Department of Finance, the Attorney General, yourself, as Governor ... acting Governor of the Central Bank, and the chief-----
Joe Higgins (Dublin West, Socialist Party)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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Yes, well, the Governor had just resumed work-----
Joe Higgins (Dublin West, Socialist Party)
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-----after a period of some illness, but ... but the chief executive officer of the National Treasury Management Agency. Would you agree that it's a very-----
Joe Higgins (Dublin West, Socialist Party)
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-----high-level meeting?
Joe Higgins (Dublin West, Socialist Party)
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So can you tell us about that meeting please?
Mr. Tony Grimes:
Yes. My recollection is that it was a stock-taking meeting. I mean, it was clear, even in the days before the guarantee, that we were facing, you know, important issues, and very serious issues as regards the liquidity of the banking system. It was one of a series of meetings at the end of the previous week. I think the date of the meeting in question is the 26th, which, I think, is the Thursday or Friday of the weekend before the guarantee. It was one, you know, of a series to discuss options, to hear the latest information that we all had on the state of the banking system and on the state of individual banks. So, that was the purpose of the meeting.
Joe Higgins (Dublin West, Socialist Party)
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Chairman, the minute we have here is from ... was it ... this was not an official meeting of the domestic standing group, it was-----
Joe Higgins (Dublin West, Socialist Party)
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-----it was an informal meeting.
Joe Higgins (Dublin West, Socialist Party)
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So I think that the minute could then be put up. There is no prohibition, Central Bank-wise, on this.
Ciarán Lynch (Cork South Central, Labour)
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There are two institutions identified in it, Deputy Higgins, and there's financial information on it other than the general point that you're making with regard to that this would be a crisis. This would imply that this was a crisis management situation.
Joe Higgins (Dublin West, Socialist Party)
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Yes ... it would just be easier to explain if the minute was there, Chair, but ... but, Mr. Grimes, it seems as if there was a debate between different attendees in relation to whether or not some financial institutions were solvent or insolvent. Would that be true?
Mr. Tony Grimes:
Yes, I think the issue of solvency was raised in the course of the meeting. I don't think it was at the core of the meeting; I think the real purpose of the meeting was contingency planning for what we felt might be coming down the road in the following few days. So, it wasn't a meeting called to discuss solvency of particular institutions, but, as you see from the minutes, there is a reference there to a possible solvency situation-----
Joe Higgins (Dublin West, Socialist Party)
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Mr. Grimes, if you say it wasn't a discussion on particular institutions that might be insolvent, half the minute, half the minute is given over to that. So it must have been a very important core of the meeting.
Mr. Tony Grimes:
My recollection is that the core of the meeting was concerned with discussing a Merrill Lynch report around the same time. Now, it may not have been the same meeting precisely at which the Taoiseach, you know, attended because the meetings at that time over that particular weekend tended to merge, and it was very hard to know which was which, but ... over the same day, if my memory is right, the extent of Merrill Lynch report, which was commissioned by the Department, was discussed in some detail. And I think the date of that was around that period as well. I might be wrong about the particular date but just to reiterate, I have a strong memory that the purpose of the meeting that the minute refers to was not just about the possible solvency situation of one or two institutions.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Grimes, I correct myself. In fact, the entire minute that we have, which was written by a very high level official, is entirely on the question of insolvency. Can I quote Chair from this minute?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Joe Higgins (Dublin West, Socialist Party)
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It's ... the minute starts, the PwC reported on the Anglo loan book and gave details.
Ciarán Lynch (Cork South Central, Labour)
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.....institutions if you can, just the PwC report and the financial institution.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Then you see paragraph 4, Mr. Grimes, there was a discussion of various forms of State intervention. Then the regulator said, there is no evidence to suggest that a particular institution which is named is insolvent on the going concern basis, it is simply unable to continue on the current basis from a liquidity point of view. He felt another institution was in a similar situation. Now a very high-level official in the Department then, noted that Government would need a good idea of the potential loss exposure within, and those two financial institutions are named. On some assumptions one of them could be €2 billion after capital, and the other one could be €8.5 billion after capital. What's the meaning of that minute? Does it mean, to put it clearly from an interpretation that I drew which I just put out to you, that after its capital and resources were used up, the first institution would be €2 billion ... insolvent to the tune of €2 billion, and the second insolvent to the tune of €8.5 billion?
Joe Higgins (Dublin West, Socialist Party)
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Mr. Grimes, that's not the question I asked you.
Okay, sure. On the particular reference, I don't recall the interpretation you're putting on that, Deputy ... that the figures refer to the possible insolvency of those two institutions. There is some doubt about the reference to capital there, and whether the possible losses are before or after capital; and certainly my recollection, you know, from having attended the meeting, was that virtually nobody who was present at the meeting concluded after the meeting that ... that the two institutions which are referred to here, were, or were likely to be, insolvent at that time.
Joe Higgins (Dublin West, Socialist Party)
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But, Mr ... Mr. Grimes, why did the very high-level official in the Department of Finance specifically refer to the Government needing a good idea of the potential loss exposures within these two institutions and then, what seems to me goes on to put a scenario, which was being mooted, that both of them were seriously insolvent?
Mr. Tony Grimes:
Again ... to state ... it is ... it was not my interpretation - and the minute is somewhat obscure on this - it was not my interpretation that the reference there was meant to imply the two institutions were insolvent. If you read the following paragraph, it actually refers to the various options in terms of resolution of the crisis that were also being discussed at the meeting, which was in fact the real purpose of the meeting. So I can't do anything else but to repeat my understanding that actually-----
Joe Higgins (Dublin West, Socialist Party)
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Yes, Mr. Grimes, it was the purpose of the meeting undoubtedly but the entire minute is virtually taken up with the question of these two institutions. Now, can I put to you as well, because my time is running short, that we had evidence from senior bankers - from Allied Irish Banks and Bank of Ireland - that the Government on the night of the guarantee, night-early morning, proposed to put out a statement which ... which referred to the solvency of all the banks and the bankers advised against that particular statement and it was taken out. Are you aware of that evidence?
Joe Higgins (Dublin West, Socialist Party)
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What's your interpretation of that?
Joe Higgins (Dublin West, Socialist Party)
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Mr. Grimes, why would it scare the markets to reaffirm that all the banks were-----
Ciarán Lynch (Cork South Central, Labour)
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You're out of time now, Deputy, again. So, Mr. Grimes, to respond. Mr. Grimes.
Mr. Tony Grimes:
Again, on this, just to come back to the point, I think nobody present at that meeting walked out of the meeting of the view that we had been told that two institutions were insolvent. It would have been absolutely inconsistent with the subsequent meetings that were heard ... that were held between the 26th, the date of this particular minute, and the date of the guarantee decision on the 29th.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Grimes, just going back to your previous answer, in regard ... reference to what senior bankers advised the Government. Surely it would be to reassure the markets that one would say that there was no problem with solvency. Why would it scare the markets, as you say?
Joe Higgins (Dublin West, Socialist Party)
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Mr. Grimes, keeping that ... the minute of that very high-level meeting, in which, I reiterate, the Taoiseach, the Minister for Finance, the most senior officials of all the institutions dealing with the finances of the State were in attendance, where the entire minute is given over to, yes, the crisis generally but the vast majority to problems of one and two financial institutions, in my ... or what I put to you was that the most senior official in finance referred to plain insolvency.
Keeping that in mind, and keeping in mind the earlier questions I asked you in relation to the discussions within the Department and the Central Bank about the process of providing emergency liquidity or emergency lending assistance not being possible where institutions were deemed to be ... deemed to be insolvent, but would need a guarantee to have such assistance, can I put it to you that a reasonable person would say that what we have here is an explanation for the guarantee that was given on 28-29 September? In other words, that it was to cover over the fact that two institutions were insolvent, that this was known at the highest level of the State, the political and the financial ... the political leadership and the financial leadership of the State, and that the guarantee was given in order to-----
Ciarán Lynch (Cork South Central, Labour)
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You'll have to allow the witness to respond and you're going to run out of time.
Joe Higgins (Dublin West, Socialist Party)
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-----to allow those institutions to survive?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And when I take your reply I'll be moving on now, okay? Mr. Grimes.
Michael McGrath (Cork South Central, Fianna Fail)
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Chairman, a bit of consistency, please, in your application of the rules.
Ciarán Lynch (Cork South Central, Labour)
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Yes, I do appreciate that. Mr. Grimes?
Mr. Tony Grimes:
Deputy, again, I would like to state very categorically that in my experience the representatives of ... you know, of the Central Bank, but also I think of others who were at the meeting, did not come out of that meeting with the view that we had been told that there was an insolvency situation in ... okay, in the two banks, and that we carried that information and point of view into the meetings that were held in the Taoiseach's Department on the 29th. It was clear, to me at least, that as we entered the meetings on the 29th, we were not talking about anything like certainty about the solvency ... about the insolvency of two institutions. The working assumption was they were under stress but solvent.
Ciarán Lynch (Cork South Central, Labour)
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Yes, and can I just round that off with you before I bring in Deputy O'Donnell. We'll come to Deputy Higgins later on in the wrap-up again. And I just want to bring up a document. It's a memorandum from Merrill Lynch, it's Sunday, 28 September, it's from Vol. 1, 12 May, it's TG ... it's TGR that that is ... but it'll come on your screen now in a moment, Mr Grimes. This is ... the overall situation here, as we understand from the 28th, is that the one party that was to have the fullest picture of each financial institution in the marketplace was the CBFSAI ... was your agency. And, if you ... what I'm asking you here to do is to comment from the Central Bank's collation and analysis and scrutiny of Irish financial institutions' advices on the liquidity and solvency of Irish financial institutions prior to the issue of the guarantee. Now, this document is the Sunday before the guarantee ... and it's the Merrill Lynch briefing document, and if you look at paragraph four, the very last sentence actually in it says "The liquidity issues facing Irish banks are compounded by investor concerns with regard to the high concentration of commercial property risk in their [prospective] portfolios." Now, this would show that there are major liquidity concerns developing there ... that the ... Merrill Lynch are saying that there are very big problems coming down the line. Would you care to comment upon what ... what was the Central Bank's reading and your own interpretation of that Merrill Lynch memorandum?
Mr. Tony Grimes:
I think it was clear that it echoed a lot of the concerns and the knowledge that we had about the liquidity situation of the system, as a whole, and individual banks in that period. I mean, we had been tracking very carefully - I suppose for more than one year - the liquidity developments, you know, which affected every single bank. The Central Bank effectively organises the provision of liquidity to the individual banks on behalf of the Eurosystem. So we were ... we could track very well the deterioration in the liquidity situation of each bank over those months. This was no surprise.
But what has been said in the Merrill Lynch document here, Mr. Grimes, is that it's not just a liquidity issue, but there are particular concerns with regard to the concentration of commercial property, so it's the type of loan exposure, the concentration risks. So it's not just liquidity, that there's a whole load of other stuff here as well with regard to the type of lending model that was actually in place.
So, was the exposure to the property market actually on your radar at that time along with the liquidity issue?
Mr. Tony Grimes:
Well, it was, you know, obviously known. I mean the markets had been talking for, you know, nine months about the exposure to property, you know, of the major banks here. It, you know, had been subject to various reports in the market; indeed, it had been highlighted in financial stability reports for many years that there was, you know, a major exposure here, so it was no surprise. If you look at the movement of the share prices of the Irish banks over the previous six months or so, it was clear that market commentary tended to focus a lot on the banks' exposure to property. So this was saying no more than what, you know, everybody knew.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Deputy O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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I want to welcome Mr. Grimes. Mr. Grimes, can I take up ... you were a member of the financial, the ... a board of the regulator, correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. So do you believe that a financial stability report took sufficient note of the concerns of the supervision during the period, we'll say, in which, which is the critical period in '08? So you were, you were director general of the Central Bank, but you were a member of the regularity board, which, obviously, was over supervision. So do you feel that, I suppose, in particular, that the financial, we'll say, stability report, particularly for '07 and '08, took account of the level of supervision and the concerns of the supervisory authority?
Mr. Tony Grimes:
Just to go back, I, I think, took up my position about halfway through the production of the 2007, yes, FSR. It was published in the middle of November 2007, so I was involved in that to some extent. I think I set out in the written statement that we acknowledge now, of course, that that FSR did not fully anticipate the sort of crisis that occurred in the autumn of 2008.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just before you ... can I just put it in context? And, Chairman, I'd like to quote from Vol. 1, page 97, which is the Governor of the Central Bank at the time, John Hurley's, foreword to the financial stability report, and I quote, and he's speaking about, he says:
However, the Irish banks have negligible exposure [it's the third paragraph down] to the sub-prime sector, and they maintain relatively healthy by the standard measures of capital, profitability and [the] asset quality. This has been confirmed by the stress testing exercises we have carried with the banks.
So the two questions, I suppose, I want to ask there is that were those stress tests ... do you believe that they reflected the concerns, we'll say, that were being expressed at the regularity board level of which you were a member of at the time? Did it come up for discussion in terms of the stress test of the banks with the Financial Regulator at the time and that board, that they'd concerns about the loan portfolios of the banks, stress tests, liquidity, profitability?
Mr. Tony Grimes:
Okay. I think, though, I need to talk about the timing here. I was appointed to the board of the Financial Regulator authority on 1 May. The first meeting I attended was at the very end of May 2008. The last FSR to be published was done in November 2007.
So, it wouldn't have been that current, of course, at the time I was appointed to the regulatory board. But I mean the issues that were identified in the FSR were the usual ones that, you know ... high rates of increase in credit, indebtedness and so on.
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose the question, really, and the limited time ... because I don't want to ... when you ... in your time on the board of the financial regulatory authority from May 2008 onwards, which was a critical period, was there discussions at board level with the Financial Regulator, financial regulatory board, on the solvency of the banks, the liquidity of the banks, the stress tests of the loans, the problem with the quality of the loans, the high concentration in the construction sector, the overall viability of the banking sector itself?
Kieran O'Donnell (Limerick City, Fine Gael)
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But in terms of the most recent developments that were occurring?
Kieran O'Donnell (Limerick City, Fine Gael)
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In '08?
Kieran O'Donnell (Limerick City, Fine Gael)
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And were they serious discussions?
Kieran O'Donnell (Limerick City, Fine Gael)
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Would you be comfortable naming that institution, Mr. Grimes?
Ciarán Lynch (Cork South Central, Labour)
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Be careful now.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay and in that context, what particular issues were coming to the fore in relation to that institution?
Mr. Tony Grimes:
Apart from the issues which subsequently became the subject, you know, of legal issues ... yes, there was obviously issues to do with liquidity, with market views on concentration on property and that that was a major reason for the very significant decline in the share price of Anglo, which was relatively worse than that of other Irish institutions at the time and certainly, there was concern around those issues.
Kieran O'Donnell (Limerick City, Fine Gael)
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Would be fair to say in conclusion at this point that a significant portion of the time of the financial regulatory board was taken up with discussing the circumstances of Anglo? Of this institution?
Mr. Tony Grimes:
Yes, but, I suppose, as a new member of the board, I was also taken with the number of regular regulatory issues that came before the board that actually absorbed a fair bit of the time of the board in terms of consumer issues but not just consumer issues, the process, you know-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I move on to an area-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----the round-table discussions, did you chair those?
Kieran O'Donnell (Limerick City, Fine Gael)
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Which was the February------
Kieran O'Donnell (Limerick City, Fine Gael)
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In February 2008.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can you explain how often and what was the round-table discussions?
Kieran O'Donnell (Limerick City, Fine Gael)
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And how often?
Mr. Tony Grimes:
-----which typically followed on from the publication of the financial stability reports. So, there would be a gap of a few months and the purpose of the meeting was to ... to outline to the banks the particular issues contained in the financial stability reports to make sure that the issues were fully understood by the banks and, most importantly probably, to get the feedback from the banks about the issues raised.
Kieran O'Donnell (Limerick City, Fine Gael)
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And you chaired that in which meeting?
Kieran O'Donnell (Limerick City, Fine Gael)
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Which obviously was coming into a very critical period.
Kieran O'Donnell (Limerick City, Fine Gael)
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What did you discuss with ... what banks were present?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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Nine banks. And what would have been discussed ... what would have been the primary issues?
Mr. Tony Grimes:
There would have been a presentation by some of the authors of the FSRs. They would have ... yes ... actually outlined the principal messages contained in the ... in the reports in two or three sessions. And then there would have been I suppose, yes, a wide-ranging discussion that was aimed at hearing the responses from the banks on the messages conveyed.
Kieran O'Donnell (Limerick City, Fine Gael)
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In ... in your witness statement, Mr. Grimes you state that ''Liquidity issues were also raised at the Roundtable with the banks in February 2008''. In what form did that ... what way did you raise that liquidity? Was solvency raised with the banks at that time?
Mr. Tony Grimes:
I don't recall solvency being raised as such. But it would have been implicit, to some extent in some of the messages, you know, contained in the reports. Liquidity was a more topical issue at the time in terms of the liquidity flows and what was happening in the marketplace. But again, in general terms, because the nature of the meetings was such that none of the banks are likely to be very explicit about their own circumstances.
Kieran O'Donnell (Limerick City, Fine Gael)
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Was the meeting ... would you regard the meeting as a regular meeting or at that time would you regard it as a crisis meeting?
Kieran O'Donnell (Limerick City, Fine Gael)
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And did you regard liquidity issues at that time as being of an urgent nature?
Mr. Tony Grimes:
I think so, yes. I mean we, in the Central Bank had sight of what was happening. We had sight of the tensions in the liquidity markets, which occurred right up from the beginning in Northern Rock and more especially about the ... around the year-end 2007, they abated somewhat at the beginning of 2008 and ... but were still there and they were apparent from the increase in the, in the volume of funding that the domestic banks were taking from the ECB.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I move on to the period at which you were acting Governor which was from 19 July to 15 September and just to look at that period? And I suppose, the things I want to discuss on are the type of representations, views or advices that were provided by the Central Bank to the Government or the other advisers regarding the bank guarantee and the extent of the discussions with Government. And you might also discuss your interaction with officials of the ECB, including the ... Jean-Claude Trichet on the options being discussed. So you might just give me an idea of ... of the type of areas that were being discussed around the guarantee at that time and just that two-month lead in which you were acting Governor at the time.
Kieran O'Donnell (Limerick City, Fine Gael)
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What, what date was that in August with ... in Frankfurt?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Mr. Tony Grimes:
And so, actually from that period ... and I am restricted a little bit in what I can say. I can really only talk in general terms about this. But there would have been concern in Frankfurt, I think, about what was ... what was happening in the global markets. But at the same time, there was a view in Frankfurt I think that ... or should I say, you know, there was no view in Frankfurt that we were heading into the spiral that we all headed into in September. But there was increasing concern as we moved from August into September, about what was, what was happening.
In September, in particular, and starting in September but moving on from there, there were a lot of issues in the markets-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Had you another meeting in Frankfurt early September?
Kieran O'Donnell (Limerick City, Fine Gael)
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How early would that have been, first week?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, and you might just take us to there in terms of your interaction with ... with Jean-Claude Trichet and the ECB and their view on, in terms of Ireland and the banking sector.
Mr. Tony Grimes:
I think the views were, in very general terms, about the issues which affected all of the member states at that time It was normal that there would be a full discussion but you have to recall that meetings of the ECB are conditioned more by what's happening in the euro area as a whole and do not actually look at the individual member state's circumstances.
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose what I want-----
Kieran O'Donnell (Limerick City, Fine Gael)
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In the limited time I have, Mr. Grimes, what was the general policy around saving or not saving banks in terms of any bank ... no bank to fail, in terms of the approach from the ECB?
Mr. Tony Grimes:
Well, I think that issue only became live after, I think, the middle of September and particularly after the Lehman's affair and even more particularly towards the weekend before our guarantee, which would have been 27th, 28th, 29th of the month. I wasn't privy at all to all the interactions between the ECB and the Central Bank over the period. The Governor had returned to take up his position around mid-month-----
Kieran O'Donnell (Limerick City, Fine Gael)
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So you'd no specific discussions with the ECB in your tenure around how to ... the approach on the Irish banking situation?
Mr. Tony Grimes:
There were discussions in general terms about the tensions in the markets and, in particular, how the ECB would respond in terms of liquidity issues and over that, if you like, over that time there were a lot of very special liquidity interventions, some of them co-ordinated by the Bank of England and the Fed and the Swiss Bank, so a lot of the attention focused, you know, on the global markets and the role that the ECB could play in this area as part-----
Kieran O'Donnell (Limerick City, Fine Gael)
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What would ... what was your interaction with Government during your time, tenure as Governor of the Central Bank-----
Ciarán Lynch (Cork South Central, Labour)
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On the same issues.
Kieran O'Donnell (Limerick City, Fine Gael)
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-----on the same issue, in terms of the bank situation and giving advice in terms of a potential bank guarantee and so forth?
Mr. Tony Grimes:
I don't recall any specific interaction with the Minister at that time but, of course, we would have been frequently meeting in the DSG format, which contained the senior officials from the Department and the regulator and the NTMA at that time, so I don't recall specifically meeting the Minister over that period, but the intensity of the meetings was quite high.
Kieran O'Donnell (Limerick City, Fine Gael)
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When you say the intensity, what was generally the ... the general-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And what do you think? Do you believe ... What was the ... the defining moment in terms of the banking crisis for Ireland?
Mr. Tony Grimes:
I think the Lehman's issue was, you know, a major one. I mean, you could see that from the perspective of the ECB as well, that the concentration on having to put in place special liquidity issues became very intense from that time and I guess the system as a whole was following issues like what was happening with Freddie Mac and Fannie Mae, AIG and all the events in the US, in particular. So it was building up to the end of the month when, I think, the real issues emerged over the weekend in Europe in terms of some of the European banks which required special interventions.
Kieran O'Donnell (Limerick City, Fine Gael)
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Now, are you ... you were present in Government Buildings on the night of the guarantee, Mr. Grimes, is that correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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What meetings were you present at?
Kieran O'Donnell (Limerick City, Fine Gael)
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Were you asked for your opinion, Mr. Grimes?
Kieran O'Donnell (Limerick City, Fine Gael)
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What view would you have given on the night, Mr. Grimes?
Kieran O'Donnell (Limerick City, Fine Gael)
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And was that in respect of ELA funding?
Kieran O'Donnell (Limerick City, Fine Gael)
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So what type-----
Kieran O'Donnell (Limerick City, Fine Gael)
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ECB funding?
Kieran O'Donnell (Limerick City, Fine Gael)
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And were you taking major discounts on the ... on the collateral at that time?
Kieran O'Donnell (Limerick City, Fine Gael)
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And what level of ... of discount are we talking about on ... on the collateral being offered, the loans being offered?
Ciarán Lynch (Cork South Central, Labour)
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Well, you needn't be specific but can you confirm that that matter was being discussed?
Kieran O'Donnell (Limerick City, Fine Gael)
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Had that been going on for some time, Mr. Grimes?
Kieran O'Donnell (Limerick City, Fine Gael)
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No, both the size in haircuts and how long had this type of haircut been in place for collateral being provided for the ECB for funding.
Kieran O'Donnell (Limerick City, Fine Gael)
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I accept that.
Kieran O'Donnell (Limerick City, Fine Gael)
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The question ... the question, I suppose, I'd like to know is that, how long would that ... had that type of haircut been ... been posed on that institution with the ECB, in terms of funding from the ECB?
Kieran O'Donnell (Limerick City, Fine Gael)
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And that's obviously one institution that ... am I at liberty to name, Chairman?
Ciarán Lynch (Cork South Central, Labour)
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No, you're not.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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And please ... and don't even slip it out there by accident either because I'll have to reprimand you, Deputy, for breach of-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, I ... I think it's ... it's ... it's a bit like the elephant in the room that ... that the ... we have an institution here that, clearly, was getting major discounts on its collateral in terms of what the haircuts, as you call it, from the ECB, over a long period of time. Would that not indicate, Mr. Grimes, that there was ... that the level ... that the type of loans that ... that were in place in this institution were of low quality?
Kieran O'Donnell (Limerick City, Fine Gael)
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No, I'm not ... no and I'm not saying-----
Ciarán Lynch (Cork South Central, Labour)
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I have to allow him finish, and then I'll bring you in.
Kieran O'Donnell (Limerick City, Fine Gael)
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But ... but I would think it would be reasonable to say ... I'm not talking about a specific institution, but, clearly, the level of discount that's applied in respect of ... if you're giving over something that is a loan of a value of, we'll say, €1 million, and you're getting back only 50% of that by way of ... of funding from the ECB, that's clearly of a less quality than giving over €1 million and getting back €900 million, so ... is ... is the haircut not an indication of the quality of the loans?
Mr. Tony Grimes:
It is in part, but actually it just reflects the type of ... the type of asset they have. And, just to be fair to the institution involved, it's as much that they hadn't what we call market driven ... marketable securities in their portfolio. Much of the portfolio was in ... in the form of individual loans, and the haircut automatically, across the system, applicable to individual loans, tend to be higher, because of the nature of those.
Kieran O'Donnell (Limerick City, Fine Gael)
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And did you have concern over ... that it was over a long period of time that that level of haircut had been applied on any institution? Is it ... would it be a cause of concern to the Central Bank?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, and, just, I suppose, to follow on from that, you finish out ... in terms of your ... you were present at the first meeting on the night of the guarantee. Were you present at any further meetings?
Kieran O'Donnell (Limerick City, Fine Gael)
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And what ... what happened at subsequent meetings that you attended?
Kieran O'Donnell (Limerick City, Fine Gael)
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And can I finish on one point?
Ciarán Lynch (Cork South Central, Labour)
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Last question?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, last question, Chairman, thank you. Finish up on one point. The big issue around the night of the guarantee is clear around the issue of solvency versus liquidity. The question I have to ask is: what would have been the test of the Central Bank would have looked at to ensure that the Irish banks were solvent on the night of the guarantee?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you, Deputy. Mr. Grimes.
Mr. Tony Grimes:
I suppose that we would have been informed by a number of factors. One of them would have been the assurances from the regulator that there was not a solvency issue, but I think that we would probably also have taken, somewhat into account, some of the issues in the marketplace that were out there, and ... but, formally speaking, we had no indications that any of the banks were insolvent. They were meeting all of their regulatory requirements and so on. If you took a forward looking view I ... I contend that it still wasn't obvious that there was a serious insolvency issue at that time, because to think that a bank is actually insolvent, you really have to understand the loan book. If we're ... if we're operating on the commercial property side you have to, you know, evaluate the collateral, you have to evaluate the loan-to-value ratios, you have to evaluate whether the size of any capital losses are likely to eat through what would be the buffers of capital in place, and it's important to bear in mind, I think, that many of the ... of the catastrophic falls in the ... in the value, particularly of commercial property at the time, occurred subsequent to the introduction of ... of the guarantee. I mean, the fall in ... in the commercial property market, if my figures are right, were what was about 3% in quarter 1 of 2008, but the rate of ... of decline increased to about 15% in quarter 3, 2008, and about 19% in quarter 4, 2008. So, I think a lot of the destruction in value occurred subsequent to the introduction of the guarantee, and reflected, I think, in many respects, the meltdown, okay, in the financial markets as a whole. But they're also the read across to conditions in our local markets and in the economy here.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. I just want to deal with one matter before I bring in Deputy O'Keeffe. Just one particular matter with regards to the financial stability round-table discussions that took place with the Governor of the Central Bank and with the banks themselves, and that's to do with the aggregate lending exposure of the banks. Deputy O'Donnell touched on this, and I touched on it earlier when I was speaking to you as well. Was there dialogue taking place regarding the change in funding of banks and the concentration of bank lending on the property sector at these meetings?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. Tony Grimes:
It would have been referred to in the presentation that was given to the round table, to the members of the banks at the round table. But you have to recall it would have been in general terms, you would not expect very specific reactions from individual banks there in light of the fact that their competitors were sitting around the table in the same room. So their reactions tended also to be in general terms.
Ciarán Lynch (Cork South Central, Labour)
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Okay. But was this seen as a concern or was it seen as something that needed to be attended to, or was it something that was seen that required an action, either by your side of the house or by the banks themselves?
Mr. Tony Grimes:
Well, I think it should probably be read in the context of the message of the 2007 FSR, which recognised a lot of the issues that you talked of, the increase in concentration in property, even though some of the aggregates had actually started to improve in 2000, you know, in the period. But it would have been referred to in the presentation, the fact that the concentration in property was still high, at the time we were speaking there were just the first signs, I think, of a decline in the commercial property market. So it would have been a concern certainly of the bank in its presentation.
Ciarán Lynch (Cork South Central, Labour)
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And in regard to any difficulties that might arise coming down the lines Mr. Grimes, was there any consideration given to the shock absorption capacity of the banks in that regard, how would they deal with it if it were to happen?
Ciarán Lynch (Cork South Central, Labour)
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And was that on your radar or on the bank's radar?
Mr. Tony Grimes:
I think it was not something the banks actually focused on, I think if you asked them individually at the time, they would not have recognised that it was a major solvency issue for them at that time. Certainly there were no strong views expressed at the round table that recognised this as a major threat at the time.
Ciarán Lynch (Cork South Central, Labour)
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That was the banks' analysis and views. What was the Central Bank's analysis and view?
Ciarán Lynch (Cork South Central, Labour)
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And what action did you take upon highlighting this as a difficulty, what action was then taken by the Central Bank?
Mr. Tony Grimes:
I think at the stage that we are talking about, which was spring of 2008, there was probably an awful lot ... there was not a lot that, you know, we might have been able to do. What we were doing all the time, in the background of course, was working on the contingency arrangements and they had been in place since the beginning of 2008, in fairly serious terms, in terms of what the authorities would actually do.
Ciarán Lynch (Cork South Central, Labour)
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No, but I actually ... we can talk about contingency and measures and all the rest, but there was, you were saying this morning that there was a concern by the Central Bank with regard to the aggregate lending exposures of the bank, particularly in property and concentration levels. You had identified this to the bank. Did the bank take any action itself in this regard specifically?
Ciarán Lynch (Cork South Central, Labour)
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Okay thank you. Senator O'Keeffe. Senator, ten minutes.
Susan O'Keeffe (Labour)
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Thanks Chair. Can you tell me Mr. Grimes, why do you think that the stress tests that were carried out by the bank, by the Central Bank, failed to foresee the severity of the crisis?
Susan O'Keeffe (Labour)
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But you were senior manager at the bank.
Susan O'Keeffe (Labour)
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Okay. So it is not something you can discuss.
Mr. Tony Grimes:
But I mean, I can answer in general terms. It is clear I think that what was set out, what the risks were, were understated to some extent. There were issues on the methodologies employed and I think even though the people at the time felt they were in line with, you know, international standards, there were clearly some issues that arose in terms of the lack of second-round effects and so on.
Susan O'Keeffe (Labour)
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At the time Mr. Grimes, as opposed to now with hindsight, do you think that the Central Bank was responding in a timely fashion? I am talking here between August 2007 and September 2008. As you were going in and out of work every day, did you think at the time that the Central Bank was responding in a timely fashion to the local dilemmas that were facing you and the international environment that was all around you?
Susan O'Keeffe (Labour)
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No, sorry Mr. Grimes, I am asking you to recall at the time, did you think when you went in and out of work we're going a good job, we're doing a great job, we're doing a poor job, it's very difficult. What were you thinking?
Mr. Tony Grimes:
Yes, I think that we were hit with a series of issues from the very beginning of my time in August 2007. That was the start of Northern Rock. From the very beginning of that time, we were really involved in crisis management issues. That absorbed a huge amount of the attention of the bank, as well as the interaction with the ECB in Frankfurt on similar issues. Were we doing a good job? We were certainly trying to prepare as well as we could, in case the contingency arose, that we had to respond to the sorts of issues which subsequently actually emerged.
Susan O'Keeffe (Labour)
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Do you believe Mr. Grimes that the Central Bank was independent of Government?
Susan O'Keeffe (Labour)
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Do you believe that the board of the Central Bank was independent of Government or, if you like, of political parties in general?
Susan O'Keeffe (Labour)
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Do you recall whether the Central Bank met with any representatives from the Construction Industry Federation in the time that you were discussing and the time that you were involved?
Susan O'Keeffe (Labour)
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Do you know why they ... what the meeting was about?
Susan O'Keeffe (Labour)
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Their members being developers.
Susan O'Keeffe (Labour)
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But just the one meeting?
Susan O'Keeffe (Labour)
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Do you recall Mr. Grimes, whether when the financial stability reports were being presented across 2005, 2006, 2007, do you remember any discussion about changing the tone of those reports, about removing material that might have been difficult or that would be suggesting that things were more difficult than they were or do you believe that they were treated fairly and put out as a fair representation of what was happening?
Mr. Tony Grimes:
I think they were regarded, you know, as a fair representation. I mean, there would have been some internal discussion to which I was not a party, because I was not a party other than the second half of the 2007 report, but from my knowledge I think there would have been some debate about the tone. But the tone was really reflected I think more in the Governor's introduction than in the substance of, you know, of the reports. I would be very surprised if the text of the report was, you know, affected in any way.
Susan O'Keeffe (Labour)
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There were not people in the bank, you know, working in the bank saying "we really should be putting this in" or "this piece is really important" and senior people saying "let's take them out because that will reflect badly on the bank".
Mr. Tony Grimes:
I say again, I wasn't directly involved but from the knowledge I had at the time, other than a normal debate about whether the tone properly reflected the sort of risks being run and on the other side, the need not to so-called "frighten the horses" but I mean in general, I felt the message was very clear and that the risks were well highlighted at the time.
Susan O'Keeffe (Labour)
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By the end of 2007, two financial institutions were already highly dependent on ECB money for their liquidity, in fact the same two institutions that Deputy Higgins was discussing with you earlier. So from that time on, they were under pressure. Would that be a fair way of describing their position?
Mr. Tony Grimes:
Yes, it would, but you have to recall that it's quite normal that banks would access ECB funding. I mean, it's a normal state of things, so the fact, you know, that some individual institutions are constantly accessing funds is, in itself, in no way remarkable. It's not ... I mean, what would be remarkable is probably a very significant increase, okay, in the amount of funding taken from the ECB.
Susan O'Keeffe (Labour)
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One of those two institutions had its credit ratings downgraded significantly at the beginning of September. Were you present at the meeting that took place over a ... the first weekend in September, at which representatives of two major banks were present to discuss what to do with this institution because it was in crisis?
Ciarán Lynch (Cork South Central, Labour)
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.... specific now. Just be general.
Susan O'Keeffe (Labour)
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Okay. At that meeting, there's evidence given by Mr. Boucher over several pages, but he says "we [looked] at, from memory, ... a quantum of around ... €4 billion and we fed back to the regulator that we weren't comfortable, that wasn't an accurate picture of what was needed" and then he went on to say:
to be honest, I felt we should get out of the building ... "We can't support these people. [We] don't have enough information to enable us."
That figure of around €4 billion, if we go back then to the Vol. 2, the one ... page 45, the minute that we discussed earlier, that this institution could be €2 billion after capital. This meeting had taken place some weeks before this one so, again, there's obviously something going on, that lots of people are saying, "There are big problems here." This is what I can only conclude from reading these.
Susan O'Keeffe (Labour)
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No, sorry, Mr. Grimes, these are people meeting in your offices talking about it, not the market.
Susan O'Keeffe (Labour)
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I'm talking here about your own ... you guys.
Susan O'Keeffe (Labour)
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But the regulator-----
Susan O'Keeffe (Labour)
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But the regulator's side would have surely reported this to the bank's side in the ... no?
Susan O'Keeffe (Labour)
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Okay. So, going back again if I may, in my last bit of time, go back to the minute that we discussed earlier. How ... what other way can you describe what that means? If institution X could be €2 billion after capital and institution Y could be €8 and a half billion after ... what does that actually mean then, if it's not suggesting insolvency? What does it actually mean?
Susan O'Keeffe (Labour)
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No, I understand that, Mr. Grimes, because you said that earlier, but the point is, what do those figures mean then?
Ciarán Lynch (Cork South Central, Labour)
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And it's not your minute either. I appreciate that.
Ciarán Lynch (Cork South Central, Labour)
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Final question, Senator.
Susan O'Keeffe (Labour)
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Do you then ... finally, do you believe that the banks, all of them, were solvent on that night when that guarantee was agreed by all the people sitting round at that table? And was the ... can you recall whether the NTMA was present at any of those meetings in Government Buildings that night?
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Senator.
Susan O'Keeffe (Labour)
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There's two parts.
Susan O'Keeffe (Labour)
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Sorry, say again, Mr. Grimes?
Susan O'Keeffe (Labour)
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Were the banks solvent, in your view?
Ciarán Lynch (Cork South Central, Labour)
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Deputy Murphy. Deputy, ten minutes.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you, Mr. Grimes. You're very welcome. You mentioned Lehman Brothers earlier on and I was just wondering is it fair to say that the Irish authorities - the Department of Finance, the Central Bank, the Financial Regulator - did not anticipate the fall of Lehman Brothers or a Lehman-style crisis?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. But then, in your opening statement, you say that, from early 2008, the domestic standing group was increasingly active in crisis management preparations, especially in discussions on the legislative changes necessary for nationalising a bank and on the circumstances in which a guarantee of all bank liabilities would be appropriate. So, the possibility of a system-wide guarantee was already there, regardless of what might happen to Lehman Brothers, or a bank of such a size?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And is it fair to say then that, having those discussions in February 2008, that crisis management is at an advanced stage, or is it just preparation? Are we in discussions, or are we actually actively working to manage a crisis that could be coming?
Mr. Tony Grimes:
No, it was contingency planning at that stage, but I think it had moved beyond it to some extent. I mean, we already had the Northern Rock episode in September 2007. We had the liquidity issues at the end of 2007 also, over the end of the year, so we'd moved beyond the stage of thinking it could never happen. It was into, I think, a realisation that we'd better be prepared in case and that a lot of the discussions around that time had that in mind. So I think we felt it wasn't a purely academic exercise at that stage and there was ... there was a possibility that at some stage we would have to make a call.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. You'd had a simulation at the end of 2007 and so now, in early 2008, we've moved from simulations and exercises into actual possible management of a crisis coming?
Eoghan Murphy (Dublin South East, Fine Gael)
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So then, in relation to March 2008, we heard evidence from Mr. Hurley last week about the green jersey agenda. Are you familiar with that?
Mr. Tony Grimes:
Only indirectly again, but I would have been present at meetings with some of the banks at a time when the Irish banks, as a group, were under stress in liquidity terms and, as happened elsewhere, I think, there would have been a view that, in the light of those circumstances and in the light of circumstances in which the money market, the euro area money market, was becoming increasingly sort of nationalised and segmented; that, from a financial stability point of view, it wouldn't make sense if Irish banks were to pull their lines with each other.
Eoghan Murphy (Dublin South East, Fine Gael)
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So where did the Central-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. I'm just curious though as to where the Central Bank and the regulator got the authority to approach Irish financial institutions in secret to ask them to provide each other with funding support in order to maintain the financial stability of the system?
Eoghan Murphy (Dublin South East, Fine Gael)
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But did the domestic standing group know about this?
Eoghan Murphy (Dublin South East, Fine Gael)
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Did the board of the Central Bank know about it?
Eoghan Murphy (Dublin South East, Fine Gael)
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Did the European Central Bank know about it?
Eoghan Murphy (Dublin South East, Fine Gael)
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And the Department of Finance, did they know about it?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. In March 2008, it's about five months since one of the pillar banks has cut funding off from another bank, so was the green jersey agenda designed to support a particular institution?
Eoghan Murphy (Dublin South East, Fine Gael)
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So, if it wasn't-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. So, if it wasn't concerning an individual institution, then the concern was a systemic risk?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And yet you're not aware if the domestic standing group, or the Department of Finance, or the board of the Central Bank knew that this approach was being made?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And was this green jersey agenda ignored by the banks?
Mr. Tony Grimes:
I think that we ... that we run the risk of actually overstating it because it wasn't really a policy decision, it was more something that you know emerged in the course of the frequent meetings that we would have had with all the individual institutions. And in the context of the exploration by them, and us, of what measures might be put ... be put in place to make the liquidity situation somewhat better.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Was it an approach in the context of discussions in February 2008 in the ... of the circumstances in which a guarantee of all bank liabilities might be necessary?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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But this action being taken, then, in March 2008, are we already in the type of crisis that you say that the domestic standing group is preparing for?
Eoghan Murphy (Dublin South East, Fine Gael)
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2008.
Mr. Tony Grimes:
It's becoming closer but still, I think, very much in the liquidity sphere. For example, you'll recall that on 17 March 2008 there was a major issue with regard to the share price of one bank. But, I mean ... and that led ... or that was part of a worldwide decline, I think, in bank share prices. But it was a very serious issue. Again, I think some of the pressures eased to some extent after that but that was the context. Certainly, from then on, a heightened, you know, awareness of the possibility of some systemic issue became apparent.
Eoghan Murphy (Dublin South East, Fine Gael)
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But prior to that share price issue in the middle of March, you were already considering the possible nationalisation of an Irish bank or a system-wide guarantee to all liabilities?
Eoghan Murphy (Dublin South East, Fine Gael)
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What does that mean?
Eoghan Murphy (Dublin South East, Fine Gael)
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You had a fear for the system?
Eoghan Murphy (Dublin South East, Fine Gael)
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And at this point had you already discussed, in the domestic standing group, the idea of a domino effect? Or a contagion effect?
Eoghan Murphy (Dublin South East, Fine Gael)
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Implicit right the way through?
Eoghan Murphy (Dublin South East, Fine Gael)
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That one bank could-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----bring the other banks down?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. So, should concerns ... these concerns and these actions, taken in March 2008, they were clearly expressed and acted upon by the Central Bank and the Financial Regulator ... should they have prompted emergency intervention by the Government in one or more of the Irish banks at the time?
Eoghan Murphy (Dublin South East, Fine Gael)
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Despite ... I beg your pardon ... despite the drop in shares-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----from, I think, €50 billion to €30 billion in Irish share prices in a period of six months up until March 2008?
Eoghan Murphy (Dublin South East, Fine Gael)
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That wasn't seen as a significant enough fall in share prices?
Mr. Tony Grimes:
I think the fall ... it was important, of course, but, in relative terms, it was higher than what was recorded elsewhere but not by a huge extent. If you look at the figures about the fall in financial stocks at the time, it's clear that the share prices of the Irish banks ... the fall was higher by not by ... yes, but not by a massive amount.
Eoghan Murphy (Dublin South East, Fine Gael)
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But should the Government have intervened in March 2008 with a bank or with the system formally, as opposed to what the Central Bank Governor and the Financial Regulator were doing themselves?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you. I'll move on from that, if I may.
Ciarán Lynch (Cork South Central, Labour)
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Final question, Deputy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Just, then, looking back at the ... the rapid growth in the bank balance sheets between 2003 and 2008 up to that period. I mean, should the Central Bank have been more active in assessing the asset quality of the banks?
Mr. Tony Grimes:
Again, I was not directly involved in my role. With hindsight, I think that ... yes ... the growth looks extremely high. I heard Mr. Hurley saying, you know ... and described the actions the Central Bank took in terms of ... yes, the capital increase that was put in place by the regulator, the expectation that interest rates, you know, were about to rise and so on. With hindsight, I think some intervention would have been good but it wasn't seen in that way at the time. And, as I say again, I wasn't directly involved at that time.
Ciarán Lynch (Cork South Central, Labour)
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A brief supplementary, if you want.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair. In a simulation exercise in 2007, did fear over the asset qualities in the banks come up on the Central Bank side?
Eoghan Murphy (Dublin South East, Fine Gael)
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Were you involved in that simulation?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And so when we see the concerns raised by the Central Bank after the simulation about asset quality, is that you raising those concerns?
Mr. Tony Grimes:
We were certainly concerned about them. The simulation exercise, though, was a little different in that it looked specifically at what would happen if one individual bank were to fail or close to failure. We never tested, you know, a systemic issue. I think that conditioned to some extent ... yes ... the lessons that we took from the experience.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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There are just one or two matters I want to deal with before we take a break, Mr. Grimes, and one follows on from Deputy Murphy's question in that the ... it would appear that clear concerns were expressed by the regulator about the risk of asset growth at some banks before the onset of the crises. Now, you're indicating there that the Central Bank-FSAI examined the possibility or were looking at this. Did ... at any time did you see that a systematic ... a systemic problem?
Ciarán Lynch (Cork South Central, Labour)
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In the period that you were taking to Deputy Murphy about.
Ciarán Lynch (Cork South Central, Labour)
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And then onwards, yes, yes.
Ciarán Lynch (Cork South Central, Labour)
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No, I come back to 2003-2008 now. Not after that.
Ciarán Lynch (Cork South Central, Labour)
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But to your knowledge, did the CBFSAI examine the possibility that this might be a systemic problem?
Ciarán Lynch (Cork South Central, Labour)
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Systemic risks?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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So were you, at that time, more focused upon the ... the quality of lending or on the asset base of the banks?
Mr. Tony Grimes:
I just have to speak personally here because I took up my role in 2007 - towards the end of, you know, 2007 - at which stage the bulk of my focus was on the ... the liquidity situation of the banking system. And it was, I think, way earlier than that that the issues to which you refer arose.
Ciarán Lynch (Cork South Central, Labour)
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Okay, can I just in general ... just to get a feel ... maybe to get a feel for this before we return after the break. Now what I want to do is just ... describe, maybe if you could, for us the separate roles played by you, as the deputy governor of the bank ... of the Central Bank of Ireland and that which Mr. Patrick Neary, the director of the Financial Regulator, during this period?
Mr. Tony Grimes:
Well, they were entirely separate. He was the head of the regulatory office. He was the head of all the supervision teams that actually inspected the banks. So, in reality, the regulatory office was looking after the well-being and the supervision of the individual banking institutions. My role was on the central banking side. Obviously, financial stability was one of the issues I was concerned with. But we were also concerned with the whole range of the ... of the other services that the Central Bank was actually involved with on the payment side, on the liquidity management side and on behalf of the ECB and so on, on production of notes and-----
Ciarán Lynch (Cork South Central, Labour)
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If there were a structural map of the ... of the whole entire structure of the Central Bank, the regulator's office, the Governor and the board, was the regulator's office in a subordinated position to the Governor and the board?
Mr. Tony Grimes:
No. I would not have thought so. Okay, he regulate ... or ... he reported directly to the authority of the regulator and via that to the Minister, I think. Now, there was this overarching role of the CBFSAI, which was a very unusual construct, but it meant that the chair and the CEO of the regulator ... yes, they also sat on the board of the bank, but there was no reporting structure as such, okay, between the regulator's office and the Governor.
Ciarán Lynch (Cork South Central, Labour)
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Okay. So was the regulator, by your interpretation of that, Mr. Grimes, a complete and separate entity from the Governor and board of this ... of the overall authority?
Mr. Tony Grimes:
Well, it's hard to say that ... that it was, you know, entirely separate, in that ... as I say, both the chair and the CEO sat on the board of the Central Bank to ensure some form of co-ordination between the two sides of the organisation, but in terms of formal reporting lines and ... and the authority they had to implement our mandate, which was, you know, effectively, the supervision and the regulation of individual financial institutions.
Ciarán Lynch (Cork South Central, Labour)
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Okay. You were acting Governor for a period of time ... and I just want to clear this up, because Mr. Neary is coming in on Thursday and the committee wants to get a proper idea as to what the structural map of the CBFSAI was, following the 2003 Act. When you were Governor ... or acting Governor, were ... was the regulator in any way accountable to you in your broad role as Governor of the Central Bank or the chairperson of the board?
Ciarán Lynch (Cork South Central, Labour)
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In what sense, at all ... in ... if ... if any sense whatsoever?
Ciarán Lynch (Cork South Central, Labour)
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And you were chair of the board?
Ciarán Lynch (Cork South Central, Labour)
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So being chair of the board-----
Ciarán Lynch (Cork South Central, Labour)
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And could the board at any time direct the office of the Financial Regulator in the terms of taking an action or to ask it to give account for its actions?
Ciarán Lynch (Cork South Central, Labour)
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But could ... under its structure ... there's articles of association-----
Ciarán Lynch (Cork South Central, Labour)
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-----the legislation underpinning it.
Ciarán Lynch (Cork South Central, Labour)
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Could that have done those two things?
Ciarán Lynch (Cork South Central, Labour)
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I'm trying to clarify between practice and legislation and rules. Whether a practice was taken or not, what I'm trying to find is the underpinning factor of this. Was the office of the regulator accountable to the board and could it have been directed by the board? Whether it was done in practice or not, we can discuss later.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Okay. I'm now proposing that we would break until 11.30 a.m. In doing so, I just want to remind the witness that once he begins giving evidence that he should not confer with any person other than his legal team in relation to his evidence on matters that are being discussed before the committee today. With that in mind, I now suspend the meeting until 11.30 a.m., and remind the witness that they are still under oath until we resume. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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Back in quorum, I'm going to bring the meeting back into public session. Is that agreed? And in doing so, I now invite Deputy John Paul Phelan. Deputy, you have ten minutes for questioning.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. Good morning, Mr. Grimes. In the period after August 2007, while you were director general and deputy governor of the Central Bank, what was your ... what direct responsibilities did you have in those roles for specific areas within the Central Bank?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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When you say financial stability - indirectly - what do-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Did ... in evidence last week with Mr. Hurley, reference was made to the memorandum of understanding between the Central Bank and the Financial Regulator in terms of responsibilities, and it emerged that responsibility for overall financial stability rested with the Central Bank. In that capacity were there any decisions taken or discussions had in the year, we'll say, the 12-month period in the run up to September 2008 with regard to financial stability and overall responsibility for that?
Mr. Tony Grimes:
Well, I would say it happened continuously, in the sense that we were continuously directing, with the regulator side of course, as joint members of the DSG we were continuously acting with officials from the Department, we were involved in contingency planning, we were interacting with the ECB in terms of our liquidity provision.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, again, my time is slightly limited. I'm really trying to find out were there any specific decisions that were taken in that period, which would fit into the realm of overall financial stability, in light of the provision that existed in that memorandum?
Mr. Tony Grimes:
I would say it was mainly in relation to the 2007 financial stability report, which was published in 2007, and more specifically also in the degree of contingency planning in the financial stability sphere, and that started really from the autumn of 2007 and continued right through the period.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I refer then specifically to that period? I think in answer to a question from the Chairman at the start of the meeting you said that "We had been tracking very carefully ... for more than one year" the liquidity position of all banks.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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When you say "we" I assume you mean the Central Bank. Who, whom within the Cental Bank was doing that tracking? How many people; what were their levels; and were they specifically dedicated to that task for the 12-month period in question?
Mr. Tony Grimes:
They were, but it was part of their normal operation. I said earlier, I think, also that we in the Central Bank are responsible for the provision of liquidity to domestic institutions on behalf of the ECB. So that involved, you know, auctions of liquidity in normal times every week and every month. As the crisis enveloped it was much more frequent in practice. So the people in what we call our financial markets department, of which I was head at one stage, they would have been in constant touch with each of the banks. Not just the six domestic banks we are speaking of here, but the 30 or 40 banks which were-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In operation.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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How many people were in that section, can you remember? Do you know?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, and in terms of those ten to 12 people then who were specifically looking at this area of tracking liquidity, did any reservations emerge, or any information come to light in the course of that 12-month period that indicated that it was more than a liquidity issue that faced the Irish banks in the fall of 2008?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Why not?
Mr. Tony Grimes:
Because in that particular part of the bank, our role was to monitor and interact with the Central Bank in terms of providing the liquidity to the individual banks. Now, we would obviously have seen that the levels of liquidity provided on behalf of the ECB was growing, okay, in the light of the wider liquidity crisis, affecting both Irish banks and the Eurosystem as a whole. So from ... towards the end of 2007 the level of support that banks were receiving from the ECB was growing.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But there was no stage that alarm bells rang that it was more than a liquidity-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----issue?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you view that now as a failing, with hindsight? Or how do you explain that subsequent to September 2008, in the early part of 2009 major cash injections had to be provided for all of the domestic banks to varying levels?
Mr. Tony Grimes:
Okay, well, I mean, I'd account for it by saying I think that, you know, the extent of the deterioration in the quality of the assets in quarters three and four of 2008 was extremely sharp, and that if you look at the data, even the decline, okay, you know, in the value of houses was modest enough until September 2008, about 10% or 12%. The decline in the value of commercial property; again, until the summer of 2008, was modest enough. It was really in that period in the second half of 2008 that the decline occurred, and I think reflecting the deterioration in the domestic economy here, but also the global economy.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you accept with hindsight or not that that was a substantial failing of the operation of the Central Bank at the time, and particularly with its overall responsibility for financial stability?
Mr. Tony Grimes:
I think that we took extremely seriously what we were looking at from the liquidity side. It clearly reflected there were tensions out there. The tensions were not unique to Ireland, but indicated, I think you're right in saying, more widely a perception that there was a serious issue with regard to commercial property in particular. I think you can have that in tension, okay, without it leading to the conclusion of insolvency.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But you don't accept any responsibility-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----for the subsequent developments?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask you briefly then what are your views with regard to the changes in the regulatory structure following on from the Central Bank Reform Act in 2010? And do you believe that the new structure will help-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----to prevent such a similar crisis happening in the future?
Mr. Tony Grimes:
I do. I think one of the faults of the system that we had in place was the splitting of responsibility between the two parts of the organisation. The information flows between the two sides, it did exist, but probably required one or the other to sort of initiate the information request. And the structure didn't really lend itself, I think, to very efficient management.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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My final question: in evidence last Thursday Mr. Hurley said the following: "In fact, in the course of the crisis, because we had a smaller banking system, and because we had developed very close links with the banks, particularly in the type of meetings I referred to earlier ... my assessment is we had far more information than some of the larger countries where the logistics were much more difficult." Firstly, I'd ask you do you agree with that statement from Mr. Hurley? And then, if you had access to much more information, how is it that you didn't appear to recognise the dangers that lay ahead at the end of 2008?
Mr. Tony Grimes:
Okay, let me answer that in two parts. The first part is we had a lot of information on the liquidity requirements of banks from interacting with them every week and every day, sometimes even hourly, on their requirements. So when I heard from other witnesses to the inquiry saying that we really didn't know the situation in terms of liquidity, in my view that's absolutely false. We did know. We had very precise information. But the second part of the question is: we had information on the liquidity requirements of banks. We did not have the information on how the funding they received from the ECB was part of their overall funding strategy.
In other words, we would not have known in terms of individual institutions what share of their funding was coming from ECB as opposed to from depositing institutions or from the markets, because that is a type of overview that came from the people who looked after the individual institutions and not from the point of view of the markets operations desk of the Central Bank.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Michael McGrath. Deputy, 20 ... ten minutes.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. You're very welcome, Mr. Grimes. Can I just start by asking you if there was a clear understanding of who had ultimate accountability for the financial stability of the financial system, and you believe that this was clearly defined and understood by both the Central Bank and the regulator?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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And that was clearly understood by both entities?
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you. You refer in your witness statement on page 11 that special resolution regime legislation as such was not available at the time, and this was in the crisis in September 2008. Can I ask you why special resolution legislation was not available at that stage, given that you said yourself contingency arrangements were being planned since early 2008?
Mr. Tony Grimes:
Yes, and in reviewing the minutes, actually, of the DSG in the earlier part of 2008, I ... yes, I noticed, you know, a reference there that the Central Bank had made a request that there would be some update with regard to the legislation on insolvency, and that was on the record, I think, far back in 2008. I think the issue of special regime was further discussed around the summer of 2008, and there was a relatively clear and strong view from the Department, I think on the advice of the lawyers there that, one, there were technical and constitutional issues which made it not feasible to introduce such a regime-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. But can I ask the Central Bank's position? Did the Central Bank recommend to the-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----Department of Finance that special resolution legislation be prepared?
Michael McGrath (Cork South Central, Fianna Fail)
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And that was conveyed to the Department of Finance?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. And what did you make of the fact that at the end of September '08 it would appear that there wasn't resolution legislation in place, and you believe if it was ready that the Government would have had greater options as to what they may have decided to do?
Mr. Tony Grimes:
Deputy, I think it would have actually increased the options, but having been part of the discussions on the evening I'm not really sure it would have made a difference on the night. But certainly it would have ... in the week or so leading up, you know, to the crisis it would have been one additional measure that might have been considered.
Michael McGrath (Cork South Central, Fianna Fail)
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I suppose the point is, Mr. Grimes, that in September 2007 we had hundreds of people queuing on the streets of Dublin to get their cash out of Northern Rock, and this was a full year before the crisis hit Ireland as such, and the main banks. And so the question that I think a lot of people would want to know is, why the Central Bank and the Department of Finance were not more prepared with legislation on the books that would have given them the option of taking banks into custody, for example, separating good assets from bad assets?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Mr. Tony Grimes:
We were governed by, I think, the advice we got that it wasn't something that could be easily introduced. I think it should have been perhaps, but ... and I also think that even when it was introduced in 2010 or so, it was less ambitious in scope than the SRRs that had been introduced elsewhere for constitutional reasons as well.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I just clarify, Mr. Grimes, did you say that the amount of emergency liquidity assistance at the end of September '08 was in the region of €40 billion?
Michael McGrath (Cork South Central, Fianna Fail)
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Normal ECB lending, but what type of lending what that? That wasn't ELA?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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And how much actual ELA was there in the Irish banking system at that time?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. So when you were making the arrangements for a €3 billion facility for Anglo Irish Bank, for example, that would have been ELA?
Michael McGrath (Cork South Central, Fianna Fail)
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There was no other ELA in the system-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----at that stage?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I just ask you to clarify in the course of the meetings you attended on the night of the guarantee decision, who raised the issue of subordinated debt being included in the guarantee, or did anyone raise it in your presence?
Michael McGrath (Cork South Central, Fianna Fail)
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By whom?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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You weren't in the room when the banks were present at any stage, were you?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I just take you to Vol. 1 page 56, Mr. Grimes, which is an extract from a meeting in July 2008 of the domestic standing group.
Michael McGrath (Cork South Central, Fianna Fail)
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And from the documentation before us it is clear that the domestic standing group discussed Seán Quinn's contracts for difference in Anglo. Can I ask you, Mr. Grimes, when did you become aware of Mr. Quinn's exposures to CFDs?
Michael McGrath (Cork South Central, Fianna Fail)
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Approximately?
Michael McGrath (Cork South Central, Fianna Fail)
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These meetings of the domestic standing group noted that Anglo was funding Mr. Quinn's margin calls. Can you recall when you became aware of that?
Michael McGrath (Cork South Central, Fianna Fail)
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Well, it's in the core booklet.
Michael McGrath (Cork South Central, Fianna Fail)
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Pages 56 and 57.
Michael McGrath (Cork South Central, Fianna Fail)
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And it relates to a meeting which you attended.
Michael McGrath (Cork South Central, Fianna Fail)
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And did you think it was appropriate for a bank to fund margin calls for the biggest investor in its own shares?
Michael McGrath (Cork South Central, Fianna Fail)
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Highly unusual. And would you have expressed that view at the meeting?
Michael McGrath (Cork South Central, Fianna Fail)
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And from the documentation before us, the domestic standing group was told the CEO of Anglo Irish Bank had very recently advised the Financial Regulator that there was a low point in the share price below which the bank could not continue to lend to Mr. Quinn. Did that cause concern at the meeting?
Michael McGrath (Cork South Central, Fianna Fail)
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It does.
Michael McGrath (Cork South Central, Fianna Fail)
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But can I ask you what was the position of the Central Bank with regard to the exposure that Seán Quinn had built up in Anglo Irish Bank in relation to contracts for difference in the summer of 2008? What was the Central Bank's position?
Mr. Tony Grimes:
I think the Central Bank regarded it mainly as, you know, a regulatory issue but we would have been, of course, interested in the implications it could have, both with the share price, you know, of Anglo and any further implications of that for liquidity to Anglo in the event that, you know, market confidence in Anglo were to decline further.
Michael McGrath (Cork South Central, Fianna Fail)
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And did you believe it was a significant issue potentially which could affect the stability of the financial system?
Michael McGrath (Cork South Central, Fianna Fail)
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And what action was the Central Bank taking at that time to address that concern which you have expressed there now?
Mr. Tony Grimes:
Well, the action at the time was really, you know, to stand behind the banks in liquidity terms and to do whatever was necessary. I mean, I don't think that we saw ourselves as having any other direct role, you know, in that period. I think that we regarded it mainly as a regulatory issue.
Michael McGrath (Cork South Central, Fianna Fail)
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I would put it to you, Mr. Grimes, that the concerns were documented at this meeting in July 2008 and there's a reference to this being:
a very sensitive market situation as if Quinn was unable to meet to his margin requirements and if the 'overhang' of Anglo shares were disposed of by the [contracts for difference] counterpart[s], ... the adverse impact on Anglo's share price could be very serious. However, it was very difficult to predict how the situation would be likely to unfold.
So, there was a high degree of knowledge at the Central Bank at this stage about the potential risks to the bank and indeed, the wider system as a result of the contracts for difference built up by Mr. Quinn and I'm asking you what actions were being taken at that stage to address the risks and the concerns which were clearly evident?
Mr. Tony Grimes:
Yes, to be clear, I think that we actually envisaged any direct actions would fall within the realm of the regulator. I mean, we felt it was actually outside our role but certainly we were aware of the fallout from anything that happened for the liquidity and for the stability of the system as a whole. So, it was more a sort of indirect concern than a direct concern and I think at that stage we felt that we, as a central bank, did not have any direct intervention mechanisms.
Michael McGrath (Cork South Central, Fianna Fail)
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So, just to clarify, there were no actions by the Central Bank, just to clarify.
Michael McGrath (Cork South Central, Fianna Fail)
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And were there actions by the Financial Regulator that you were aware of as a very senior person in the Central Bank?
Ciarán Lynch (Cork South Central, Labour)
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Senator Michael D'Arcy. Senator, ten minutes.
Michael D'Arcy (Fine Gael)
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Chair. Mr. Grimes, thank you for coming. Can I, first of all, clarify with you, please, because it is still a little bit unclear and Mr. Patrick Neary is in tomorrow, can you define exactly what is guidance in the definition of guidance that the CB ... Central Bank could provide for the Financial Regulator, in terms of financial stability? Is it instruction, is it direction, or what exactly is guidance, please?
Mr. Tony Grimes:
As far as I know, the understanding was that it would reflect, if it were ever used and thought to be necessary, a type of general instruction of concern that the Central Bank might have had about developments in individual banks or in the system as a whole that required the regulator to use its own intervention tools, so I would not have thought that the Central Bank would ever have issued a guidance to the regulator saying "you must, you know, increase some particular ratio by X per cent".
Mr. Tony Grimes:
I think the interpretation of when it would be used was in relation to principles and policy and there is, I guess, some debate about what that actually means in practice but in so far as I was aware at the time, I would have thought that a guidance would have reflected some general concerns that there were on behalf of the bank and that they would be conveyed to the regulatory authority in sufficient specificity, if you like, to enable the authority and the regulator to take it forward and to impose specific actions but that the recommendations for specific actions would not come from the bank but would come from the regulator's interpretation of what the guidance would be.
Michael D'Arcy (Fine Gael)
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I'm still not sure that's clear ... you said you could tell and to give an instruction but could you tell the regulator that there was a specific issue that was causing concern for the Central Bank, that the stability of the banking sector could be at risk? Could you tell them to do ... to make a particular action or not?
Mr. Tony Grimes:
Senator, I think it's a matter, you know, of legal interpretation here. The understanding on the Central Bank's side was that if ever a guidance had to be used, it would be expressed in very general terms but it would also be expressed in terms specific enough to leave it clear to the regulator what type of intervention would be required on their part to address the concern conveyed.
Michael D'Arcy (Fine Gael)
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I just want to explore this a little bit more, Chairman, please, so ... so what you've said is you could raise the matter with the regulator-----
Michael D'Arcy (Fine Gael)
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-----directly, raise the matter directly-----
Michael D'Arcy (Fine Gael)
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If a guidance was issued----
Michael D'Arcy (Fine Gael)
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-----there was a matter to be acted upon. Is that correct?
Michael D'Arcy (Fine Gael)
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Okay and then it was a matter for the regulator to act?
Michael D'Arcy (Fine Gael)
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That's your understanding?
Michael D'Arcy (Fine Gael)
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Okay, thank you. In terms of the information available to us from the Central Bank, did the Central Bank identify specific problems developing in the Irish economy? The Central Bank have the responsibility for financial stability and that requires it to communicate such problems to the Department of Finance. Do you believe the nature and severity of the problems were clearly communicated to the Department of Finance in an appropriate manner?
Michael D'Arcy (Fine Gael)
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The period from the Northern Rock issue to the guarantee.
Mr. Tony Grimes:
I would have thought so, to be honest ... I mean, the intensity of interaction between all, you know, of the authorities, was extremely high at that time. The DSG came into effect, I think, some time formally in either 2006 or in 2007 and from that time there was a lot of interaction between all the authorities, not just at the level of the DSG principals but, you know, down a layer or two, and I would have thought that between the formal communication as part of the DSG but also the very frequent informal contacts that there should have been no doubt at all at the level of the departments about the information that we had and the concerns that we had.
Michael D'Arcy (Fine Gael)
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You ... in the first page of your opening statement, I want to quote you:
For example, it did not collect [the Central Bank did not collect] information on the consolidated balance sheets of individual banks on which calculations of capital were based using the prudential framework. Also, the Central Bank did not examine the quality of bank assets; [that] was the role of the Financial Regulator.
Did the Central Bank have the consolidated data on the cumulative sectors, the statistics that were available per sector, per commercial real estate, per residential - was that information available to the Central Bank?
Mr. Tony Grimes:
As I understand it, the Central Bank had information on the sectoral analysis of lending but it was on the basis of the returns that were made by the banks operating within the State, not on a consolidated basis. Only the regulator collected consolidated information from the banks, i.e., the headquarters of the banks here plus their foreign subsidiaries.
Michael D'Arcy (Fine Gael)
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But you had the information in relation ... per sector? So, the commercial real estate sector -----
Michael D'Arcy (Fine Gael)
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Yes. And in terms of the ... the bank balance sheet growth from '01 to '08 for the main banks in the region ... year on year, 30% growth per annum, compound. And also the level of indebtedness of the ... the private sector in relation to GDP ratio. From the FSR reports and I'm ... I collated these figures, in 1995 the rate was 71% of GDP, for 2007 the rate of indebtedness ... personal indebtedness within the State in a 12-year period had reached a projected figure from the FSR report of '07 of 248% of GNP. That left the citizens of this country now the most indebted people within Europe. And you had... and you said a moment ago, Mr. Grimes, that you had the ... you had consolidated data per sector and prior to that I asked you about the-----
Ciarán Lynch (Cork South Central, Labour)
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If you allow time, Deputy, or Senator to allow time. What is your question?
Michael D'Arcy (Fine Gael)
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My question to you is: why did you not act in relation to the guidance for the Financial Regulator to act upon his powers when you saw those levels of growth? You identified them in the FSR reports year on year and there was no action taken by you ... and when I say you ... not you, individually, but your organisation.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Grimes.
Michael D'Arcy (Fine Gael)
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That's a bit of an understatement-----
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Senator. I'll have to allow time for a response.
Ciarán Lynch (Cork South Central, Labour)
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And if you want to get a question in, you'll have to allow it.
Mr. Tony Grimes:
I was not personally involved in any of the analysis, you know, at that time. I mean, the bulk of the increase in credit and indebtedness to which you refer took place, I think, in the period 2003 to 2007. I was working in a ... in a sort of entirely unrelated part of the bank in that period. So, I would've been generally aware, as a senior officer of the bank, I suppose, at the time but ... but not at the level of policy reaction.
Ciarán Lynch (Cork South Central, Labour)
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A brief supplementary.
Michael D'Arcy (Fine Gael)
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Mr. Grimes, did you ... did you participate in the FSR reports?
Mr. Tony Grimes:
As I said earlier, I participated only in the second half of the 2007 FSR. The FSR was largely in draft form in August 2007 when I took over. It was published in 2000 ... sorry ... in November of that year. The bulk of the drafting was done. There were nuances that occurred subsequently from a board meeting of the bank in September and a short meeting of the board in October but the bulk of the drafting was done earlier.
Ciarán Lynch (Cork South Central, Labour)
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Senator Barrett. Senator, you have ten minutes.
Sean Barrett (Independent)
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Thank you very much, Chairman, and welcome, Mr. Grimes. You state in your opening statement on page 5, in paragraph 3, ''with regard to money and capital flows within the euro area, the Central Bank could not have [been] intervened directly to control such flows''. Could it have intervened indirectly?
Mr. Tony Grimes:
Yes. I think, first of all, any direct intervention ... restriction of money and capital flows would have been entirely at odds with the single capital market and single money market that was set up in 1999 as part of monetary union. I'm ... in fact, it would have been entirely contrary to the ethos of that. So, no is the answer ... no direct intervention. If there was concern - as there was, because it was raised at the time in the FSRs about the degree to which some of the banks were funding externally - I think, if there was concern, it would have to have been addressed by restrictions addressed to the individual banks in terms of their funding ratios. But ... but that would be at a level of individual banks. It could not have been a general banning of capital flows.
Sean Barrett (Independent)
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Thank you. The core documents, Chairman. Vol. 1, page 4. There is a minute there, "Board discussions: 2006". Do we know what month that board discussion took place?
Sean Barrett (Independent)
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Because the second sentence says ''The risks to the property market and the very high component of economic growth accounted for by the construction sector together with the rapid rate of credit growth are increasingly problematic." So, the people at that meeting ... who was with you ... that was ... the Central Bank board knew that in June 2006, is that correct?
Sean Barrett (Independent)
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Thank you very much. Now the question that was raised with you by Deputy McGrath - the material that's on page 57 of the same volume. You recall, Chairman, this had to do with Anglo and the Quinn CFD purchase and so on. And that meeting was on 8 July 2008. I think that's about 12 weeks before the events of 29 September and attending ... you were ... you were listed as an attendee and representatives of the Central Bank, Financial Regulator, the Department ... two from the Department of Finance. What happened that report of the domestic group? Did it go through other people? Was it ... did ... was it actioned at any later stage?
Sean Barrett (Independent)
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Because is does, as I think as Deputy McGrath was saying, illustrate very important knowledge. But I'm trying to see ... did anything happen because, you know, this knowledge which was available in early July ... about the difficulties that Deputy McGrath elucidated and your replied to? What happened? Was this knowledge just left lying around the place or did ... was did people go on holidays in August, as they might? But, what were the results of ... of this very important information?
Mr. Tony Grimes:
Well, I think that ... my ... my recollection is that there was a lot of interaction between regulatory staff and, you know, Anglo Irish Bank at this stage. There was a lot of concern about how the overhang of the CFD positions would be resolved. But, from the Central Bank point of view, this ... we looked upon that directly as an issue of regulation. And it was primarily a matter for discussion between the regulator and the bank concerned. Having said that, as I said earlier, I think, we were concerned about the fallout from such an overhang for the liquidity ... that might occur and the need to maybe supplement liquidity available to that bank if it became-----
Sean Barrett (Independent)
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Because page 6 of the-----
Sean Barrett (Independent)
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Yes. If I may, page 6 of your statement has, as a duty of the Central Bank, to contribute "to the maintenance of financial stability both domestically and within the euro area". Was the ECB informed of the ... of the difficulties ... on these pages?
Sean Barrett (Independent)
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And could I take up finally ... page 101 of that document?
I think it's a Department of Finance document, is that right, written in January 2008?
Sean Barrett (Independent)
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It says "The authorities in Ireland have practiced constructive ambiguity regarding financial stability planning to date. For the future it would seem appropriate to maintain this approach." Would there not be a case for precision and clarity rather than constructive ambiguity?
Mr. Tony Grimes:
In my view, this, in a way, would go to the heart of the moral hazard issue with regard to ELA in that, traditionally, it has always been thought that central banks would never pre-commit to give ELA because if ... if it did, there was the risk that, you know, a bank would engage, you know, in a type of reckless activity and, you know, there was a feeling always - and it's not just here - that actually you would not want them to count on you if something went wrong. So ... so there was no pre-commitment here. It ... it was always entirely at the discretion of the local central bank. So, constructive ambiguity referred to that. It was to avoid the moral hazard issue that might arise.
Ciarán Lynch (Cork South Central, Labour)
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Two minutes there now, Senator.
Sean Barrett (Independent)
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Thank you, Chairman. How many staff were involved in the prudential regulation of banks during your time as Governor?
Sean Barrett (Independent)
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Thank you very much and thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Okay, the next questioner is Deputy Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat, a Chathaoirligh, agus fáilte roimh an tUasal Grimes. Can I ask you ... begin by asking you just what advice was sought by the Department of Finance in relation to the financial stability of the banking sector and/or individual financial institutions? And could you outline to the committee what meetings you participated in with any Government Department to understand the nature of those interactions during the period and what did you do?
Pearse Doherty (Donegal South West, Sinn Fein)
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Well in the ... not just in the-----
Pearse Doherty (Donegal South West, Sinn Fein)
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The financial stability reports ... or even the year before, was there meetings, was there interactions?
Mr. Tony Grimes:
Well, there were constant meetings to be honest. I mean, okay, we spoke, you know, to what the operation of the DSGs. They tended to meet extremely frequently at .. okay, at the level, you know, of principal, from time to time, but at the operational level as well ... so ... and also informally.
Pearse Doherty (Donegal South West, Sinn Fein)
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The question, sorry, Mr. Grimes, the question specifically is in relation to advice sought by the Department of Finance in relation to the financial stability of the banking sector or individual institutions so it's meetings in that regard that I'm interested in.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. And outside of the DSG, were there meetings with the Department of Finance or did the Department of Finance seek advice from the Central Bank in relation to the stability of the banking sector or in any individual banking ... bank in the State?
Mr. Tony Grimes:
I think once or twice it sought formal advice. I think there was a request to the regulator and the bank around the period of the guarantee to write to the Minister on the advice - and that's on the record - but, other than that, I would've thought that the frequency of the interaction constituted the information exchange.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, okay. Can I ask you in ... you've mentioned ... in your opening statement, on page 4, you mention the problems surrounding ELA. If I quote from your statement it says one of the ... one of the ... with the use of ELA, one of the issues with the "use of ELA is that its use required a floating charge on banks' assets that needed to be registered at the Companies Office. New legal instruments were introduced in 2007 to avoid this issue." So, what were those legal instruments and were they used?
Mr. Tony Grimes:
Yes, I mean, it's fairly technical but they were legal instruments and the banks ... we signed with the individual banks that allowed us to take good title to the types of collateral they would have offered. Often they would be ... it would be non-marketable instruments so you're ... so to take good title for those you required a particular legal structure and we had worked on that structure and, you know, they were extensively used over the following years.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. You also mention, in relation to ECB liquidity, that it reached €40 billion at the period of September 2008. Can you give us a breakdown of the ECB liquidity to Irish domestic banks and for international banks of that €40 billion?
Pearse Doherty (Donegal South West, Sinn Fein)
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So was there any liquidity extended to the non-domestic banks - the IFSC banks?
Mr. Tony Grimes:
Yes, of course. Sure. I mean, at one stage the liquidity extended to Irish banks was only a share of the total liquidity that the Central Bank extended to, you know ... to the system here. Often the share would've been 20% to 25% of the total, reflecting the importance of the foreign banks operating here who would use, yes, the Central Bank here as the source of their liquidity.
Pearse Doherty (Donegal South West, Sinn Fein)
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So when the ECB references the percentage of the entire liquidity that was available to ... at the Irish banking system as a percentage of the entire ECB that was available-----
Pearse Doherty (Donegal South West, Sinn Fein)
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And are you saying that 80% of that went to banks that were in the IFSC or non-domestic-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----on average?
Mr. Tony Grimes:
In more normal times it would be 80% or so to the non-Irish banks. That share would have varied of course as the crisis hit here ... and the non-Irish banks. But we had also issues with foreign banks who would not have been eligible to access ECB, you know, funding in their own jurisdictions, who might have had subsidiaries operating in Ireland, accessing funds through the subsidiaries here. And we were concerned about that because the impact of that was to raise the overall figure that had a profile and we were concerned about that.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Did the ECB ever express any concerns, or not, with the quality of assets that were being used as collateral for ECB liquidity purposes in the pre-guarantee period?
Mr. Tony Grimes:
They expressed concern but in general terms ... not specifically related to Ireland, in fact it's sort of ironic that just before the crisis, in September '08, there was a tightening of liquidity ... or a tightening of collateral conditions, you know, by the ECB, reflecting a general concern within the Eurosystem that the quality of assets it was being required to take was lower than it was comfortable with ... reflecting increasing risk that the Eurosystem, as a whole, had to take on.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, but it wasn't specific to Ireland?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. In your opening statement you say "The possible nationalisation of Anglo raised issues, both in terms of lack of an immediate legislative provision (although it could perhaps have been ready by the following weekend)". So, that's your evidence. Are you aware that that is contradicted by what Governor Hurley has said ... that the legislation was available and what's your view in relation to what he has said before the committee?
Mr. Tony Grimes:
Well, I don't think it contradicts it exactly. I mean, my understanding was that the legislation was very close to finalisation. Whether it was absolutely on the stocks on the night of the 29th I am not aware of but certainly the finalisation ... it had been worked upon for months, so ... so I wouldn't regard that as a serious difference.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. I want to go to page 45 of Vol. 2 of the evidence book. It's the minute of the meeting on 25 September 2008, which was referred to earlier on. And I just want to focus in on the bit where David, and I'm quoting, "D[avid] Doyle noted that Government would need a good idea of the potential loss exposure ... within Anglo and INBS - on some assumptions INBS could be 2bn after capital and Anglo could be 8½ [full stop]".
Ciarán Lynch (Cork South Central, Labour)
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Deputy, is that in the public-----
Pearse Doherty (Donegal South West, Sinn Fein)
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It's a public document. In relation to this here ... just in relation to the accuracy of that part of the minute, do you agree with it or do you disagree with it and can you outline to the committee, if you disagree with it, what part of it?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Mr. Tony Grimes:
I ... I didn't say the information that's here, so I've no way of knowing the source of this. But my conclusion was, from having attended the meeting, that ... I mean, if this had been said at the meeting I think it would have been a very notable piece of information for the meeting to absorb, and would undoubtedly have conditioned some of the policy reactions taken afterwards, in the light of that information, if that was our conclusion. It was not my understanding.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. So that's the point. I appreciate that it's not your minute. It is the minute of the meeting that you attended, and my question is, in your recollection, does that minute reflect what happened or what was said and, if not, what in your view was said that would best reflect what should be in that minute?
Mr. Tony Grimes:
Deputy, I don't recall. We were having so many meetings around that period. I'm ... I really have to rely on the minute that's here. But, as I say, in substance I did not take from the conclusion of the meeting that there was a clear and definitive outcome that this was, you know ... a conclusion that said, you know, two of the institutions which are mentioned here, were insolvent.
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Grimes, you mentioned earlier on that there was an issue, I think, or words to that effect, in relation to ... in relation to after capital or before capital, and that has been suggested to the committee before. Is that your view, or is it not your view, or do you have any view in relation to this?
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Deputy. Mr. Grimes, we acknowledge that these are not your minutes. Do you have minutes of this meeting? No meeting ... and were minutes kept by you of this meeting?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Can I confirm that ... were you acting Governor at this meeting, or not?
Ciarán Lynch (Cork South Central, Labour)
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Would you accept or not, that in ... you weren't acting Governor, is that what you-----?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So, you were present at the meeting, and did ... Mr. Hurley was not present at the meeting, so what capacity-----?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So, in what capacity were you there at the meeting?
Ciarán Lynch (Cork South Central, Labour)
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Did the Central Bank take minutes of the meeting?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Would you accept or not, that in ... during this period, and certainly over any significant period, that this would have been an extraordinary critical time for the State and for people in your career, and in your positions, this would have been a major ticket item in terms of your duties and roles as ... relating to the Central Bank?
Ciarán Lynch (Cork South Central, Labour)
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And, are you challenging the content of that minute this evening, to say that it's not accurate?
Ciarán Lynch (Cork South Central, Labour)
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I just want to clarify that.
Mr. Tony Grimes:
Yes. I'm saying, I think, that I regard the paragraph you refer to as sort of ambiguous, and that its message is not clear to me, and that the substance of the conclusion of the meeting, in my memory, was not in line with one interpretation of that paragraph, which is that the two institutions were not solvent. That is my understanding of the outcome of the meeting, that no clear message emerged from the meeting that this was the conclusion.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Senator MacSharry, Senator you have ten minutes.
Marc MacSharry (Fianna Fail)
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Thanks Chairman, and welcome, Mr. Grimes, and thanks very much for being here. We were talking earlier on about the issue to do with contracts for difference with Deputy McGrath, and you were saying that it certainly was a highly unusual situation and that, really, you felt that it was in the regulator's domain to take appropriate action. Is that a fair representation of-----
Marc MacSharry (Fianna Fail)
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Okay. Were you a director of the regulator, at any stage?
Marc MacSharry (Fianna Fail)
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Is it correct that six members of both boards are members of each, so that there's dual membership for six?
Marc MacSharry (Fianna Fail)
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Okay, so-----
Marc MacSharry (Fianna Fail)
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Okay. Just so I'm clear, and maybe I'm not, there are six of the regulatory authority-----
Marc MacSharry (Fianna Fail)
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On the Central Bank.
Marc MacSharry (Fianna Fail)
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Okay. Were you one of those?
Marc MacSharry (Fianna Fail)
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Were you-----
Marc MacSharry (Fianna Fail)
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Okay. What I'm trying to just get around here is that ... and it's come up a couple of times that, look, that was an issue for the regulator, this is an issue for the Central Bank. Was there any dual membership, so that people-----
Marc MacSharry (Fianna Fail)
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Okay. Were you ever one of those?
Marc MacSharry (Fianna Fail)
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Okay. And during that period, is it reasonable that you would have known what was going on in the regulator and the Central Bank?
Marc MacSharry (Fianna Fail)
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I understand that. Is it that things are kept secret from members of the board?
Marc MacSharry (Fianna Fail)
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I see. So, before your appointment in this dual role, where you were available to both, and were knowledgeable to both, and their activities, to the extent that board members would be made available ... other people had that kind of a role, did they?
Marc MacSharry (Fianna Fail)
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You were the very first?
Marc MacSharry (Fianna Fail)
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Okay, and what date did you assume that role?
Marc MacSharry (Fianna Fail)
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Okay. And just so ... so that we're clear, the domestic standing group that Deputy McGrath would have spoken about earlier that discussed the contracts for difference was that before that time?
Marc MacSharry (Fianna Fail)
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So, you were in this dual role-----
Marc MacSharry (Fianna Fail)
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-----at the time that the domestic standing group considered the issue of contracts for difference, which you told Deputy McGrath you felt was highly unusual, and that really it was a matter for the regulatory authority ... it was a regulatory issue, I think you said at the time, is that fair?
Marc MacSharry (Fianna Fail)
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Okay. So, what did they do?
Marc MacSharry (Fianna Fail)
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Well, you can take it as read that I want to get into them. It's whether these people let me.
Ciarán Lynch (Cork South Central, Labour)
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Sorry, the ... Deputy, it's the jurisdiction and the legislative basis of the State that will determine what questions which you can ask and can't ask, not any individual member of this committee. So please proceed.
Marc MacSharry (Fianna Fail)
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Well, he's looking for guidance I think.
Ciarán Lynch (Cork South Central, Labour)
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Well he is, and ... and he's given it to himself, because he knows what the guidance is.
Marc MacSharry (Fianna Fail)
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Okay, so is it the position that the regulator took actions that are secret because of Article 33AK?
Ciarán Lynch (Cork South Central, Labour)
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That's a leading question, please.
Ciarán Lynch (Cork South Central, Labour)
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No, even "or not", it is ... it's leading. No matter what way you dress it up and throw it out, it's leading. Move on.
Marc MacSharry (Fianna Fail)
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I think it's a fair question.
Ciarán Lynch (Cork South Central, Labour)
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Well, you can-----
Marc MacSharry (Fianna Fail)
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And I would ask that the Chairman take further guidance on it. What we are asking here is-----
Ciarán Lynch (Cork South Central, Labour)
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I have, and I have been told. It is a leading question.
Marc MacSharry (Fianna Fail)
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What we are asking here ... Chairman, I am talking to yourself; I am not asking anybody. Okay. What we are asking here is that at a time that Mr. Grimes had a dual role with both the regulator and the Central Bank, he made reference earlier on to actions being taken, when asked directly by Deputy McGrath what actions were taken, he answered, "Well, it was a regulatory issue." So I have asked what regulatory actions were taken in that regard, and he's saying, "Well, I don't know whether you want to get into it." Now I'd like to get into it. So what's the legal basis that we can't?
Ciarán Lynch (Cork South Central, Labour)
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I do not think that's what actually he said, but you can clarify that: were there actions taken by the regulator in respect to these matters?
Mr. Tony Grimes:
Well, yes, the actions that I am aware of were the interactions between the regulator staff and the staff of the bank concerned. And here were actions taken within the bank concerned that, ultimately, led to the resolution of this but also to additional issues that I am not, you know, at liberty, I think, to talk about.
Marc MacSharry (Fianna Fail)
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Just so we're clear, you're not at liberty to tell us the actions the regulator took?
Marc MacSharry (Fianna Fail)
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Does that mean that they had a chat with the staff? Would that, would have been or...
Ciarán Lynch (Cork South Central, Labour)
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Sorry, I'll have to interject here. You are now moving into issues that are specific to the section that was ... that I read at the opening of this address. Mr. Grimes is very aware of this and, in fairness to Mr. Grimes, with whatever testimony he gave, he cannot end up in a situation where he's incriminating himself by breaching that section. You cannot and you know that, I know that, everyone knows that.
Marc MacSharry (Fianna Fail)
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I'm learning it. I mightn't know it.
Ciarán Lynch (Cork South Central, Labour)
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Well, there was plenty of training on this for the committee members.
Marc MacSharry (Fianna Fail)
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Just so that we are clear, we can't talk about the actions the regulator took because of section 33AK. Is that the case?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Grimes can't talk about it because you cannot ask somebody to commit a legal offence. It's a legal offence if Mr. Grimes ... We can go round in circles ...
Marc MacSharry (Fianna Fail)
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It is specifically covered then, is it?
Ciarán Lynch (Cork South Central, Labour)
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Yes, and you know this. Senator, there was plenty of back briefing on this when we actually met in private session around this, so please don't play this out as if it's something new. And you're using your time, and, in fairness, you're deliberately now creating a situation where you are asking the witness in front of us to create a felony. That cannot be permitted. Please drive on.
Marc MacSharry (Fianna Fail)
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Well, we might have a private session on this.
Ciarán Lynch (Cork South Central, Labour)
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We can have as much private time as you can, but the legal advice is very clear on this so move on, Senator, please.
Marc MacSharry (Fianna Fail)
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I know the advice is clear, maybe the ... it's the interpretation that-----
Ciarán Lynch (Cork South Central, Labour)
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It is the committee's legal advice. The committee has its own legal team. If you wish to challenge that and go away and get your own independent legal advice and feed it into us, I'd be quite happy to hear it, but I am sure they'd give you the same legal advice. So please move on.
Marc MacSharry (Fianna Fail)
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What I'd say Chairman-----
Ciarán Lynch (Cork South Central, Labour)
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Move on.
Marc MacSharry (Fianna Fail)
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With the best of respect to your good self-----
Ciarán Lynch (Cork South Central, Labour)
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Move on.
Marc MacSharry (Fianna Fail)
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------ is if a genuine question arises and it's put to you, there's no point in getting annoyed about it. Okay.
Ciarán Lynch (Cork South Central, Labour)
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Move on.
Marc MacSharry (Fianna Fail)
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At the end of the day, we are all here------
Ciarán Lynch (Cork South Central, Labour)
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We are indeed and we're operating within a legislative framework which we all must honour. So please move on.
Marc MacSharry (Fianna Fail)
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That's grand. What I'll say for the record is that we might just have a brief couple of words, as we did several times last week to facilitate you and your queries, for me and my queries.
Ciarán Lynch (Cork South Central, Labour)
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And I said we'll accommodate that, Senator.
Ciarán Lynch (Cork South Central, Labour)
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So you're going to extinguish your time and we still ... the same spot.
Marc MacSharry (Fianna Fail)
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Very good. Well, you might allow me some time as you do for Deputy Doherty and others when these things arise-----
Ciarán Lynch (Cork South Central, Labour)
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I will if ... and I allowed it for your colleague, Deputy McGrath, this morning and he certainly went over time because he was pursuing a good line of questioning so I'd ask you now to.
Marc MacSharry (Fianna Fail)
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Very good. Well, as you know, Chairman, none of us are here on a party political basis. We're all colleagues I thought.
Ciarán Lynch (Cork South Central, Labour)
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Please, please. Move on.
Marc MacSharry (Fianna Fail)
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Can you just confirm that a contract for difference for want of a better expression is a spread bet on stock? And can I also ask, in terms of the principles-based regulation, which was adopted both here and nationally, did it in effect amount - and I asked this last week - was it tantamount to self-regulation?
Mr. Tony Grimes:
I think that is to go too far, Senator, but there was a huge degree of reliance, I think, on the boards and the managements of the banks concerned, and that the focus of the regulatory activity, as I understand it, was on process, rather than looking at underlying activities and looking at fundamental risks. So there was a refocusing, I think, under the principles-based regulation. There was process, maybe at the expense of substance.
Marc MacSharry (Fianna Fail)
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Do you feel that the interconnectivity between the regulator and the Central Bank was sufficient or insufficient?
Mr. Tony Grimes:
I think in the crisis period it turned out to be sufficient. I think there was a lot of contact between, you know, the senior management of both sides of the organisation. So in general, you know, it was sufficient but we were still operating within the divisions of labour that had flowed from the 2003 Act, which meant that each side regarded its focus as rather exclusive: one side on the prudential regulation of financial institutions and the Central Bank side of the broader financial stability issues
Marc MacSharry (Fianna Fail)
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Just finally, Mr. Hurley, last week, there was much talk and it was touched on earlier on by some others here, about the issue of no bank should fail ... that we should not have another Lehmans, I think, was the wording that certain witnesses have used. When questioning last week Mr. Hurley, it was somewhat frustrating in the sense that it was difficult to ascertain who said this, at what point did somebody make the determination, and in what office of authority they may have been. Mr. Hurley wasn't in a position to provide that clarity and I wonder are you in a position to say who first mentioned it to you, or like so many others, was it something that just happened?
Marc MacSharry (Fianna Fail)
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Because Mr. Hurley did not mention anything about a constraint or section 33AK.
Ciarán Lynch (Cork South Central, Labour)
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He did.
Marc MacSharry (Fianna Fail)
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Not on this issue he didn't, Chairman, and this would be a very significant point. This would be a significant point. If this question is answerable, and we just cannot have the answer because of that, that in itself is important evidence.
Marc MacSharry (Fianna Fail)
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At what point in time did this general understanding become generally accepted?
Ciarán Lynch (Cork South Central, Labour)
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I just want to return to one issue there and that's, Mr. Grimes, to ask you can you comment upon or advise on regulator checks on structured large and medium exposed facilities by Irish financial institutions in the years leading up to 2008?
Ciarán Lynch (Cork South Central, Labour)
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There is no reference; it's just in general to the documentation we have received. What I would be asking you to do is to comment upon or advise on regulator checks on structured large and medium exposure facilities by Irish financial institutions in the years leading up to 2008. Have you any comment to offer in that regard?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And that's with regard to restructure of large and medium facilities, yes?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. I am going to move towards wrapping matters up. I just want to deal with just one item and that's going back to the minutes that we were ... A number of matters I will take them in the wrap-up after I bring in the leads. On that minute that we discussed earlier and following the line of questioning from Deputy McGrath and from Senator MacSharry as well, there would be one consistent issue or maybe I can put it to you - is there a consistent issue with regard to the content of both those documents that relate to the stability of the Irish State? These are not regulatory matters but are actually stability issues.
Would you see them, or accept them, as being stability issues?
Mr. Tony Grimes:
I do, in the sense that by the time that meeting was held - I think it was held on 26 September. I mean, the stability issues for the State were emerging. I mean, all around us it was ... and at the end of a period after Lehmans when so many banks, globally, had failed, there was a huge amount of tension. So, when that meeting was held, it was definitely in the context of, you know, a financial stability issue and, you know, the minute refers, in the final paragraph, I think, to the various options that were on the table. So that's the context in which the meeting was held and that's the context in which my memory of the meeting was formulated.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy Higgins, five minutes.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Grimes, did the Financial Regulator have sufficient staff and resources, in your view, to carry out the regulator's responsibilities?
Mr. Tony Grimes:
I wouldn't have thought so. Certainly, if you judge by the resources which are now actually made available, both in the reconstituted bank but also globally, I think that, if you have a handful of people looking after the two or three major banks in the country, it clearly was not sufficient. It might have been in a very principles-based environment but even then I doubt it, it wasn't-----
Joe Higgins (Dublin West, Socialist Party)
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Yes, Mr. Grimes, evidence before the committee would say that there was a three-person team in the regulator's office responsible for Bank of Ireland and Anglo Irish Banks together and another three-person team responsible for Allied Irish Banks and IL and P. Considering that the auditors of those banks told us that, in one case, there was up to 200 staff working on the audit of Allied Irish Banks, was that, or not, just a question of a shortage of resources, or was it a pathetic inadequacy of resources?
Joe Higgins (Dublin West, Socialist Party)
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And did that feature at the Central Bank board in ... leading up to 2006, 2007?
Joe Higgins (Dublin West, Socialist Party)
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Mr. Grimes, our evidence book shows that there were generally at least six members of the financial regulatory board also on the board of the Central Bank ... of the 12, so half or more of the board of the Central Bank were also in the Financial Regulator. Are you telling me that, in 2003, 2004, 2005 and 2006, that it wasn't a major subject of discussion on the board, the amount of resources available?
Joe Higgins (Dublin West, Socialist Party)
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Mr. Grimes, you attended two meetings on the night of the guarantee. Were you at the meeting where the, according to Governor Hurley's evidence, the Taoiseach went around the room to see if everybody there was in agreement with the guarantee. Were you at that portion of the meeting?
Mr. Tony Grimes:
I'm not absolutely certain I was at that. I was certainly at the initial meeting where all the parties were around the table and there was an initial exchange of views on options, which included the guarantee and nationalisation, and it was an exchange of views around the table on that. After that, there was a meeting with the banks that I did not participate in and that went on for a number of hours. There was another plenary session after that, with the banks absent, and I'm not 100% sure if I was at that.
Joe Higgins (Dublin West, Socialist Party)
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Do you remember, or did it happen at the meeting you were at, that the Taoiseach went around the room and asked if there were any dissenters to the idea of a guarantee?
Joe Higgins (Dublin West, Socialist Party)
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Were there any dissenters?
Joe Higgins (Dublin West, Socialist Party)
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Was the Minister for Finance present at that meeting?
Joe Higgins (Dublin West, Socialist Party)
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Thank you. Mr. Grimes, you said to Senator O'Keeffe that there was no evidence that the banks were insolvent on the night of the guarantee. Can I ask you by which ... which definition of "insolvency" were you ... had you in mind when you made that statement?
Mr. Tony Grimes:
I think that you can be ... look at the very formal definition of insolvency in regulatory terms: did they breach the regulatory ratios? It's clear that they didn't. A wider look at insolvency would be much more forward looking and ... but even then, as I said earlier, it was unclear. There were certainly risks there of insolvency for one or two institutions but you had to take into account, I think, a lot of factors in making a judgment on insolvency, including collateral, including the buffers available for the banks, including the declines in asset prices, which actually occurred in a very serious way subsequent to that meeting, so it's a very delicate judgment to make and the judgment that I made was that they're probably not insolvent at that stage.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman. Could I refer again, Chairman, to Vol. 1, page 57? It's a domestic standing group committee meeting of 8 July '08 which, Mr. Grimes, you attended on behalf of the Central Bank and it relates to the Quinn Group. It says:
Consideration was also required given the exposure of the Irish banking system and the Irish economy to the Quinn Group and the impact on investor sentiment towards Ireland of any deterioration in its financial position of the possible need to refinance its bond holding. The current bond holders were largely US insurance firms and had no domestic interest.
And it looks ... the company were due to post a loss published the end of October. So, the question I suppose I wanted to ask you was, on the night of the guarantee, was the Quinn Group a factor in guaranteeing Anglo Irish Bank?
Kieran O'Donnell (Limerick City, Fine Gael)
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And that ... do you remember that particular issue coming up at the domestic standing group and what was the context in which it was brought up? Do you remember that?
Mr. Tony Grimes:
Yes, in general terms, I'm aware of the difficulties caused by the CFD and the need to sort of unwind them and the risks that, if the shares were released suddenly to the market, that would create a very serious risk and that it could, you know, ultimately undermine further confidence in Anglo and hence the need for the bank to intervene further in providing liquidity. All those were certainly-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And was the Central Bank supportive of the unwinding process that unfolded?
Kieran O'Donnell (Limerick City, Fine Gael)
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Would you regard it as a stability issue for the Central Bank?
Kieran O'Donnell (Limerick City, Fine Gael)
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You would have seen ... there could have been a stability issue?
Kieran O'Donnell (Limerick City, Fine Gael)
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And would you-----
Kieran O'Donnell (Limerick City, Fine Gael)
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You were consulted by the Financial Regulator in the type of process that was put in place to unwind the shares?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, and the ... the final question I want to ask was, we spoke earlier, and when I asked you about, you said one institution that the level of discounts the ECB was applying to loans that were being provided as security for funding was very very high. A very high hair shirt you called it at the time-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Haircut. What did I, hair ... hair shirt, haircut.
Ciarán Lynch (Cork South Central, Labour)
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Deputy, move on.
Kieran O'Donnell (Limerick City, Fine Gael)
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I presume Chairman, like everyone else, I get a bit of extra time, thank you Chairman. I think I'm too much of a gentleman, Chairman. Can I go back and say that, did it apply to any other institution that they were getting that level of discounts?
Mr. Tony Grimes:
As I said earlier, Deputy, the level of haircut was not specific to the institution. It was specific to the mix of assets they offered. So if some other institution had offered the same mix of assets in line with the existing ECB policy they would have been subject to the haircut, the same haircut.
Kieran O'Donnell (Limerick City, Fine Gael)
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The question I suppose I'm asking was, did it apply to any other financial institution in Ireland?
Mr. Tony Grimes:
Did the same degree of haircut? At time ... at that time, because of the institution concerned, it would not have had the same ... the same range of other assets as other banks. And, of course, the haircut was dependent. In other words, if a bank has a large share of retail mortgages, the haircut on retail mortgages was significantly less than it would be on commercial sort of loans-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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And the final thing then, would you have been aware at the time that, we have seen correspondence here last week from the Financial Regulator to another institution where they were unable to raise any money from the ECB or any interbank funding, would you have been aware of that at the time? That you had one institution that was not able to raise money on either the interbank market or the ECB market as early as 8 March of '08?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well I suppose the question is-----
Ciarán Lynch (Cork South Central, Labour)
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The last question.
Kieran O'Donnell (Limerick City, Fine Gael)
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The last question really is, when you had an institution like that, which could not raise money on the interbank market or the ECB, would that have set off red lights in terms of how the Central Bank would have viewed liquidity for that bank?
Mr. Tony Grimes:
I think the answer is that we had red lights from many institutions from time to time. I wasn't aware of that particular instance because sometimes, the collateral they bring to market can vary, as they get more collateral into ECB-conformable styles. So the fact that they wouldn't have enough collateral at a point in time doesn't mean that, a few weeks down the road, they couldn't convert other assets into a format that would become ECB-compatible.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. I just want to tidy up some very quick matters and then I'm going to bring matters to a conclusion, Mr. Grimes. You said that you were in, on the night of the guarantee, you were in an ante-room with Mr. McDonagh from the NTMA for a period of time, yes? Did you discuss what the business of the evening's ... or course of events were going to be with Mr. McDonagh at any time during that engagement or what did you discuss with him?
Ciarán Lynch (Cork South Central, Labour)
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What time of the evening was that approximately?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Just going back to Senator O'Keeffe's question earlier, where there was a meeting in the first weekend in September to discuss one financial institution, which was in the process of being downgraded. And then, following on from Mr. Boucher's testimony in regard to that, were you at that meeting or not?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Boucher, you refer to here.
Ciarán Lynch (Cork South Central, Labour)
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I think it was the first week ... its the first weekend in September.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Were you the Governor at that time?
Ciarán Lynch (Cork South Central, Labour)
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And, so what ... this was an emergency meeting at that weekend to discuss one institution which had received a significant downgrading and it's your recollection to the committee today that you weren't aware of that and that you had no hand, part, act or role in that meeting.
Ciarán Lynch (Cork South Central, Labour)
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And were you aware of even the meeting itself? Were you aware of it, as Governor?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Okay. Just finally, I just want you to comment upon the adequacy of loan loss provisions and capital adequacy positions of the Irish financial institutions up to 2008. What we see here is the annual report of the, its going to come up on the screens any second now, its the ... it's the Governor's foreword. And down in the corner of the page it says, the financial crisis was of course inspected like others, but it goes on to say then:
However, Irish banks [were negligible] have negligible exposure to the sub-prime sector and they remain relatively healthy by the standard measures of capital, profitability and asset quality. This has been confirmed by the stress testing exercises [that] we have carried out by the banks.
Can you talk about your role in all of that? Why would the ... what were you doing that would have made the Governor actually make that statement?
Ciarán Lynch (Cork South Central, Labour)
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Yes, sorry. 2008. It's the Governor's foreword, of the Governor's ... its the annual report in 2007, and it's ... it goes on for a number of pages. It's signed by John Hurley, Governor. But can I ask you what, what role were you doing that would've assisted the Governor and his report to have made such a statement?
Ciarán Lynch (Cork South Central, Labour)
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It's the annual report for 2007.
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. Tony Grimes:
I suppose I would have been aware of the analysis that had been conducted in the stress test. I think that we subsequently became aware they were not as stressful or methodologically as sound as we had hoped. So, I would have to say that I didn't disagree with the assessment at the time.
Ciarán Lynch (Cork South Central, Labour)
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Okay, and do you have anything further to add?
Ciarán Lynch (Cork South Central, Labour)
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I'm going to bring matters to a conclusion so and in doing so, I would like to thank Mr. Grimes for his participation here today and for his positive engagement with the inquiry. The witness is now excused and I'm proposing to suspend the meeting until 2.30 p.m., when we will hear from the further witnesses from Central Bank of Ireland. And as we now are in private session, I can just excuse the witness and accommodate Senator MacSharry's request.
Ciarán Lynch (Cork South Central, Labour)
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I now call the committee back into public session. Is that agreed? Agreed. We now commence with session 2 of today's public hearings with Ms Mary Burke, Central Bank of Ireland IFSRA. The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I remind members and those in the public Gallery to ensure that their mobile devices are switched off? Today we continue our hearings with the Central Bank of Ireland and the Financial Regulator. At our first session this afternoon we will hear from Ms Mary Burke, a senior official at the Central Bank IFSRA. Later this afternoon we will hear from another Central Bank IFSRA witness, Mr. Con Horan.
Mary Burke joined the Central Bank of Ireland in 1984 and has worked in financial services regulation and supervision since 1998 across various industry sectors. In May 2006, she was appointed to the position of head of banking supervision at the Financial Regulator. She is currently head of prudential policy at the Central Bank, a position she has held since 2010. Ms Burke, you're very welcome and I would also like to acknowledge that you are accompanied today by your legal representative, Mr. Niall Michelle.
Before I hear from you this afternoon and the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect to their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry and, therefore, the utmost caution should be taken not to prejudice those proceedings.
In addition, there are particular obligations of professional secrecy on officers of the Central Bank in respect of confidential information they have come across in the course of their duties. This stems from European and Irish law, including section 33AK of the Central Bank Act 1942. The banking inquiry also has obligations of professional secrecy in terms of some of the information which has been provided to it by the Central Bank. These obligations have been taken into account by the committee and will affect the questions asked and the answers which can lawfully be given in today's proceedings. In particular, it will mean that some information can be dealt with in a summary or aggregate basis only such that individual institutions will not be identified.
Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witness has been directed to attend this 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 affirmation to you.
Ciarán Lynch (Cork South Central, Labour)
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So once again ... thank you very much, Ms Burke, for being before the committee this afternoon and can I invite you to make your opening comments, please?
Ms Mary Burke:
Thank you, Chairman. And good afternoon to members of the joint committee. I have, as requested, submitted a written statement to the inquiry under two broad categories of themes on which I have been directed to give evidence: regulatory, supervisory and Government; and banking.
For the purposes of this statement and in the interest of time, therefore, I propose to focus on particular aspects of my commentary on the regulatory and supervisory themes. It may also assist the committee if I clarify again that my personal knowledge of, and involvement with, those themes dates from my appointment to the head of banking supervision department in May 2006. It may further save time if I reiterate that while I may take issue with some of the fine detail of the respective Honohan and Nyberg reports, I accept generally the thrust of the findings contained in them. As with the commentary I have already provided to the inquiry in writing, the commentary I will now give is necessarily generalised, given the constraints already mentioned by you, Chairman, and, in particular, the strict non-disclosure requirements to which I am subject by virtue of section 33AK of the Central Bank Acts.
My opening commentary briefly centres on five issues which are as follows: IFSRA's regulatory approach and philosophy; the regulatory and supervisory toolkit; effectiveness of regulation and supervision; any relationship between macroeconomic policy and prudential policy; and prudential policy itself.
In terms of regulatory approach and philosophy, the regulatory regime implemented by IFSRA was positioned as principles-based. The approach to regulation appeared to me to be broadly similar to that previously applied by the Central Bank and did not represent a significant shift in prudential regulation or supervision. From my perspective, the focus on defining it as principles-based seemed driven by a desire to brand the organisation and its strategy rather than any fundamental change in approach per se, beyond the changes associated with consumer protection. As articulated at the time, principles-based regulation placed an emphasis on seeking to require regulated entities themselves to abide by good governance and on the responsibilities of the boards in management of such institutions to have, and maintain in place, appropriate governance as well as controls and risk management measures in order to appropriately manage their institutions.
However, principles-based regulation was not without rules. The cornerstones of banking regulation in May 2006, the point at which I was transferred to BSD, were the capital adequacy directive, the Central Bank Acts and the building societies Acts. A key document supporting the regulatory regime was the licensing and supervision standards. However, it should be noted that these standards were non-statutory and not enforceable as such. EU legislative initiatives also changed the regulatory landscape. The capital requirements directive became fully effective in on 1 January 2008. This was a complex framework which, amongst other things, facilitated the use of banks' internal models for the calculation of regulatory capital and mandated supervisory co-operation through colleges of supervisors, particularly in the context of capital decisions for EU banks and banking groups.
Since the emergence of the crisis in 2007, and given the scale of changes to the regulatory framework at international, EU and domestic level, it is only reasonable to accept, albeit with the benefit of hindsight, that the pre-existing regulatory regime, both domestically and internationally, was not fully appropriate in terms of the areas covered, the detail prescribed and the regulatory tools available. However, in my view, revision of the regulatory framework in and of itself is not, and would not, have been a panacea. In fact, given the nature of the issues we now know to have arisen in Irish banks, I would suggest that the regulatory powers available to IFSRA and the bank before it, were broadly sufficient, aside from those with respect to crisis management and resolution.
In my view, the issues were the strategic approach, and the willingness or otherwise, as well as the logistical wherewithal, or lack thereof, to use those powers to prescribe detailed rules or to challenge and intervene in a manner which would impact banks' business models. The strategy was, I believe, influenced by external factors, including international approaches to regulation and supervision, Government policy and its better regulation agenda, the promotion of Ireland as a financial services centre, industry influence and costs. The effectiveness of the regulatory regime is directly linked to the culture of the supervisory authority and the resources allocated to supervision. Unlike the regulatory framework, which is set out in legislation and published requirements, these are tangible aspects which are not necessarily visible and can be lost in statistics and in the prose of formal strategy documents and annual reports.
However, importantly in my view, a more onerous or prescriptive regulatory framework would, in and of itself, not necessarily have delivered a significantly different outcome if, as was the case, the supervisory resources, both in terms of staff numbers and specialist expertise, were not in place to monitor, challenge and enforce where compliance was not delivered. If there are insufficient people to do the work, the work simply cannot be done. In that regard, in 2006, BSD had an approved staff complement of only 53.5, with actual numbers averaging around 50, to supervise approximately 80 banks, 50 Irish-licensed and 30 EU branches. The level of resources, and the available specialist expertise, was not such as to be capable of delivering intrusive supervision, even in a business-as-usual mode of operation. Added to that, during my tenure in BSD, a business-as-usual scenario never in fact applied. Initially, there was the additional burden of implementing the CRD, and from August 2007, the crisis mounted with ever-increasing issues and problems heaped upon an already under-resourced and over-stretched department.
While an additional complement of three staff was agreed in 2007, my request for additional staff in May 2008, in the face of the financial crisis and the demands being placed upon the department, was effectively refused. A subsequent oral request that staff who had previously worked in BSD be re-assigned to the department was also rejected. It is difficult to convey the sheer scale of pressures management and staff in BSD were working under, particularly from autumn 2007 onwards. It was not a question of somehow multi-tasking: it was a question of dealing with an unrelenting onslaught of demands, with staff working unreasonably and unsustainably long days, and ultimately weeks, with no let-up. Resource constraints were such that IFSRA was unable, although required by the CRD, to conclude on ICAAP assessments for banks by the end of 2007. Throughout 2008, staff were, on an almost daily basis, being assigned additional responsibilities. Every new issue or new request was a priority on top of existing priorities, and issues with one institution were dealt with at the expense of issues with others. It was only immediately following the introduction of the Government guarantee that an increase of 20 in staff complement was agreed, and a separate department dealing with the Government-guaranteed banks was established. Over the following years, BSD was restructured on a number of occasions, with overall staff numbers for banking supervision increasing to approximately 140 approved in 2010. From 2010 onwards, supervision was also supported by the newly-established policy enforcement directorates.
In terms of the use of powers, even where regulations were sanctionable under the administrative sanctions process, in the period 2003 to the end of 2008, no prudential enforcement cases were pursued against credit institutions. I consider there were a number of factors in this: strategically, the authorities saw the sanctioning process as being primarily a tool in consumer protection; there were concerns regarding market reaction as the crisis mounted; and BSD did not have the resources to mount and pursue such cases. It was only as the resources issue started to be addressed, from 2009 onwards, that prudential enforcement cases became more routine.
In assessing the effectiveness of the supervisory regime, it is also important to understand the culture of the organisation and the different levels of industry engagement. IFSRA's relationship with banks appeared to me to operate at two levels: at a frontline level with BSD and at a senior executive level. Senior banking executives had direct contact with senior executives in IFSRA, often without the knowledge of, not to say engagement with, supervisory staff. Staff were regularly requested by senior IFSRA executives to review decisions or issues based on these discussions, or were told by contacts in banks that the issues had been or would be discussed with our senior executives. To me, at its most benign, this indicated a disconnect between BSD and senior IFSRA executives. I believe it also signalled a manifest lack of support for staff, undermining them in their dealings with banks.
In terms of any linkage between macro-economic and prudential policy, when working in BSD, I saw no evidence of a strong link in that regard. Given the demands placed on resources, as a result of the implementation of CRD, at some time prior to my arrival in BSD, a decision was taken that the department would cease to be actively involved in work relating to the financial stability review. However, this would have been in the knowledge that the relevant economic department within the Bank had access to data regarding individual banks. The financial stability committee was a formal structure for co-operation between IFSRA and the bank on financial stability-related issues. However, the main focus of meetings tended to be on drafting of economic articles and publications.
In terms of prudential policy, IFSRA took a number of policy measures aimed at strengthening the regulatory framework, including the introduction of liquidity requirements. In implementing options and discretions, under the CRD, it took a conservative approach to the exercise of discretions in relation to property-related lending. The proposals on all options and discretions were subject to a public consultation in October 2006. In addition, the Governor of the Central Bank confirmed that the proposals represented the best that could be achieved in the circumstances. While these interventions can now be seen to have been insufficient, it is worth noting that IFSRA was the only public authority which took measures to try and cool the property-related lending.
Further detail on these and other lines of inquiry is provided in my written statement. In addition, I have not dealt with the specifics of the regulatory framework and supervisory arrangements as I am aware the Central Bank has provided significant detail on these to the inquiry. Again, thank you for the opportunity to make this opening statement. I hope it is useful in providing additional background and context on the wider issues under consideration by the inquiry.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Ms Burke, for your opening statement, and if I can now ask Senator O'Keeffe to lead off the questions this afternoon. Senator, you have 15 minutes.
Susan O'Keeffe (Labour)
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Thank you, Chair. Ms Burke, at what point did you begin to be concerned about the liquidity of the Irish banking system?
Ms Mary Burke:
From late 2007, I think. We had introduced new liquidity requirements which took effect on 1 July, the first reporting date for that would have been at the end of September, it was quarterly reporting as we originally implemented it, but the concern was such regarding market reaction of circumstances of the time that from, I think it was 14 September, we required them to report to us weekly. So there were concerns at that point that we needed to be aware of what was happening in terms of bank liquidity, but there was no immediate urgent concern, it was just an escalation of monitoring.
Susan O'Keeffe (Labour)
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And so, as things escalated, do you recall a point at which it became more urgent than it had been previously?
Susan O'Keeffe (Labour)
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And then, if you like, we saw it all, if you like, unravel, unfold, right all the way through until September, in terms of banking and the banking system in the country. Is that a long time or a short time, that many months? Because it's very hard, I think, for members of the public, when we talk about millions and billions and loans, to know ... you know, if I have a crisis in my own bank, I know in an afternoon, I need some more money to pay my bills, but it seems, people might construe that as a long period of time. But perhaps it's not, perhaps it's short.
Ms Mary Burke:
Yes, I appreciate, I suppose, it does seem, as you say, if you compare it to your own personal finances, but obviously, that isn't what we were dealing with. In terms of my feeling, it was more urgent. I mean, we had had Northern Rock, we'd had Sachsen and we'd had Bear Stearns ... so, we were monitoring it, marketing conditions were certainly more erratic, might be a good phrase.
I wasn't at that stage conscious or thinking, you know, we were going to run out of liquidity, but the possibility for ... more so for an individual bank, I think, than ... I certainly never saw the system seizing up at that point.
Susan O'Keeffe (Labour)
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Is it the case that when banks are illiquid or there's a problem with liquidity that there is always a risk to solvency, or is that ... is that a fair or an unfair statement?
Ms Mary Burke:
I wouldn't say there's necessarily always a risk. I think it depends on the circumstances that would give rise to the liquidity. It is possible that those circumstances might be something relatively short-lived or something unexpected happens. The very fact that central banks around the globe provide a facility for emergency liquidity certainly implies that there is an expectation that it might happen and not that it was something that would ... obviously a central bank can't give emergency liquidity if the bank is insolvent, so the two are not necessarily one following from the other.
Susan O'Keeffe (Labour)
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In that period of time that we ... that you've outlined, sort of maybe April, May, June, do you recall whether then at that point the issue of solvency and liquidity were being talked about at the same time, being talked about together, or was the focus entirely and solely on liquidity?
Ms Mary Burke:
I don't recall that at that time we were talking about solvency. I certainly don't recall that I was talking about solvency or that people in banking supervision were talking about solvency. We were very much focused on liquidity. The weekly reporting had come in, as I said, late in the previous year. We were moving to ... we had started with daily calls with banks, we were now at intra ... you know, intra-day calls, talking through the position with their treasury teams. So our focus was very much on liquidity. Now, there was also some work being done in inspecting banks and looking at property-related lending, but ... and there were contingency plans being developed, given Northern Rock had collapsed. But I can't say that I was particularly engaged on that. Now, I will say, in terms of the meetings and the planning that was going on at the time, it was particularly chaotic and, from where I sat, it felt chaotic in terms of the amount of work we were trying to do. I was conscious that there were meetings on the seventh floor. Sorry for my use of the vernacular, that's our executive floor. I tended to be ... occasionally I get parachuted into a meeting because they need a second person there. You wouldn't be seeing that issue through. So, the extent to which I can create a sort of a narrative as to what was happening is influenced by the fact that I was sort of parachuted in and out of meetings. But at BSD level I was not particularly focused on solvency at that point.
Ciarán Lynch (Cork South Central, Labour)
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That's the banking supervision department.
Ciarán Lynch (Cork South Central, Labour)
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Yes, that's okay.
Ciarán Lynch (Cork South Central, Labour)
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That's all right, no, no, you're fine.
Susan O'Keeffe (Labour)
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We'll help you. So in 2006, when you became head of that department, the banking supervision department, was there enough evidence about ... at that point building up of the shortcomings in lending and other controls with banks that you could see systemic risks were building up, or not?
Ms Mary Burke:
I can't say that when I came in at that point I saw systemic risks building up. I ... when I came into BSD we were very focused ... I mean, obviously you have to do a sort of getting to know what the remit of what job you've been handed is. But we were very focused on trying to bring in the capital requirements directive. So we were quite forward looking, I suppose. I did not set about, at that point, to start revising all the current procedures, I was more in terms of developing procedures for the regime that was coming. But, no, I can't say that I say systemic risks building up at that time, nor can I say that anybody else that I was dealing with in the bank, either reporting to me or that I was reporting to, was indicating concerns about systemic risks.
Susan O'Keeffe (Labour)
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You say in your statement, written and verbal, that you were ... that there was a shortage of people ... actually, of resources for ... in your department to supervise and you talk about the expertise ... available specialist expertise is on page 5 of the written statement. There was not enough ... "available specialist expertise was not such as to be capable of delivering intrusive supervision". What do you mean by that term "intrusive supervision"?
Ms Mary Burke:
What I mean is the sort of supervision that I suppose we have now, the sort of supervision that comes with the SSM. It means people who are experts in lending, in treasury, in risk management being able to sit across the table from the banks and deal with them on their own level, on their terms, on the issues. We simply didn't have that sort of support system in place. Most, I think, regulatory authorities probably would have. I think the FSA at the time had a specialist support team, and we do have that sort of a team now. It's the sort of ... as banking ... it's an extremely complicated industry. It's not something that you can have a general knowledge of all of these things. You can have that knowledge but I don't think you can expect a supervisor with that level of general knowledge to argue the issue with the director of lending of an institution and tell him why you believe his policies and his decisions were the right ones or the wrong ones.
Susan O'Keeffe (Labour)
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Okay. And so you say that that has changed now but you did ask in 2008 for some additional resources. You didn't get them. Is that ... that's correct?
Susan O'Keeffe (Labour)
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You didn't get the extra people that you asked for. Do you know at what level in the bank that was refused? Was it at ... right ... up next ... or did it go all the way up to the board or the Governor or do you know?
Ms Mary Burke:
-----and perhaps that will help. The manpower planning in the Central Bank was such that some time around the first quarter you got an e-mail saying, you know, "Please fill up these various templates, setting out the staff you need and why". You would have had to submit that to the next level. You would have had to get the approval of your director and your director would have to endorse it. In this particular occasion, in fairness, my director did endorse that decision. That request, however, was made in the face of being told, while we were being asked to complete the forms, that there would be no increase in staff that year. Nonetheless, it didn't preclude the possibility, of course, that the staff could be reassigned. I certainly didn't believe that I could go through that year without asking for additional staff. I should say that in May '08 you would have been projecting staff for the next year because that's how early the budget process started. I did self-centre ... or self-censor, I beg your pardon, somewhat in what I asked for because, having worked in the organisation as long as I did, I knew the reaction to looking for large numbers. We were also in the throes of a review by Mazars and I felt very confident they would flag we were under-resourced. We'd also had Northern Rock and the FSA had produced a report, the name escapes me, but The Collapse of the Rock, or something to that effect, where they indicated that they had three staff supervising Northern Rock, supported by, as I said earlier, a specialist team, and they considered that inadequate for the supervision of a bank that required close and continuous scrutiny. So those were the sort of details I put into my supporting memo.
Susan O'Keeffe (Labour)
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But you don't know at what level ultimately it was turned down, do you?
Susan O'Keeffe (Labour)
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But it was turned down.
Susan O'Keeffe (Labour)
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Okay. Do you recall a document that was delivered by the banking supervision department called the "Outlook for Liquidity - Irish Domestic Institutions" on 10 September 2008? So this would have been right up in the crisis time?
Susan O'Keeffe (Labour)
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You've some, yes. Really rather than ask you the detail because you don't have it ... but, broadly speaking, do you recall how serious at that point, if you now ... you've come through from 2007 to April 2008, this is now mid-September 2008 ... how serious were things now for the banks that you examined in this document? And what ... I mean, we have some of it, some of it's been redacted.
Susan O'Keeffe (Labour)
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And what does that mean then when you guys say "very serious"? Is that a big red flag or ten red flags or how would you-----
Ms Mary Burke:
I'm not sure how many red flags makes it too many red flags, but certainly for two banks in particular we felt ... or two institutions rather, it was very serious, I think. Less so for the others. I'm not conscious that we did see obviously that if you have contagion in one it could spread. As I say, I haven't read that document, Deputy, in quite a number of years, so that's more my instinctive reaction.
Susan O'Keeffe (Labour)
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But you do recall that there were two and that it was very serious and that you would have been saying to anyone who asked ... when they asked about it-----
Ms Mary Burke:
Yes, I mean, at that point we had a regular committee or an internal committee chaired by the ... one of the deputy directors ... the deputy director general, actually, I think, there was only one, where we met with our people from the financial markets department on a regular basis, weekly at least, reviewing the liquidity. We would have been at that stage, I think, probably ringing each bank and talking to them a number of times during the course of the day as to what sort of access they had in the market, etc., and conscious that all banks ... we were trying to ensure they maximised their collateral for ECB purposes as well. So, it was very intensive monitoring of liquidity.
Susan O'Keeffe (Labour)
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And at point in terms of the ECB borrowing, would you have been recommending or did this fall into your bag that banks would be reducing their dependence on ECB, or do you remember?
Ms Mary Burke:
Well, certainly you would never have been encouraging a bank to be dependent on the ECB. What you would have been recognising, however, was that they needed to have, to the maximum extent possible, access to the ECB if they needed it. So you would have been encouraging banks to make sure that they had eligible collateral for Central Bank purposes, but I don't think any regulator would be saying if you have an alternative, you know, access to liquidity that you should be going to a central bank ... that wouldn't have been ... but at that point, we would have been looking for liquidity for banks wherever they could get it, to be quite honest.
Susan O'Keeffe (Labour)
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Wherever you could find it. So, so you wouldn't be ... how ... you wouldn't be comfortable if a number of your banks were all knocking on the ECB door. You wouldn't be thinking that was a good thing.
Susan O'Keeffe (Labour)
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Okay. On page 47 of Vol. 2 of Mary Burke's own documents, this is the letter that was written to you by the head of ... by the Bank of Ireland Group, and this is in relation to them being in breach of their limits, and they're replying to you, as your letter notes:
...Bank of Ireland exceeds the 200% limit in Real Estate, Renting and Business category. Bank of Ireland remains comfortable with the exposure in this category because of the diversification of the loan book, in terms of both lending type and geographical spread-----
Ciarán Lynch (Cork South Central, Labour)
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You need to be general on that there, Senator.
Susan O'Keeffe (Labour)
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I'm sorry. And then at the end they ask for, to be allowed to, that those limits should be reconsidered. So, I'm just wondering what would ... what was the view then of that kind of letter? And there were others, I know, but what was the dialogue going on here at that time between your department and the banks-----
Susan O'Keeffe (Labour)
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-----and their breaches?
Ms Mary Burke:
When I came to banking supervision, we did ... we had licensing and supervision standards and requirements. They were described as a guide. I knew they were unenforceable under the administrative sanctions procedure. When I came to the department, in terms of the banks this committee is looking at, any of them that breached those limits were already in breach of the limits at that point. In the case of one institution, it had exceeded the limits for almost a decade. In inquiring into the history to those limits, I understood that they had been, in effect, disapplied, in the sense of the particular sectors that the Central Bank had set out. If you look back ... I mean I obviously can't give you all of the details on this but there is a Central Bank board paper from 2003 that acknowledges that in the case of a particular institution, and, more generally, mortgage lending institutions, that the Central Bank had accepted the argument that there was diversification within sectors. That was ... I think that's an April '03 paper, which predates the establishment of the regulator, so it was very much a Central Bank position.
So, as I understood it, the Central Bank and the regulator, subsequently, was accepting the argument that there were ... was diversification within sectors. So if you take property, there's a difference between, I don't know, an office block in London and a semi-d in Midleton, to pick somewhere, so, you know, those ... that diversification was there. The sectors themselves were not prescribed in the licensing standards. We didn't say what we counted as a sector. What was used was ESCB, which ... sorry, European System of Central Banks statistical return, and various categories were the sectors that were used. Interestingly, personal lending, which would have included lending for residential mortgages, so if I bought a house, even to let as opposed to rent, or let as opposed to live in, that lending was excluded; that wasn't considered in looking at the sectoral limits.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much.
Ciarán Lynch (Cork South Central, Labour)
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Senator Sean Barrett. Senator, you've 15 minutes.
Sean Barrett (Independent)
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Thank you, Chairman, and welcome to Ms Burke. The memorandum of understanding between the CB and the FR, was there clarity in that division of labour between the two bodies?
Ms Mary Burke:
Again, I haven't looked at that memorandum in quite some time. From my perspective, I was clear. I know there has been quite an emphasis on perhaps ... it was, it was maybe a cumbersome arrangement. I will accept that, certainly not the most elegant arrangement one could have come up with. It was, however, the arrangement that was put in place. I felt I was clear. I certainly didn't feel there was any lack of clarity at that point.
Sean Barrett (Independent)
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Was it more or less the same people who used to do the job in ... before 2003, got a different administrative structure, wasn't that right, that there was about, I think in Honohan, there was about 30 people did prudence work beforehand on the Central Bank and it went to about 50, as you say? So there were no new people. So it's kind of strange that, to the outsider, that people who'd been doing the job suddenly saw themselves as different and the ... Did you come across that?
Ms Mary Burke:
I can't say that I felt it was radically different. I mean, come 1 May 2003, if you want to call it D-Day or whatever you want to call, I was in the same office that day as I was the previous day. I was not conscious of some radical change. I amn't in a position to say, because I don't have the details nor do I recall whether there was any increase in staff. The one difference there would have been was, I think, there was more focus on the consumer protection aspect.
Sean Barrett (Independent)
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Your 50 that you mentioned in your presentation to us, that's out of a staff of, what, 1,200 or something? Is there anything to assist the committee in why ... what we're investigating seemed to be so small overall in the allocation of staff in the organisation?
Ms Mary Burke:
I, well, I don't know, to be quite honest, Deputy. I mean you inherited ... when I went in there I inherited a certain number of staff. When I was asked to transfer to that department, it was described to me as being "in good shape"; I think was the phrase that was used, and we had recruited two senior staff who were experts in CRD and modelling. Unfortunately, we lost both of those staff to the private sector within 12 months, which added to the problem.
Sean Barrett (Independent)
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I'll come to that in a minute, if I may. The European aspects: was it the regulator's job to communicate with Frankfurt and the ECB, or how was that connection made?
Ms Mary Burke:
The regulator would not generally have dealt with the ECB, Senator. It was ... that was very much the Central Bank side. I don't know that anything precluded us from having a discussion with them, but, in my time, I don't recall ever having the need to, or being asked to sit on any ECB committee.
Sean Barrett (Independent)
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Thank you. Now, Senator O'Keeffe referred to the correspondence you had with the Bank of Ireland. Now, if ... I may refer to other correspondence in the Vol. 2, Mr. Chairman, and there's page 15, that's a communication to the EBS. There's page-----
Ciarán Lynch (Cork South Central, Labour)
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Just in general terms now, Senator.
Sean Barrett (Independent)
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Indeed. Thank you. Thank you, Chairman. And there's page 43, AIB. There's the reply from Bank of Ireland on page 47 that Senator O'Keeffe has referred to, and there's a ... there's another one to Bank of Ireland mortgage bank, page 57; and Ulster, page 61; and AIB, page 69. Only one bank seems to have replied to you. I see your letters out, and they're very comprehensive, telling you what you've found that concerns you. Are there letters of reply to all of that correspondence or are our files complete in the volume you have in your hand?
Sean Barrett (Independent)
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Okay, thank you.
Ms Mary Burke:
-----which was the general policy review of how we dealt with sectoral concentration limits, which was the issue that Senator O'Keeffe was referring to earlier. If you want to give me further page numbers, but I think some of the correspondence is ... they're dealing with different issues.
Sean Barrett (Independent)
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Yes. There's 57 and 61 and 69 and-----
Sean Barrett (Independent)
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-----and there are advices to them and no replies. That was what was interesting. Thank you.
Ms Mary Burke:
Okay, I can't speak to the one in February '06 because that was issued by the director general, Liam Barron, and I assume the replies would have been to him. The Central Bank, rather than the regulator was dealing with the system-wide stress test, so I presume there were replies but I just can't speak to them. In terms of the February '07 letter, which was our policy review of sectoral concentration limits, my understanding is there were replies received by us. I think something like nine banks replied. I haven't gone to check whether that was a reply to every single ... from every single bank. When you come to page 57, that is a letter from me, it's a standard letter. It would have issued to all mortgage lending institutions, and yes, I appreciate it refers to stress testing in there but that should not be confused with the system-wide stress test that I referred to earlier that was run by the Central Bank. This was guidance that we had in place where we expected banks to ... it was in the context of the affordability of a mortgage that a customer might take on, so every mortgage should have been stress test and the applicant assessed as to whether or not they could handle a 2% increase in the interest rate. So again, those are three separate issues and in the context of that letter on page 57, I would have expected no more than a reply to say yes, they were aware of it and they would comply.
Sean Barrett (Independent)
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Yes, and then the last ... 61 and 69, thank you for those, yes.
Ms Mary Burke:
Sixty-one is and, sorry, I'll get to 69, both of those are following up on a themed inspection that was done by the Financial Regulator in December '07 across a number of institutions looking at commercial property lending. So those letters are to individual institutions giving them findings of inspections. Again, it's not a policy ... it's not the wider policy review I spoke of earlier. It's not the system-wide stress test and it's not the individual mortgage stress test.
Ciarán Lynch (Cork South Central, Labour)
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The point, Ms Burke, is that the evidence books are examples and not the full set of letters that would have gone back and forth, I assume, yes?
Ciarán Lynch (Cork South Central, Labour)
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Senator?
Sean Barrett (Independent)
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So, thank you, Chairman and thanks again, Ms Burke. So, the Bank of Ireland reply that you spoke about with Senator O'Keeffe ... "we felt comfortable" ... I mean, that seems very strange to the outsider, you know, if-----
Ciarán Lynch (Cork South Central, Labour)
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Can we speak in general about institutions?
Sean Barrett (Independent)
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Yes. Just to ... I appreciate what Ms Burke was attempting in the letter but, I mean, would I say to a policeman "I feel comfortable driving down the middle of the road. You know, thank you for the advice that I should really be on the left". I mean, it is normal way to react to a regulator to say "Well, we feel comfortable doing something else"?
Ms Mary Burke:
One, this was not the Bank of Ireland's supervisory team taking up a particular issue and pushing Bank of Ireland on their view of it ... sorry, I beg your pardon, pushing the bank on their view of it. It was positioned as a general policy review, we were trying to do in the context of the requirements that were coming in CRD, which is Basel II. So in that context, perhaps the language they used as to whether they were comfortable or not might not be the language you would use normally but they were trying to explain to us the policy they had to inform our thinking on the policy we would develop. In terms of your analogy of a policeman, I suppose, what I'm saying is this wasn't the policeman role per se.
Sean Barrett (Independent)
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Was there a general reluctance to be regulated in the industry?
Sean Barrett (Independent)
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And as you say on your statement to us ... sorry, mine hasn't got page numbers. It's on page-----
Sean Barrett (Independent)
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It's on page 3, "it should be noted [the] standards were non-statutory and [therefore] not enforceable". Was it ever considered that we'd better get around to Leinster House and get some legislation, because if this is not enforceable, well, we couldn't have predicted what happened in 29 September 2008 but was a more organised system ever considered?
Ms Mary Burke:
Okay. I should say when I refer to the standards, I mean those particular ... that particular document called the "Licensing Standards and Requirements" or the other way around, that was not in itself enforceable under our administrative sanctions procedure. It could, with some work and probably some considerable rewriting, have been put in an enforceable position but it wasn't at that time. It was not imposed as a condition, for example, on banks' licences nor was it issued under any statutory power. Had IFSRA or the bank before it wanted to put some of those requirements and standards on an enforceable footing, I don't believe it would have been necessary to come to the Oireachtas to seek a legislative change.
Sean Barrett (Independent)
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You say, "I saw no evidence" of a strong link between macroeconomic and prudential policy. Is that still your view, reflecting back on that time?
Sean Barrett (Independent)
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And what difference would that have made if we had a better connection?
Ms Mary Burke:
I don't know whether it would have made any difference, Deputy. I mean, I can't, sort of, predict a past that didn't happen, if you follow me. However, had there been a closer connection and had the Central Bank, in terms of its financial stability role, been able to foresee the consequences that we've subsequently seen, then I would have thought they would have been in the position to effectively ... I mean, I appreciate the terminology and I think it's 33D, is again not the most elegant. It talks about guidance which the regulator had to follow in terms of policy but my view is that they could have effectively instructed us on policies, had we not seen fit to do so ourselves.
Sean Barrett (Independent)
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You've had to, I think, advise banks on loans-to-deposit ratios, sectoral concentration and even keeping better records. Would that be a reflection on some of the work you've done in your communications with banks?
Sean Barrett (Independent)
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And again, it's strange to the outsider that you as the regulator would have to say, "Look, you'd better keep accounts of the possible repayment capacities of these borrowers", and so on but you actually had to do that on occasions, is that correct? Recommend that they had better records on their lending?
Sean Barrett (Independent)
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And just before your signature on the last page, you noted that the role of external auditors, saying that "where such deficiencies are not flagged, auditors may be taken as indicating to the board and to [the] management that they have not identified any significant risk exposures, including in relation to property", and you go on to say, I would like a more root and branch approach to auditing. Was that something you'd like to deal with in regard to this committee?
Sean Barrett (Independent)
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I'm grateful for your observations. Do you think now that you'd see the role of external auditors ... I think it was mentioned this morning that some-----
Ciarán Lynch (Cork South Central, Labour)
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Time now, Senator.
Sean Barrett (Independent)
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-----some auditors had 200 staff and 20 partners in a bank, you had only three, I think, for Bank of Ireland and AIB combined, so would you see a role for external auditors and your office in the future? And thank you, Chairman, that is my last question.
Ms Mary Burke:
I do see a role for external auditors and for engagement between the regulator and external auditors but not in fundamentally changing the role of external auditors. The Central Bank ... Act 2013 has given us a more flexible framework for engaging with auditors regarding what they may uncover during their audit but I think banking regulation has moved on very significantly since the period that I was reviewing in my statement or commenting on in my statement. So, we have a more intrusive regime of supervision. The SSM is a game-changer, frankly, in terms of supervision of systemically important banks within the euro area, so I don't, personally, at this point see a need to change the role of auditors, certainly in the context of supervision if you wish to their role in some other respect, that is-----
Sean Barrett (Independent)
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How many staff do you have now?
Sean Barrett (Independent)
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Thank you very much.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Senator. If I could deal with a couple of matters before we move on to the next question? Just following the lead's engagement with you, Ms Burke, and maybe if you'd care to comment further on the balance of consumer versus prudential focus and adequate resources during your tenure?
Ms Mary Burke:
I can't actually remember the number of resources that were devoted to consumer protection and I have no issue with the consumer directorate ... or consumer protection directorate being adequately resourced. I think all directorates, both prudential and consumer, need to be adequately resourced. There was a particular focus in IFSRA post its establishment on the consumer protection area. I think, even in the documents you've given me, I chose to look back at the agendas of various authority meetings ... and, yes, there probably was a greater focus at that level at that time on consumer protection. But I think it needs to be borne in mind that IFSRA was a new authority, so there was a lot of agenda items to do with establishing that authority and budgeting, etc. And, perhaps, not unsurprisingly there was a particular focus on consumer protection at the time. But we do have to remember why IFSRA was set up. I suppose, it was in response to consumer protection issues.
Ciarán Lynch (Cork South Central, Labour)
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And looking back on that period when there was the two separate institutions under the ... following the 2003 Act, would you have a view now on how principles-based regulations actually worked and would you have a comment to make upon them?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And who in the IFRSA would have been the sort of ... engagement point with the banks on that regulation? What side of the IFRSA would have been the most engaging side on principles-based regulation? Who would have been monitoring that and who would have been having the discussions as to the interpretation of these principles?
Ms Mary Burke:
I'm not really sure that anybody would have been having discussions with the financial services industry on the ... sort of ... that strategic level. Each department dealt with the particular industry sectors and they supervised within the framework they were given. To the extent that there was a pressure, if that's what you are looking at, to have principles-based regulation, I think that probably came from industry. You have the Clearing House Group, the Government's better regulation agenda ... the industry panel was another part of the architecture of the IFSRA regime. And all of those would have pushed for principles-based regulation. But, in fairness, it was also an international theme of, you know, lesser regulation, for the want of a better term.
Ciarán Lynch (Cork South Central, Labour)
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On your opening statement in page 7, and I had to number mine as well just so we are on the same ... it is ... it is in the very last paragraph ... sorry, in the very last couple of sentences there in the last ... in the first paragraph. But just before I get into that, could you maybe explain, Ms Burke, that you ... this paragraph is talking about you looking for additional resources, additional staff and so forth. If the additional ... request for ... staff had been provided, what would they have been doing and what may have been done differently?
Ms Mary Burke:
I looked at that point for what I would have describe as a de minimusnumber. I was clear in my communication that I didn't believe it was the right number but I knew I had to get over various hurdles, including the process, the fact that Mazars were in reviewing, etc. So six was by no means the sort of numbers that would have made any ... I don't believe it would have made any fundamental difference to the outcome. What I had hoped to do was to establish dedicated two-person teams for each of the main banks. Now, given what we now know, that would still have been inadequate. And, as I say, I wasn't saying it was adequate. I ... at that point, I don't think it would have made any fundamental difference. My vision was that people would not be distracted from one bank to ... issues with another bank. But it still wouldn't have given us the resources to do intrusive supervision. And, I suppose, to the extent that I can take any comfort from things, I think Governor Honohan said in his own report that even if you had a brilliant idea at the end of '06, it was probably too late. I don't think my request for six staff was a brilliant idea but even, I think, if we had put in an army at that point, an awful lot of the damage was already done.
Ciarán Lynch (Cork South Central, Labour)
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And it just brings me to a final question now before I move onto the other questioners. At the very end of that paragraph, this is the response that you give to your request:
To me, at its most benign, this indicated a disconnect between the [banking supervisory ... supervision division ... or department] and senior IFSRA executives which, in practice, banks used to their advantage. I believe that [this is signalled or this] ... also signalled a manifest lack of support for staff, undermining them in their dealings with bank ...".
Could you talk to us some more about how maybe this gave the banks ... banks an advantage and also how you see that this may have been undermining them in their dealing with the banks?
Ms Mary Burke:
I think if you are the ... leading a team dealing with a bank, you should be the main point of contact with that bank. I don't have an issue with the fact that institutions might choose to escalate something. And if they choose to do so, I think the executive in the regulatory authority should engage with the supervisory staff and they should be part of informing that discussion. Personally, I believe they probably should be at the meetings or certainly some of them should be at the meetings. And that's very much the framework we have now. We have more directors, in fairness, so the responsibility at the executive level is more widely spread. And for want of a better term they are very much "embedded" in the supervisory regime. And that's my view as to how it should work. In terms of undermining staff - and I have had personal experience of this - if you are talking to a bank and they say to you, ''Oh well, we discussed that issue on the seventh floor'', you're immediately wrong footed. You're in a position where, one, you don't know whether they did discuss it, you don't know what they discussed, you don't know what the outcome is. And you're already very much already seen, from the bank's perspective, as somebody who's not in the loop.
Ciarán Lynch (Cork South Central, Labour)
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And does that imply-----
Ciarán Lynch (Cork South Central, Labour)
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And does that imply a disconnect in the structure that there was a two-tier structure ... or that there was a disconnect-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Senator D'Arcy. Senator, you have six minutes.
Michael D'Arcy (Fine Gael)
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Thank you, Chairman. Ms Burke, you're very welcome. Thank you for coming. One of the objectives of the Financial Regulator was the promotion of the financial services industry in Ireland. Did the objective get in the way of correct prudential supervision?
Ms Mary Burke:
I think, technically, our view on this is it probably wasn't an objective, per se, in law. I think that probably applied to the Central Bank but we obviously had to be conscious of any Central Bank objectives in the manner in which we went about our work. Yes, I think it did. I think it put a huge emphasis ... or a disproportionate emphasis is probably a better way of putting it ... on competitiveness ... on the level playing field. We had the added complications in two respects ... one, we had an International Financial Services Centre, where we were trying to attract in industry. We very much wanted to keep them on the same regulatory regime. There was one regime for banking in Ireland. We also had the difficulty that, under the European provisions regarding freedom of services, certain institutions operated here on a branch basis. And, therefore, in terms of prudential regulation, they were supervised by a different regulator. They were supervised by us for conduct of business but not for prudential. So, if we imposed particular rules or regulations on Irish licensed banks that weren't imposed on the passport ... the branches, then the issue of level playing field and competitiveness immediately raised its head. But it was a ... from looking back at documents - and I have had the dubious pleasure of doing so for coming in here in terms of my research - the term ''competitiveness'' and ''level playing field'' comes up repeatedly. It comes up in IFSRA's own strategy statements, it comes up in industry panel, it comes up in ... even the Minister, when he announced the consolidation ... proposals to consolidate financial services legislation - I think that was in '06 sometime - even that press release talks about how it is important to do so for competitiveness and recognising the ... we have such a large international banking presence here. So it was a repeated theme.
Michael D'Arcy (Fine Gael)
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And was the single regime a mistake?
Michael D'Arcy (Fine Gael)
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-----international and ... for both, yes.
Ms Mary Burke:
I don't know that it was a mistake. I certainly ... we still have one regime. I think we were probably unduly influenced by the fact that the single regime was ... we were focusing too much on what it might mean for the International Financial Services Centre. I'm not sure there would've been any dire consequences in the international sector had we been ... taken a different approach. But I mean, again, I can't predict the past in that sense.
Michael D'Arcy (Fine Gael)
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Can I ask you, Ms Burke, your ... your view in relation to guidance? You quoted the section 33 from the Central Bank in relation to guidance between the Central Bank and their role in financial stability.
Michael D'Arcy (Fine Gael)
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And it's something that I am trying to get a handle on.
Can I ask your view in relation to guidance, what guidance means? We've had former Governor Hurley in here previously and we had Mr. Grimes in this morning. Could you give the committee what your knowledge of guidance means, of guidance from the Central Bank board to IFSRA-----
Ciarán Lynch (Cork South Central, Labour)
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To Ms Burke now Senator to make time.
Ms Mary Burke:
My interpretation of that particular provision which is 33D, again, I mean it is an oddly phrased piece of legislation I have to admit but when something refers to guidelines, as to policies and principles that the authority is required to implement, I'd place the emphasis on the "required to implement", and my interpretation of that is, that in the context of financial stability, the Central Bank could effectively have required us to implement certain policies. I appreciate there are other interpretations of that, and different people have different opinions, but to the extent that there is a need to reconcile those different opinions I will have to leave that to the committee.
Michael D'Arcy (Fine Gael)
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Did you hear former Governor Hurley's view that this piece of legislation was theoretical?
Ciarán Lynch (Cork South Central, Labour)
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Governor Hurley was referencing the correspondence that came from Professor Honohan which had earlier said that it was theoretical, or it could have been interpreted as theoretical. Okay. Ms Burke.
Michael D'Arcy (Fine Gael)
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I am not sure if you had. You heard the quotation about ... from Governor, former Governor Hurley?
Michael D'Arcy (Fine Gael)
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Do you have an opinion upon his view that it was theoretical?
Ms Mary Burke:
I would look at it as ... in terms of what is written in the legislation. I'm not concerning myself with why it was put there or whether people ... what people thought they meant when they wrote it. I can only tell you what my view and opinion is on that piece, and it says what it says.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Senator. Deputy Doherty ten minutes - or six minutes.
Pearse Doherty (Donegal South West, Sinn Fein)
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A Chathaoirligh ... fáilte. Can I ask you first of all who was responsible for creating and updating the stress tests scenarios and why weren't they effective in predicting the banks' failures?
Ms Mary Burke:
Looking at the correspondence that you have provided me with, in 2004 the stress test seems to have been run out of banking supervision, because I can see a letter that was issued. As I say I didn't go there until May '06. By then it was a Central Bank responsibility to run the stress tests and my recollection of the presentation of the financial stability committee at the time was, it was described as an innovation in terms of '06, was that the responsibility had moved to the CBFSAI.
Pearse Doherty (Donegal South West, Sinn Fein)
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So you would have had no role in relation to the stress tests during your period as head of-----?
Ms Mary Burke:
Well I ... whether I would have had, had I been the deputy or have been the head when the stress tests were being done and formulated - I don't know. I certainly didn't at that point, it was all of those stresses and scenarios were developed before I got there and in '06 I think they were done in consultation with the IMF but I'm open to correction on that.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, but no consultation with your own division?
Pearse Doherty (Donegal South West, Sinn Fein)
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No, in '06 sorry.
Ms Mary Burke:
In '06 I still wasn't in the division at that point, I only went in in May '06 and I think those stress tests were done earlier in that year, certainly in terms of setting out the parameters and the scenarios. I think the correspondence, if I had to find it, issued in February and I think there's replies in April.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, okay. Can I ask you in relation to the inspection of commercial property lending exposures in December 2007 on the financial institutions? Can I ask you did this cover all of the financial institutions that were eventually guaranteed by the Irish State and what was the purpose of these inspections?
Ms Mary Burke:
I can't answer your first question Deputy - I don't know whether it covered all of them, it certainly covered some of them. I don't actually have the list to hand of the particular institutions. And the purpose of it was to look across the system to some degree, so it would have covered, it certainly I think it covered the key ones in terms of their management and controls around commercial property lending.
Pearse Doherty (Donegal South West, Sinn Fein)
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And what was the general findings in relation to the inspections?
Ms Mary Burke:
I think there was a common finding across the industry - if I could find the letter - but certainly I know the net worth statements, we felt, were not reliable and not consistently sought across the system and there was one other key finding. If someone could direct me to the particular-----
Pearse Doherty (Donegal South West, Sinn Fein)
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It's there on pages I think 62 on.
Pearse Doherty (Donegal South West, Sinn Fein)
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Vol. 2.
Pearse Doherty (Donegal South West, Sinn Fein)
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And can I ask you, Ms Burke, what did you do when you figured out that this is what was going on within the financial institutions, that there were issues, as you say, about property developers being able to withstand a downturn, exposures, no net-worth statements. What did you do, as head of banking supervision?
Ms Mary Burke:
We issued post-inspection letters to all of those institutions flagging them and flagging the issues both - there would have been individual issues within the institutions as well as the general broad themes across the institutions. It was also escalated both through the executive and to the authority and my recollection is the CEO report to the authority in early '08 flagged that there were issues across the system and one of the issues in particular that I recall was the issue of net worth statements and the extent to which they were validated by third parties. So it was escalated internally and the standard procedure for issuing letters to banks was followed.
Pearse Doherty (Donegal South West, Sinn Fein)
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But beyond writing to the banks and saying this ... these are the areas that we're concerned about, was there any other action taken?
Ms Mary Burke:
No there was not any other action taken. I mean if the action you're considering is something like an administrative sanction procedure, for example, in terms of inadequate internal controls, I've already said in my statement that we didn't have the resources to do that. The approach to administrative sanctions had been established in, I think it was probably '05, following the Act that was brought in. Each department went through the rules requirements, whatever ... that were sanctionable, and identified the priority they attached to them. I did it for the department I was in at the time, you graded them either one to five or A to D, something like that. In fairness, in banking supervision, that assessment was done. What was interesting was that even in '05 the opening paragraph of that policy noted that BSD was not in a position to have the resources to pursue an ASP case. That was the case in '05 Deputy, it was even more the case in '08.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. I want to go to, again Vol. 2 of the documents and it's page 86 and it's actually from ... it's from the "Misjudging Risk: Causes of the Systemic Banking Crises in Ireland", and then paragraph 4.3.5. It says however, it talks about:
In the same vein, inspection reports on Anglo during the Period (both in 2004 and 2007) correctly identified a number of more important problems in the bank at the time. However, there is no indication that these internal reports led to either a reconsideration of supervisory practices or serious consideration of regulatory action. Had the FR [Financial Regulator] rigorously enforced its recommendation to improve structures and processes, it is possible that Anglo would have grown its property lending in a more prudent manner.
And it goes on to say that that could also have had an impact on other banks' lending. Do you subscribe to this view that because the Financial Regulator, and the division which you were head of, did not follow up on these issues, that Anglo was allowed to - and I'm paraphrasing here in my view, I'm asking you for a view on this - that Anglo was allowed to continue to grow in a more imprudent manner?
Ciarán Lynch (Cork South Central, Labour)
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The question was made. Ms Burke.
Ms Mary Burke:
I can't speak for 2004, that was before my time. In terms of the 2007 inspection, yes issues were identified. I have already explained why we didn't take administrative sanctions procedures. I can't tell you whether, you know, that would have resulted in the outcome. It is clearly the view of, and I presume this is Mr. Nyberg's report, that it is a possible outcome. I'll accept it as a possible outcome. There are other possible outcomes. I mean if things had been different, Deputy, things would have been different but I can't tell you precisely in terms of a systemic failure, which particular levers, if we pulled them differently or did things differently, would have resulted in a fundamentally different outcome.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Just as a supervisor, Ms Burke, do you have any view on the quality of the Central Bank's stress tests, as to their quality?
Ciarán Lynch (Cork South Central, Labour)
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I'm on a big one myself.
Ms Mary Burke:
Well, I'll tell you, given the financial crisis that hit in '07 it was a fairly steep learning curve for me as well. My recollection of the discussion is that it did note that there was areas for improvement. I think the IMF commented that there had been some improvement but there were more areas for improvement, and there were certainly caveats to the extent that we should acknowledge the limitations of the stress test. I think the regime for stress testing has moved on in leaps and bounds, if you look at, you know, the PCAR and the PLAR that were done subsequently, and the more recent SSM as a quality review, they were very different animals in terms of stress tests.
Ciarán Lynch (Cork South Central, Labour)
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And having completed a very, very steep learning curve, do you now have a view on the quality of those stress tests?
Ciarán Lynch (Cork South Central, Labour)
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Well ... even on reflection now ... how would you view them?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much. Deputy Eoghan Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you, Ms Burke. You're very welcome. You were head of banking supervision from 2006 to 2008 ... May 2006. So, did that come with supervisory powers of the banks?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. In evidence ...in evidence from Mr. Hurley he said that the Central Bank was divested of supervisory powers over financial institutions after the 2003 Act. So, would you agree with that statement?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, but as head of banking supervision, did you have supervisory powers of the banks?
Eoghan Murphy (Dublin South East, Fine Gael)
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So after the 2003 Act, the Central Bank still had supervisory powers over the financial institutions?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, but ... just trying to clarify-----
Eoghan Murphy (Dublin South East, Fine Gael)
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With ... with banking supervision, and you were involved with stress tests. I know you weren't, but the role was. You had the power to set the parameters for stress tests with the banks, to get them to conduct a stress test and to set the scenarios by which they'd do that.
Ms Mary Burke:
Okay, I ... I can't speak for how the scenarios were developed in 2006 because it was before my time. The overall responsibility for running the stress test had moved from banking supervision, which seemed to be taking the lead - again, I can only deduce this from the documentation provided to me - in '04; the correspondence was issuing from banking supervision. By the time we got to '06, that responsibility was with the Central Bank. The extent to which they engaged with the then management in banking supervision as to the scenarios and the stresses, I can't speak to. I am, however, aware that the IMF also had input, but I can't speak to you as to how much input BSD had.
Eoghan Murphy (Dublin South East, Fine Gael)
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And then, as head of banking supervision, were you involved in the domestic standing group at all?
Ms Mary Burke:
I wasn't. I was asked to attend one meeting at some point because ... I think it's my reference earlier to being parachuted into meetings. I think they wanted two people from the regulator there for that meeting and there was nobody else in the building, or, I was the next most senior person might be a better way of putting it. There were clearly people in the building. And I was asked to attend.
Eoghan Murphy (Dublin South East, Fine Gael)
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And did you take part in the crisis simulation exercise in late 2007, which dealt with the collapse of a bank?
Ms Mary Burke:
I didn't in any meaningful sense. There was various functions assigned to people. My recollection is that I was asked to be responsible for the co-ordination of gathering any information requests that may emanate from the authority. So, there were people in various rooms. The Department of Finance was in one room, the boardroom was used by the authority and senior executives from the regulator. I wasn't in there as part of that discussion so I don't know the cut and thrust of the debate. I was in, for the want of a better word, an ante-room dealing with any requests that may emanate from them for information.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Were you involved in preparing or reviewing the scoping paper that was prepared by the Department of Finance in late 2007 that dealt with possible nationalisation, liquidation, or guaranteeing of a bank?
Ciarán Lynch (Cork South Central, Labour)
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Two minutes.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you.
Eoghan Murphy (Dublin South East, Fine Gael)
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It's just he's said me two minutes.
Ms Mary Burke:
Okay. That's fine by me, Deputy. Not in any meaningful way. I have said earlier that there were so many meetings at that time and you were parachuted in and out of meetings. I cannot say to you that I wasn't at some meeting where something was discussed but I certainly wasn't a hands-on in developing it.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, and then, were you consulted on Mr. Hurley's approach to the banks in March 2008, where he asked the banks to continue lending to each other?
Eoghan Murphy (Dublin South East, Fine Gael)
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You weren't, okay. I'm just curious, as head of banking supervision, that you weren't involved in the domestic standing group as an active member, or regular member. You weren't in the room for the crisis simulation exercise, you didn't have a direct role in the scoping paper prepare, looking at the nationalisation or liquidisation ... or liquidation, excuse me, or guaranteeing of a banks, and you weren't aware that the Governor was approaching the banks directly to ask them to lend to each other. Can I ask why that is?
Ms Mary Burke:
I'm not sure I can tell you why that is, Deputy. You would need to ask some of the people that didn't approach me on various things. In fairness to people at that time, it was very fast moving. There was a lot of issues being dealt with my impression was, strategically, at the level of the seventh floor. The more issues came, the more BSD became operational, and much less strategic. We were literally fire-fighting and there were constant demands for information, be it why we didn't regulate conduits, to what the liquidity position on a particular bank was, etc., and I think, given the resource constraints within the wider organisation, the seventh floor and our executives became far more involved in those sort of strategic discussions where, in a more calm, business as usual mode, perhaps you might have expected the head of banking supervision to be involved. I can only tell you my evidence is I was not involved.
Eoghan Murphy (Dublin South East, Fine Gael)
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And can I just clarify how many positions were above you, between yourself and, say, Mr. Grimes, the deputy governor?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy. Deputy Joe Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Ms Burke, who was on the seventh floor?
Joe Higgins (Dublin West, Socialist Party)
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No, I know, but the level of responsibility.
Joe Higgins (Dublin West, Socialist Party)
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So the very senior people in both the regulator and the Central Bank were on the seventh floor?
Joe Higgins (Dublin West, Socialist Party)
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The ... the top brass, one might say, perhaps.
Joe Higgins (Dublin West, Socialist Party)
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Yes. Ms Burke, what impact, in your opinion, did the size of the supervisory teams in ... on the banks have on the supervision of some of the key prudential issues, especially issues of liquidity and capital considerations?
Ms Mary Burke:
I think the size of the teams meant we were spread extremely thin. I don't believe we could have delivered ... we didn't deliver intrusive supervision. If you are a team of three people and you have two of the major banks in the country and you are trying to supervise them through the worst financial crisis since nineteen twenty whatever, there was only so much those people could do, and it was not intrusive supervision, and, in fairness to those people in BSD, I think I should say that they went above and beyond in terms of the effort they put in.
Joe Higgins (Dublin West, Socialist Party)
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But with ... for example, you say in your evidence, three people looking after Bank of Ireland and Anglo combined, and another three looking after Allied Irish Banks and IL&P combined.
Joe Higgins (Dublin West, Socialist Party)
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You ... you say that it was impossible for them to really track the serious issues that was going on in the banks.
Ms Mary Burke:
It ... we could identify issues and, certainly, I think we could identify, and we did identify, serious issues. I mean, the reports ... the one that was quoted to me earlier on Mr. Nyberg, that was quoted by Deputy Doherty, notes that we did identify issues. I think we did identify issues and they did identify issues. They didn't necessarily see the consequences because, as I said earlier, people did not see the seizure of the ... the markets. But our ability to follow through, our ability to challenge, our ability to then enforce ... and there's not much point in threat making ... making a threat of following through if you know you can't ultimately do that. That was not there.
Joe Higgins (Dublin West, Socialist Party)
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Yes. Did you hear the auditors' evidence to this inquiry?
Joe Higgins (Dublin West, Socialist Party)
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Would you be shocked, or not, to hear that in the audit of one of those institutions - AIB - the auditor had up to 200 staff necessary, they felt, to do the audit?
Joe Higgins (Dublin West, Socialist Party)
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Would that cast into a very cold light the paucity of resources that the regulator had previously?
Joe Higgins (Dublin West, Socialist Party)
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Okay. Can I go very quickly to your written statement, page 3, and this relates to the International Financial Services Centre and I quote, which you did already, some of it:
Other factors which I consider influenced the approach to regulation and supervision were [the Financial Regulator's] mandate to promote the financial services industry and the existence of the International Financial Services Centre ... The desire to portray Ireland as business friendly led, I believe, to a reluctance to introduce prescriptive rules and a particular focus on keeping costs down [and then continue a little while on] ... In addition, the strategic decision that there should not be two different regulatory regimes - one for domestic firms and another for those in the IFSC - meant that a different approach was not taken to the domestic financial services sector. This decision was driven by a concern that the IFSC might otherwise be categorised as an off-shore centre with associated negative connotations.
Could I ask you, Ms. Burke, would it be fair or unfair to interpret that statement as meaning something like this, that in order that the IFSC was not seen as an offshore island-type financial centre with a more lax regime than normal domestic banking and an unsavoury reputation, perhaps, that regulatory standards for the domestic banking sector as a whole were significantly lowered to avoid making what was happening in the IFSC look bad?
Ciarán Lynch (Cork South Central, Labour)
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Just ask a question.
Joe Higgins (Dublin West, Socialist Party)
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I did.
Ciarán Lynch (Cork South Central, Labour)
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Yes, I know. I'm just restating.
Joe Higgins (Dublin West, Socialist Party)
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No, I ... putting a ... I was posing just a theoretical question to you in the event was ... well ... did this play into the fact that The New York Timesin 2005 could refer to Ireland and its financial system as the wild west of European finance?
Ms Mary Burke:
I don't know whether it played into it, Deputy, and I wouldn't necessarily use your language. It's more eloquent and colourful, perhaps, than mine but, perhaps, being from the Central Bank I tend to play it more low key. Yes, the wild west reference did ... was something people had in mind. It certainly was something people felt defensive about. I don't know that the standards were lowered for domestic banks by virtue of the IFSC but there was very much a view that we needed to have one regime and sell the regulatory regime in the context of the promotion of industry as being a one regime for supervising banks.
Ciarán Lynch (Cork South Central, Labour)
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Last question, Deputy Higgins, quickly.
Joe Higgins (Dublin West, Socialist Party)
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Yes. Okay, let me sum up so, Chairman. In page 7 of Ms Burke's written statement again - and the Chairman alluded to this - and you are speaking about the relationship between what I would call perhaps rank and file members ... workers in the IFSRA and more senior executives. Could I put it to you, Ms Burke, that what you portray there to an ordinary person might seem as an extraordinarily dysfunctional relationship ... that it would seem that hard work by rank and file - or whatever you would refer to - I've no doubt hard-working members of the regulator were undermined by a cosy relationship between regulators at the top and the banks? And, just the last thing, you say at its most benign this indicated a disconnect between the banking supervision department ... or division and the senior regulator executives. If that was benign, what would a malign explanation be do you think?
Ms Mary Burke:
I again will stick to the terminology I have used. I have not talked of a cosy relationship ... it's your phrase that it was dysfunctional. I would say it was frustrating for people at an operational level to feel they had to not only argue the issues with the banks they supervised but also have to argue ... some of them, not all of them ... it wasn't every decision we ever made just to be clear on that ... but if you're already arguing with the banks, to have to argue with the people that you feel should be on your side was frustrating. I think people felt undermined by the fact that you would see the CEO of a bank in at reception. It was a bank you supervised and you would come to me and say "Do you know why they're in?"and I would go "No, I have no idea." I think that did undermine people. Whether ... I don't ... it wasn't ... it didn't feel ... and perhaps you just become used to the system you're trying to work within. It didn't feel, you know, hugely dysfunctioning ... dysfunctional, I beg your pardon, it felt frustrating. I'm not suggesting there was anything inappropriate in the relationship. I've already explained that I don't have an issue with senior executives escalating matters internally within the bank or within the regulator, but I do feel that the people at the front line dealing with it should have been involved in any subsequent discussions with those senior executives.
Joe Higgins (Dublin West, Socialist Party)
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Could things have been-----
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Deputy, I'm going to have to move on.
Joe Higgins (Dublin West, Socialist Party)
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Could I listen to-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, Deputy, Deputy, please.
Ciarán Lynch (Cork South Central, Labour)
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I just want to move to the discussion with you, Ms Burke, just going to one level here before bring in Senator MacSharry. There's the Financial Services Centre, there's the Central Bank, there's the auditors, there's the regulators, the boards and all the rest of it. But, as a supervisor, you would have ... you would be gathering an intelligence and an awareness and a cognisance of things from a broad observation. Now, one observation ... or things that could have been observed during the time was loan-to-value ratios were tightening, we saw income ratios and borrowers increasing, going from two or three times' an income up to seven or eight times and beyond that, we saw schedule extensions from 20 years out to 35 and 40 years on mortgages and we saw 100% mortgage products and all the rest of it coming on the line. Did that in any way find its way into the thinking of your role and travel up the line in terms of that we need to do something about this?
Ms Mary Burke:
We were aware of a lot of those issues and there were discussions on them in various places. I mean, some of the things like the 100% mortgages actually would probably also have been discussed with ... the consumer context. So there were general discussions around those issues. In terms of banking supervision, other than doing the various inspections that we did, etc., I'm not conscious that we were ... and we were very busy, as I said earlier, dealing with operational issues - much less so strategic as time went on - and that really was probably from the end of '07 onwards. So they would have been considered, and probably discussed also at the financial stability committee, but I don't recall that any definitive particular courses of action were agreed as a result.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Senator MacSharry.
Marc MacSharry (Fianna Fail)
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Thanks very much, and thanks, Ms Burke, for being here. Can I ask ... you were talking about staff and requests were declined. Who declined your requests for staff?
Ciarán Lynch (Cork South Central, Labour)
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No. If you could give us the-----
Marc MacSharry (Fianna Fail)
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Okay. Were they on the seventh floor?
Marc MacSharry (Fianna Fail)
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As opposed to the Department of Finance, say, or-----
Marc MacSharry (Fianna Fail)
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It was internal. Okay, that's fine. In the period - and I know some of it predates yourself - records of the Financial Regulator indicate that no enforcement action was taken on any institution for regulatory breaches from 2003 to 2008. I know you only came along post-2006. Why was that?
Marc MacSharry (Fianna Fail)
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No, no. No, sorry, I mean that very specifically to do with prudential regulation. I'm not that interested in the consumer side just for now.
Ms Mary Burke:
From my perspective, it was ... at an operational level, it was a resources issue. We didn't then, I beg your pardon, have a separate enforcement directorate as we have now. We actually have a directorate with two enforcement departments who in fairness carry ... do Trojan work and carry the lion's share of responsibility in terms of taking a sanction and pushing it through. Sanctions ... you know, the initiation and the pursuit and the successful conclusion of sanctions, which is a very time-consuming process, was left with the supervision departments. It wasn't peculiar to banking supervision.
It was the same if you had investment firms, or funds, or whatever, insurance, it was the same and we didn't have, in either of the two departments I was in, the resources to divert people that ... from doing the day job of supervision to, say, take time out, which would have been a number of people, for weeks on end, to pursue a sanctions case and, as I said to Deputy Doherty earlier, in as early as '05, the banking supervision department - that was before my time - in its policy had indicated it did not have the resources to pursue a sanctions case.
Marc MacSharry (Fianna Fail)
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On prudential regulation specifically, was it the practice, therefore, or not, that, due to lack of resources, no action was taken?
Marc MacSharry (Fianna Fail)
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Okay. And again not specifically to you, because obviously this was the case before your time as well, was it a policy choice, "I'm not going to go down the sanctions route on prudential regulation but I am going to go down the sanctions route on the consumer side"?
Ms Mary Burke:
At a more strategic level, at the level of the authority, I don't know it was ever made that absolutely definitive that sanctions were only for consumer policy and they were not for prudential, but certainly if you look at minutes of certain authority meetings, you will see - and it may even have made its way into strategy documents, I can't recall - that there was a view that they were primarily consumer and that they would only be for the most egregious issues on prudential.
Marc MacSharry (Fianna Fail)
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So that was kind of seventh floor department again, was it, in terms of-----
Marc MacSharry (Fianna Fail)
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But the board-----
Marc MacSharry (Fianna Fail)
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-----and the senior executives.
Marc MacSharry (Fianna Fail)
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Kind of ... just this was the situation. It was kind of decided, "Look, we're going to focus more on the consumer side than the prudential regulation side".
Marc MacSharry (Fianna Fail)
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But the outcome of those meetings, as you understood it, was to pursue that line, was it, or not?
Marc MacSharry (Fianna Fail)
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So, in essence, was principle regulation, when it came to prudential regulation, like having a football match and FIFA but no referees?
Marc MacSharry (Fianna Fail)
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Maybe the FAI. The FAI then.
Marc MacSharry (Fianna Fail)
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Can I ask-----
Ciarán Lynch (Cork South Central, Labour)
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Final question, Senator.
Marc MacSharry (Fianna Fail)
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Yes. Any chance of some of Deputy Higgins' time there?
Ciarán Lynch (Cork South Central, Labour)
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If you're pursuing ... if you're pursuing a good line, we'll give you a bit of it.
Marc MacSharry (Fianna Fail)
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The ... you mentioned in your statement, and I'll paraphrase somewhat but you can correct me if I'm wrong, that at times you would be dealing with an issue with a bank and, similar to the issue that was mentioned to Deputy Higgins there, that it was maybe somewhat passed off and, "Look, I'll be talking to so-and-so", perhaps on the seventh floor, or higher, your superior, I think you mentioned in your statement about that?
Ms Mary Burke:
-----and things weren't moving quite fast enough for them, I certainly am aware of a number of occasions where staff said to me, you know, "Joe Bloggs in bank X says they'll raise that on the seventh floor." Now, I wouldn't say they ... we weren't passing it off. It was more being suggested by the bank, let's call it, as an incentive for us to, you know, speed up our process-----
Marc MacSharry (Fianna Fail)
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Okay. Without ... and this is the very ... this is the very last thing-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, go on.
Marc MacSharry (Fianna Fail)
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Without naming names, or banks, or institutions, was there ever an instance that you would consider serious, that you were dealing with a bank on, that their retort was, "Leave it to me. I'm dealing with so-and-so"?
Ms Mary Burke:
No. In fairness to both the regulator ... or the executives in IFSRA and the bank, it wasn't ... it wasn't that tone necessarily, you know. They would engage with us on issues but where, as I say, it wasn't moving fast enough, or they began to be concerned about the outcome, or in a number of occasions where they didn't like the decision, they would escalate it. It was not necessarily their first port of call. They would go through the process of engaging with us and it was not every decision that was ever made, but I have a number of examples in my head which I found particularly frustrating and annoying and I know people in BSD did as well.
Marc MacSharry (Fianna Fail)
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Okay, thanks.
Ciarán Lynch (Cork South Central, Labour)
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Deputy O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thank you, Chairman, and I welcome Ms Burke. Can I just go to ... it's ... I don't known what page. It's the second-last place of your statement where you speak about ... that "Senior banking executives [and I'm assuming seventh floor executives] had regular direct contact with senior executives of IFSRA, often without the knowledge of, not to say engagement with, supervisory staff." Now, you took it upon yourself, in October 2006, to ask that the support staff would advise us of the agendas, of whether briefings were required and whether the supervision staff were to be present. "In practice", you said, "this resulted in marginal if any difference, particularly as the crisis escalated" and then you spoke about, saying that:
Staff were regularly requested by senior IFSRA executives to review decisions/issues based on their discussions, or told by contacts in banks that issues had been, or would be, discussed with [other] senior executives. To me, at its most benign, this indicated a disconnect between [the supervision staff] and the senior [seventh floor] IFSRA executives which, in practice, banks used to their advantage. I believe that it also signalled a manifest lack of support for staff, undermining them in their dealings with banks.
Can you expand on that, please, Ms Burke?
Ms Mary Burke:
Well, I can ... other than, sort of, the commentary I've already given, where your colleagues explored that, there were regular meetings with certain bank executives and with industry representative bodies. I'm not saying that every one of those meetings resulted in a request for us to change a decision or do anything different.
Kieran O'Donnell (Limerick City, Fine Gael)
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Were there occasions where it did?
Ms Mary Burke:
There were occasions where we were asked to look at a decision again. The number of ones I'm thinking of, we did look at them again, but we maintained our decision. I can think of one where there was an application for a bank authorisation which we were fundamentally opposed to and it felt like a war of attrition to persuade our executives that-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And was that a new bank, or was that an existing bank?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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Did you find it impeded and frustrated the supervision division on their day-to-day work?
Ms Mary Burke:
I think it took resources that we could ill afford to be arguing things internally when we probably should have had the support of our executives and certainly had less questioning on them. If ... I had no issue if they wanted to be involved in making the assessment and the decision and then, you know, embed themselves in the decision-making process, but if you delegate the decision to somebody and they make it and you have given them the responsibility, I think you support them in that decision.
Kieran O'Donnell (Limerick City, Fine Gael)
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And do you feel-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Ms Mary Burke:
Sorry, just, Deputy, that's not to say that every decision we made was right and that it didn't preclude the possibility that somebody had to, you know, gracefully exit us from some decision we'd made, but I personally believe you do that in a manner which does not undermine your staff. The staff that deal with the banks, front and centre, have to be seen to have the support of the organisation that they work for.
Kieran O'Donnell (Limerick City, Fine Gael)
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And had ... during the crisis, had a situation developed where it was the seventh floor executives and the supervision staff, that it had developed into a them-and-us-type situation?
Ms Mary Burke:
No, I don't think it had got to that stage. I think it was very much ... and I've said earlier this wasn't every single decision and I didn't see the organisation as dysfunctional, as Deputy Higgins suggested to me. I found it, in certain aspects, frustrating. I found, however, as the crisis proceeded, there was, certainly within BSD, very much a good team spirit in trying to work together. People were frustrated with the sheer workload they had to do. I don't know that anybody felt, either from the seventh floor, looking down at us, or us looking at the seventh floor, that there was a them and us.
Everybody was trying to do the best they could in an extraordinary situation. And I have no doubt that the executives felt, as they were doing what they were doing, that they were trying to do the best they could.
Kieran O'Donnell (Limerick City, Fine Gael)
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And the qualifications of staff that were working on the banks ... I mean, when you took over, you had three executives looking after one and a half, Bank of Ireland and Anglo. You had three executives looking after AIB, divided one and a half each.
Kieran O'Donnell (Limerick City, Fine Gael)
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What were the qualifications of these people?
Kieran O'Donnell (Limerick City, Fine Gael)
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So typically what level they were at? What level-----
Ciarán Lynch (Cork South Central, Labour)
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A question, Deputy.
Kieran O'Donnell (Limerick City, Fine Gael)
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This is a critical point, Chairman. What level were they at in terms of experience? The question really, I suppose, I'm getting at is ... you were dealing with institutions like large institutions that had enormous internal audit set-ups, enormous regularity set-ups and was it David versus Goliath in terms of the supervision going out to effectively regulate and supervise the banks from your viewpoint?
Ms Mary Burke:
Yes, I mean some of the individuals would have had industry experience; some wouldn't. Some would have come up through the ranks. Most of them would have had professional qualifications or third level degrees, etc. I don't doubt the expertise of the individuals. In terms of one of the many ... many analogies that have been put with me today, I am happy to agree with the David and Goliath analogy that you've put. But in terms of just numbers, the sheer ... if you have one and a half people dealing with a bank, David and Goliath might even be optimistic.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Deputy, and thank you very much, Ms Burke. Deputy Michael McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you, Chair. You're very welcome, Ms Burke. In his witness statement, John Hurley stated "No request for funding or resources from the Financial Regulator was ever refused." Is that accurate?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, who did you report to directly, Ms Burke?
Michael McGrath (Cork South Central, Fianna Fail)
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And who was that in 2006-07.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and he then would have reported to the CEO-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----Mr. Neary?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. So if Mr. Hurley's statement is accurate, then your request for additional resources either fell at the hurdle of Mr. Horan or Mr. Neary.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. So if what you're saying is accurate, and what Mr. Hurley is saying is accurate, then it fell at the hurdle of the CEO, Mr. Patrick Neary.
Ciarán Lynch (Cork South Central, Labour)
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We'll clarify this tomorrow.
Michael McGrath (Cork South Central, Fianna Fail)
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Absolutely. He'll have an opportunity to do so. I'm just trying to join the dots, Chairman. You have stated in your evidence and it has been confirmed that there are about 50 people working in the banking supervision areas. How many were employed overall by the regulator, the IFSRA, by the Financial Regulator?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Mr. Honohan's report is referring to about 200 in prudential supervision-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----and only 50 in banking.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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So in the region of 50 out of a total of 300 or so?
Michael McGrath (Cork South Central, Fianna Fail)
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Of that order. Okay. Just on the issue of resources, your request in May 2008, was that your first request for additional resources since you became the head of-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----banking supervision?
Michael McGrath (Cork South Central, Fianna Fail)
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At your request?
Michael McGrath (Cork South Central, Fianna Fail)
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And was your request met in full?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and that was for the calendar year, 2008, and that request would have been put in during-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----2007.
Michael McGrath (Cork South Central, Fianna Fail)
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And the request which you refer to in May 2008, that was for the calendar year, 2009.
Michael McGrath (Cork South Central, Fianna Fail)
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It was an early stage of ... early of-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----early stage of the planning.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Okay. But to your knowledge that was the first request that was refused during your time as head?
Ms Mary Burke:
During my time at BSD, certainly the previous one was met, if not in full, partially. I can't remember. And that one was effectively refused. Now I think I said on my statement it was agreed that I'd have had 0.4 of a person allocated to me but that was done ... my recollection, is some sort of accounting for atypical people, you know, people that worked half days or whatever. So, in substance, it was refused.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay-----
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. You said a few moments ago that prudential enforcement cases weren't taken or weren't recommended because you simply didn't have the resources to process them and to follow through. Is that accurate?
Michael McGrath (Cork South Central, Fianna Fail)
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Isn't that quite an alarming point and quite a striking point? And doesn't it go really to the heart of what your job was that you really weren't in a position to do your job? Even if you felt that a prudential enforcement case should be taken against the bank, you didn't pursue it because of a lack of resources. You simply weren't able to do your job.
Michael McGrath (Cork South Central, Fianna Fail)
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And who did you make this known to?
Ms Mary Burke:
It ... I didn't make it known to anybody, in that the policy for BSD had been developed in '05 by my predecessor and he had clearly stated it, that it was not resourced as a department to take and pursue administrative sanctions procedures. It was well known within my reporting line that we were not resourced to do that.
Michael McGrath (Cork South Central, Fianna Fail)
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But did that not basically mean you couldn't do your job in full?
Ms Mary Burke:
Given that ... and in talking to Senator MacSharry, we talked about the strategic approach ... given that the strategic approach did not see administrative sanctions as a tool that would be regularly used, I presume people did not necessarily see a terrible inconsistency, but, at the end of the day, Deputy, I was not in a position to take administrative sanctions procedures and that is the heart of the matter.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. In your opening statement, you essentially say that a lack of powers wasn't the key issue. Is that accurate?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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I think one of the key questions that a lot of people would like answered is: did the Financial Regulator have the power and if it wanted to do so, could it have halted the amount of lending that the banks were engaging in to the property and construction sector?
Ms Mary Burke:
My view is we had a number of powers. We could have set ratios; we could have set requirements regarding the composition of assets and liabilities; we could have imposed conditions on bank licences. I have already spoken about the fact that, obviously, there would have been the level playing field issue with the branches. The extent to which and how you would have gone about doing that I’d have to think imaginatively as to the wording of any particular rule or requirement but I presume ... those are fairly broad powers and it certainly allows for the scope to do something. Whether it would have been able to halt it or not, I can’t say.
Michael McGrath (Cork South Central, Fianna Fail)
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But it wasn’t done.
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 very much, Deputy. Is that in essence putting theory into practice what you just said there?
Ciarán Lynch (Cork South Central, Labour)
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Yes, indeed.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy John Paul Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chair. Good afternoon, Ms Burke. I've a couple of brief questions. Firstly, I want to refer to your opening statement and I must confess I don’t have the page number but it’s a direct quote.
Ciarán Lynch (Cork South Central, Labour)
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It’s actually numbered down in the right hand corner, Deputy, if you look at it.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I have the quote here. I just want to read it out.
Ciarán Lynch (Cork South Central, Labour)
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Sure.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You’ll be familiar with it. "While work had been initiated in other areas such as directors’ compliance statements and a corporate governance code in 2004 and 2005, this did not lead to their imposition on the industry."
Why, in your view, were those compliance statements not introduced? And do you have a personal position as to whether they should have been introduced then?
Ms Mary Burke:
I wasn't dealing with the compliance statement issued, directly, I have to say. At the time, there was a central unit dealing with it. My recollection is that it was brought in in the IFSRA Act - and I can't remember what the full title is - modelled on proposals from the company law review group. There were less onerous provisions, I think, ultimately imposed in company law. Those provisions in company law allowed it for ... allowed for a sort of a comply and explain mechanism. They had materiality thresholds. It was very much in terms of were the directors satisfied that they had procedures and processes. It was by no means an absolute statement that you were in compliance with everything-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
Ms Mary Burke:
-----everywhere. I am paraphrasing here slightly. My recollection is that the industry had serious issues with the way the compliance statement from the Financial Regulator was structured based on what was in the legislation and not on some theory we had developed ourselves. And my recollection is also that the Department of Finance also had issues with it when it realised the consequences. I think industry, at one point, questioned the constitutionality of what was being proposed and ultimately, I think, it was agreed that the whole issue would be dealt with in the context of the consolidation of legislation project, which was launched by the Department of Finance in '06.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you have a view as to whether ... I'm sorry to be rushing you but my time is nearly up now already.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you have a view as to whether it should have been introduced as originally proposed?
Ms Mary Burke:
I certainly didn't have an issue and my recollection at the time was that our ... it was not us ... for us to decide on the constitutionality or otherwise. Somebody could take it to the courts. However, I don't believe that particular issue was fundamental to whether or not we had the collapse of the banking system.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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To turn to another area, I want to refer to evidence by Mr. Gleeson, the former chairman of AIB. When he came before the inquiry, he said ... it's in relation to sectoral lending limits:
[W]e would have been very well off not to have exceeded that sectoral limit. It's a great shame that we didn't.
Do you have a view, yourself, from the position of the regulator as to regret or otherwise that you didn't pursue those limits beyond some of the letters that had been referred to, I think, by Senator Barrett in his ... his ... his earlier question?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Specifically on sectoral limits?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I want to put one other brief quote. Mr. McCarthy, the former chief ... or the chief executive of Ulster Bank, in evidence to the inquiry said, "There was a sense that [the sectoral limits were] honoured more in the breach than in the observance." Do you accept that that culture may have existed within the banks at the time as regards the sectoral limits?
Ms Mary Burke:
Well, as I say, by the time I came to banking supervision, they were exceeded in a number of cases. It wasn't peculiar, to be clear, to property-related lending in the domestic institutions. If you were a bank in the IFSC, you would have ... and many of them would have had issues with the financial intermediation sector and it was known that if certain banks, even when you authorised them, they were inevitably going to hit an issue with these sectoral limits. So, you know, they were ... there were issues with them, Deputy, and that's as much as I can say.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I ... I've a minute left and I've a few questions I want to run through. Do you remember identifying ... following on from Deputy ... or, Senator MacSharry's questions, identifying breaches that occurred, that your unit identified, that weren't pursued owing to lack of resources or owing to this sense that you expressed that, you know, such pursual wasn't what was sought by the regulator?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Broader ... outside issues.
Ms Mary Burke:
-----based.
If I take broader issues, to the extent that we identified weaknesses in internal controls in this, I suspect a case could have been made under the capital requirements directive, that they failed to have internal controls adequate to manage their business. You would've had to make that case and pursue it through an administrative sanctions procedure. But ... it wasn't done but I suspect, theoretically, it could have been done.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay ... yes ... I just wanted also then finally to ask, outside of - and I accept your statements that you sought additional staff yourself ... did you yourself or anybody else that you're aware of on the seventh floor, to use that phrase, seek to have legislative change or regulation ... regulatory change that would allow you to use, in your own words, you know, that ability to follow through ... that it would actually come into play? Was there an attempt by yourself or by others to seek those changes?
Ms Mary Burke:
There was ... in my view there was no need for a regulatory change. And, I've said it previously, I think we had an administrative sanctions procedure, we had various rule making powers. The issue was not, to my mind, beyond resolution and recovery regimes. The issue was not the legislation, it was the manner in which supervision was approached.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. I'm now going to move to wrap things up and inviting the two leads in. It will be about three minutes each, with a question and to include a supplementary. I just want to deal with some matters first, Ms Burke, before I do. You seem to be consistent in your answering this afternoon that by 2006, regardless of the number of staff and other resources that might've been available to you ... that it may have been too late at that stage. Could you maybe indicate to us as to when would have been the optimum period to actually have made an intervention and what would have been the interventions that you would have put foremost to your mind at that time?
Ms Mary Burke:
I am taking comfort in respect of my reference to '06 from the fact that that was a reference to Governor Honohan's assessment and I think Professor Nyberg probably had ... or Mr. Nyberg had similar themes. I think the time to do something would have been in the early 2000s. You might've been able to do something up to 2005 but even then, I think, it probably would have been late in the day. In terms of ... as a regulatory regime, leaving aside what we might have done, as country, in tax policy or promotion of building ... I think we could've probably imposed more rigorous standards in terms of lending ... but even ... and possibly LTVs, LTIs along the lines we have. The ... we were working within a European framework that set out limits for large exposures, etc., to individuals and we were endeavouring not to be super equivalent to that. I haven't sat down and thought through, Deputy - in terms of my recollections and ifs, buts and maybes on what might have happened over my time there ... I haven't sat down to think through, in detail, what I might have done. I can only deal with the reality of what was there.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. And maybe just a final question on this before I bring in the leads ... maybe if you could offer us your view on the different business models being adopted by the banks in the run-up to the crisis and also the products ... some of the products I mentioned earlier. So, both the business model and the products that were available.
Ms Mary Burke:
I'm not sure I can deal with the products, per se. I can't say that I focused particularly on the products in terms of prudential regulation. Looking at the business models of the banks, a number of them were particularly aggressive in terms of commercial property lending. In some cases it certainly was outside of their original reason for being, I suppose, I will put it that way. Sorry, I've lost my train of thought, Deputy, can you say the question again?
Ciarán Lynch (Cork South Central, Labour)
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On business models and your view on them ... on the type of models that were being developed and pursued by the banks in the lead-up to the crisis period.
Ms Mary Burke:
Yes. I think some of the main retail banks aggressively pursued business looking at what competitors were doing and, by their own admission in terms of evidence here, I think they accepted that some of that lending was not entirely appropriate. I think that some institutions should have stuck to plain, vanilla, residential lending and certainly not dabbled to the extent they did in commercial property. But one bank in particular was seen as a property bank and that authorisation ... when it was authorised, it was recognised that it would have problems with the sectoral limits.
The fact that that was also in what other banks saw as a competitive space with them caused problems. I think now we would intervene more assertively in terms of the business models, in terms of whether or not we think they are viable and appropriate, but at the time we didn't do that.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator O'Keeffe, so, question and supplementary?
Susan O'Keeffe (Labour)
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Thanks Chair. The inspection of commercial property lending exposure that we talked about before in Vol. 2, can you just confirm whether the results of that would have been passed upwards? Wwould the Central Bank have known about that inspection and the level of, you know, would that have been passed through automatically?
Ms Mary Burke:
It would have been passed up to some degree. I would have orally briefed on my reporting line. My recollection is it was also mentioned in the CEO report, which was a report the CEO made to the authority. In the context of those reports, the executives on the regulatory side were always given detailed briefings so that they could deal with any issues. My understanding of the procedure for the circulation of documents from authority meetings is, and I think you'd have to refer to the authority members' handbook in that regard, is that all authority papers were circulated to two senior executives in the Central Bank. So, assuming that procedure was followed, they would have had those papers.
Susan O'Keeffe (Labour)
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When you talked earlier about the now-famous seventh floor, can we just be clear, those meetings that took place between those executives and bank executives, were they minuted and were those minutes passed back to you?
Ms Mary Burke:
Not in general. I can't speak to ... I don't know what I don't know, if you follow me, Deputy, so if meetings were happening that I didn't know about, I obviously can't speak to them. On various ... on a few occasions when people would have asked for briefing, they might give us some feedback. I don't believe ... I rarely if ever saw what one would call a minute. You might get feedback, particularly if there was an issue they wanted you to look at again, so you would get a feel for what the discussion was but, and certainly as the crisis moved on, and I know the bank, in terms of the bespoke pieces it prepared for the committee, has done an analysis of all the various meetings. The sheer number of those meetings I certainly wouldn't have been aware of what was discussed at most of them.
Susan O'Keeffe (Labour)
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Finally, the report we spoke about earlier, that you completed on 10 September, the outlook for liquidity.
Susan O'Keeffe (Labour)
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I'm sorry - your department. That was obviously, roughly two weeks or three weeks before the night of the guarantee. Would your department have had any further involvement as the crisis escalated into that period of time, would you have been asked for any more information, would you have been supplying information to the Central Bank, to the regulator, to the Department of Finance, in that period leading up?
Susan O'Keeffe (Labour)
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Sure. But you were part of-----
Susan O'Keeffe (Labour)
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Would you have been at those meetings yourself-----
Ciarán Lynch (Cork South Central, Labour)
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Last question now, Senator.
Susan O'Keeffe (Labour)
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And so, finally, would you have taken the view that on the night of the guarantee, that the financial institutions were solvent, all of them, or not? Given what you knew.
Ms Mary Burke:
Given what I knew, our focus was, at BSD, was particularly on liquidity at that point. I was not involved in any substantive discussions on the guarantee. At that point we were not questioning solvency, and I would say, I suppose, as a regulator you have to work based on the information that you have, regulatory returns, accounts, etc. You can't, based on some sort of feeling, decide that - or, you know, an instinct or whatever - that somebody or some bank may or may not be solvent, that's not how it operates. That being said, I amn't conscious that I had that particular feeling on that evening.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator Barrett.
Sean Barrett (Independent)
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Thank you, Chairman. Is a regulatory system with no sanctions, is it moral hazard and bound to fail?
Sean Barrett (Independent)
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Looking ahead ... and, you know, how do we prevent the next crisis, should we aim for a two-tier system, one regulated by you which carries your protections, and the other sort of, free-range, like, we don't reimburse losing lotto tickets or slow greyhounds, or whatever?
Would that be a way to proceed, that we have a very tightly regulated sector which protects people's savings, and gambling separated?
Ms Mary Burke:
I wouldn't have characterised any of it necessarily as gambling, Deputy. I certainly would not favour that sort of a system. I think we ... because you'd never know the contagion effects by the free range, as you've described them yourself, and where the connections may come with industry. I think that was probably part of the problem with securitisations etc., in the lead-up to the crisis. I do think, however, we do, to some degree, have various levels of oversight now in terms of banks. I wouldn't describe it as two tiers, but you do have the SSM in Frankfurt supervising the systemically important banks in each jurisdiction, and what are called the LSIs ... the less significant banks, actually, sorry, is the terminology, are supervised at a more local level, with oversight by the ECB. And so long as Ireland is within the EU, and more particularly with the euro, that regime will continue to apply.
Sean Barrett (Independent)
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Finally, May 2008, when you sought the extra staff, was that a normal shortage of staff or did you have premonitions of doom-----
Sean Barrett (Independent)
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-----a few months afterwards?
Ms Mary Burke:
I didn't have premonitions of doom. That would be probably overstating it. I did, however, have the collapse of Sachsen, the collapse of Northern Rock and the financial crisis ringing in my ears, so it was more in an effort to try and deal with the sheer workload that we were being given, rather than any foresight of doom and gloom on my part.
Sean Barrett (Independent)
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Thank you, thank you.
Ciarán Lynch (Cork South Central, Labour)
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I just need to establish one question, and this might even prepare us for tomorrow. Was there a boss of bosses on the seventh floor?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Who was the boss?
Ciarán Lynch (Cork South Central, Labour)
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Right?
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Ms Mary Burke:
-----start parsing it, I think staff in the Central ... or in Dame Street, let's use that term so as I don't have to start doing sides, would have felt that the Governor was the senior executive in the building. But, that being said, you know, I have come up through a long ... a long time in a central bank where we still call the Governor "Governor", so that would have been my feeling, as opposed to wondering whether or not, in law, he had powers over me, if you follow me.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much for that. Is there anything else? Sorry?
Pearse Doherty (Donegal South West, Sinn Fein)
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Just, sorry, because it may come up later on, just to clarify with the witness here. It was just on the question of stress testing and devising stress tests. I just looked through the core documents. You did have responsibility in relation to domestic mortgages and stress tests, isn't that correct?
Pearse Doherty (Donegal South West, Sinn Fein)
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I asked you the question.
Ms Mary Burke:
Sorry, I beg your pardon. Yes, there was a guidance we had imposed on mortgage lenders that in the case of individual applications for mortgages they should stress test them for a 2% increase in interest rate and assess whether or not the applicant was in a position to afford that. That was implemented by the prudential department. It is now actually housed on the consumer side, in the context of affordability, and it is built into our consumer protection code.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Is there anything you would like to add before we bring matters to a conclusion, Ms Burke?
Ciarán Lynch (Cork South Central, Labour)
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Okay. With that said, I'd now like to thank you for your participation with the inquiry today, Ms Burke, and for your engagement with the inquiry, and to now formally excuse you and in doing so, propose that we would break until 5 p.m. Is that agreed? Oh sorry, I need five ... we need a bit of extra time for the switch-over. Okay, what time do you need? 5.15 p.m. Well, I'm saying 5.10 p.m. for 5.15 p.m., okay, is that agreed? Agreed. Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Okay, so I now propose that the committee go back into public session; is that agreed? And we'll now deal with session 3 of our hearings today with Mr. Con Honan ... Horan, Central Bank of Ireland IFSRA, and the Committee of Inquiry into the Banking Crisis 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? This afternoon, we will continue our hearings with witnesses from the Central Bank of Ireland Financial Regulator. At our next session, we will hear from Mr. Con Horan, the senior official from the Central Bank of Ireland IFSRA.
Mr. Con Horan joined the Central Bank in 1979, where he held a number of roles. In 2003, he became head of banking supervision at the Financial Regulator and was appointed as prudential director in February 2006. Mr. Horan was appointed in February 2011 to the position of special adviser to the head of financial supervision, Matthew Elderfield. He was since seconded to the European Banking Authority in April 2011. Mr. Horan, you're very welcome before the committee this evening.
Before I hear from the witness, I wish to advise Mr. Horan that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect to their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. In addition, there are particular obligations of professional secrecy on officers of the Central Bank in respect of confidential information they have come across in the course of their duties. This stems from European and Irish law, including section 33AK of the Central Bank Act 1942. The banking inquiry also has the obligations of professional secrecy in terms of some of the information which has been provided to it by the Central Bank. These obligations have been taken into account by the committee and will affect the questions asked and the answers which can be lawfully given in today's proceedings. In particular, it will mean that some information can be dealt with on a summary or aggregate basis, such that individual institutions will not be identifiable.
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 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 they should not publish any of the documents so displayed. The witness has 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, which will be relied on in question and form part of the evidence of the inquiry. So I now ask the clerk to administer the oath.
Ciarán Lynch (Cork South Central, Labour)
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Thank you again, Mr. Horan. And if I could invite you to make your opening remarks this evening please.
Mr. Con Horan:
Chairman, members of the committee, thank you for hearing my evidence today. It provides me with the opportunity to assist the inquiry in its work into what has been the most catastrophic, financial and economic crisis in the history of the state. The crisis has left many indelible marks, the system of oversight of the Irish banking sector clearly failed. The lessons learned from these events, as well as those in European banking over the recent years, have and will continue to drive major changes so as to avoid a repeat of what occurred. Commentators have implied that I personally did nothing to prevent the problems of 2008. Nothing could be further than the truth. Four years have passed since the report of the commission of investigation. Accordingly, I very much welcome this opportunity to have my voice heard and communicate the actions I took in seeking to avert the collapse.
When the Governor of the Central Bank, Professor Honohan, spoke to you in January this year, he advised that the people who took corrective action had been vilified in the media. He was speaking about my situation. When the commission of investigation report spoke about the lack of professional scepticism in the Financial Regulator, it also identified that there were exceptions at the level of the regulatory authority. I believe that exception was me. I can, however, assure the inquiry that this does not alleviate the sense of deep regret I feel, as a member of the senior management team in a registered authority that was not more intrusive and did not prevent the collapse of the financial system.
Before going into the events leading up to the crisis, it is important to distinguish between the roles of the Financial Regulator and the Central Bank. Briefly, the Financial Regulator was primarily responsible for supervising the safety and soundness of individual banks and their compliance with prudential requirements. The Central Bank, on the other hand, monitors stability of the overall banking system and the threats to the financial system. The Central Bank's views of market ... of the market inform the Financial Regulator in its supervision of the banks. The Financial Regulator in turn, contributes to the analysis of the stability of the overall system by communicating what it was observing in individual institutions.
I joined the Financial Regulator in mid-2003 as head of banking supervision. I reported to Mr. Patrick Neary, who was the prudential director. In this role I was not a member of the senior management team and only occasionally attended meetings of the authority. I was required to implement the strategic principles-based approach to regulation adopted by the authority prior to my appointment. As it would be expected, I acted at all times within the structure and the approach set down by the authority.
However, I believe the records demonstrate that I continually pushed the boundaries seeking to make the regulations of banks more intrusive and assertive. During this time, I proposed interventions in the property market to address high-risk mortgages. I proposed the imposition of formal corporate governance requirements on banks, including specific proposals to address the most difficult cases. I advocated for the establishment of a dedicated unit of specialists to pursue administrative sanctions. I also took on the role of head of banking supervision at a time when the international approach to the regulation of banks was undergoing the most radical change in decades. The Basel II accord was published in 2004, it was designed by central banks and regulators from major countries in the world. It established the key prudential ratios the banks needed to comply with and how these ratios should be calculated. The approach containing the accord was, in effect, the continuation of the deregulation of the industry which had been happening for more than a decade. While not fully responsible for the crisis, it provided poor incentives and moved supervision towards a greater recognition of banks' own methods for managing risk and calculating capital. The system of regulation supervision contained in this accord has proven to be grossly deficient and I will revert to this point. While I cannot be specific as to the dates, I believe it was around the end of 2004 or early 2005 that I grew increasingly concerned about the way property-based lending was developing in Ireland.
My concerns were supported by my research of international banking crises and, in particular, what had happened in Scandinavia in the 1990s. In mid-2005, I made a written proposal to increase the bank's capital requirements on high loan-to-value mortgages. This sought to put more capital aside in the event of a downturn and to establish a standard in the market for prudent lending. However, the proposal was not accepted. My understanding was that senior management in the Financial Regulator and the Central Bank had considered the matter but did not believe the action was necessary. Macro-prudential analysis on mortgage growth conducted around this time suggested that the developments could be explained by economic fundamentals.
In 2006, Mr. Patrick Neary became the CEO, following the retirement of Dr. Liam O'Reilly, and I was appointed prudential director. The Irish Timesquoted in an article as follows "Shortly after Neary became the regulator's chief executive in 2006, Con Horan, who replaced him as prudential director, knocked on his door and warned that something had to be done to restrain property speculators as house prices reached new highs on spiralling land values and the market was awash with 100 per cent mortgage offers." Reflecting these concerns, my first week as prudential director, I presented proposals to the authority for capital measures to address high loan-to-value lending ... mortgage lending. This was the first time in almost a decade of an exceptional property market that the regulatory intervention was instigated. Prior to this, moral suasion was the tool used to try to persuade banks to rein in the practices. Therefore, the taking of direct action represented a significant change and met with internal resistance. There was concern that such action would jeopardise the stability of the Irish financial system. There were concerns that such intervention was inconsistent with principles-based supervision. However, it was approved, after what Governor Honohan has described as long and agonised debate.
I wish to point out that I took these actions immediately on my appointment because it was imperative to signal to the banking industry that the approach of property-based lending was changing under the new senior management regime. The speed and level of consultation in the introduction of the measures led to me being rebuked by the statutory financial services consultative industry panel. The panel considered the lack of consultation with its members in the preparation of the measures as regrettable and retrogressive. The chairman of the panel wrote to me reflecting those concerns.
Later in 2006, I followed up these mortgage measures with the introduction of the most stringent capital requirements in Europe for speculative commercial property lending and additional requirements for buy-to-let mortgages. There was also resistance to these measures. Clearly the majority view at the time was that the property market was going to have a soft landing as interest rates increased. There was fear about the message that regulatory intervention would communicate in terms of the property market in Ireland and how it might affect the competitiveness of the banking system. It is important to point out that a public consultation undertaken on the introduction of the measures did not produce support for these regulatory actions. The responses received to the consultation were largely critical, with the banks and their representative body expressing the belief that such action was unwarranted and raised the prospect of international investors reacting negatively to the Irish market. It took a lot of persuasion and a number of board meetings to get agreement on these actions.
I would highlight that had the actions been the catalyst for a sharp correction, as many had feared, it would have raised very serious consequences. However, I did not leave matters there. In July 2007, revised prudential stress testing guidelines were issued to credit institutions to address loosening underwriting standards. In effect, my first ten months as prudential director were spent pursuing this agenda of change, culminating in the most stringent regulatory regime in Europe for the key areas of property risk. Initiating such changes met a lot of internal and external resistance and an absence of public support.
The following slides demonstrate how the market slowed after the measures were introduced. Okay, I'll be very brief on this. The first slide deals with residential mortgage lending, and I just really tried to show the sequence of events, that in February 2006 I was appointed prudential director. I immediately proposed the change and the new rule was introduced on 1 May 2006.
I think the committee can see that thereafter there's a very clear and consistent decrease in the level of mortgage lending.
And if I can have the other slide please? This relates to non-mortgage credit, and again it's from October 2005, and again just appointed prudential director February 2006; I proposed the measures in around September '06 with the capital requirements directive coming in. The measures came into effect on the 31 December 2006, and again I think you can see in general how the mortgage market, or the non-mortgage credit, went thereafter.
In all my research and in making my recommendations I was conscious of the views of external contrarians and used their arguments to support the positions I was putting forward. However, I was also conscious of other views as it would have been entirely wrong and counterproductive to ignore what the domestic mainstream authorities including the ESRI and the Department of Finance were saying. You must also remember that private sector professionals such as rating agencies, stockbrokers, investment managers and analysts were broadly supportive of the way markets were performing. The IMF has also acknowledged that it provided few clear warnings about the risks and vulnerabilities associated with the impending crisis. From its on-site reviews, it was supportive of the approach of supervision that was being taken. In 2006 it proposed that the prudential director should be appointed to the authority so the position would be on a par with the consumer director.
Other international bodies such as the OECD were also supportive of the macroeconomic analysis of the domestic Irish authorities. And the ECB, with its financial stability mandate, was not advocating macroprudential action. It was positive towards the strength of the EU banking sector prior to the crisis. It is of some comfort to me that the Basel II accord and the capital requirements directive which provided the foundation of the regulatory regime in Ireland have in recent years been acknowledged to be grossly deficient. In addition to permitting grossly excessive levels of leverage, Basel II encourage pro-cyclicality, failed to provide for systemic risks and allowed banks to operate on extremely low levels of capital, resulting in buffers that were far too low prior to the collapse. The weakness of the regime has now been identified by many authoritative sources, including parliamentary committees in other jurisdictions. The process of correcting the deficiencies has been ongoing since 2008, but even now, seven years on, the reforms are not complete.
To conclude, I wish to repeat that as a member of the senior management team in the Financial Regulator from 2006, I deeply regret and I'm sorry that the system of supervision did not prevent the collapse in the banking system. I do hope the inquiry will recognise that I took risks to address key problems by introducing stricter regulations in a difficult environment of groupthink. It was of course my duty as prudential director to do so. While the ten years as prudential director I saw the introduction of some of the most stringent capital and liquidity rules in Europe, regrettably, however, these measures were too late and were not sufficient to reverse the excesses of the previous decade and save the financial system when the global financial crisis struck.
Thank you for your attention, members. Can I also add one additional point if I can, Chairman? I do want to correct a point on my earlier statement ... just a brief correction on page 4 ... the third paragraph down under macroprudential supervision. There is a reference there to the IFSRA board, that reference ... the IFSRA should be removed it should just be the board. It's the Central Bank board I was referring to there.
Ciarán Lynch (Cork South Central, Labour)
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Thank you for the clarification, Mr. Horan, and thank you for your opening statement. I now invite first lead questioner, Senator MacSharry. You have 15 minutes.
Marc MacSharry (Fianna Fail)
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Thanks very much and welcome, Mr. Horan, and thanks for being here. In your written statement you mention your proposals for regulatory intervention were put forward in 2006. You also say that concerns at the Central Bank senior management levels about the impact, the potential impact of it. And it also mentions the desire to temper what was perceived as the appetite for heavy intervention, that's a quote from page 4 of the statement. Your proposal for regulatory intervention was met with significant concerns, you say, from the senior management of the Central Bank. Was this level of intervention, in your operation as a financial regulator, normal?
Marc MacSharry (Fianna Fail)
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Yes, okay. You mentioned also in your statement a formal proposal in August 2005 to introduce measures to address high loan-to-values ... "the proposal met resistance from senior management of the Central Bank and was shelved". Subsequent to your appointment as prudential director, you implemented the same proposal, which then met with a rebuke by the chairman of the FSICP, as you mentioned there again in your oral statement as well. Can you explain the nature of this resistance to your proposal by the senior management of the Central Bank?
Mr. Con Horan:
Well, in relation to the August '05 measure, I made a proposal in mid-August 2005 to increase the capital on high loan-to-value mortgages. I did that directly up my own reporting line at the time to the prudential director, and ... who took to bring it forward and address it. And the feedback I got at that time ... I tried to set out a fairly good argument in terms of why we should take measures at that point in time, but the feedback that I got was that the matter had been considered by senior management in the Financial Regulator, and the Central Bank, and the view was that the measures were not necessary at that time.
Marc MacSharry (Fianna Fail)
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So it was a timing thing, as opposed to a "Look, we're not going there".
Mr. Con Horan:
Well, that was ... it was kind of "We don't need to go there at this point in time". There was other macroeconomic analysis conducted around the same time, which was suggesting that the mortgage market, the growth in the mortgage market, was being driven by economic fundamentals, so ... that seemed to be the background as to why it was not accepted at that point.
Marc MacSharry (Fianna Fail)
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And did that go ... was that a decision by your direct line director, as you say, the prudential director at that time, or did it go to the board, or Governor----
Marc MacSharry (Fianna Fail)
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The seventh floor we were hearing about earlier, is that where all those guys hang out?
Marc MacSharry (Fianna Fail)
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Okay ... we're not allowed use names, are we, Chairman?
Ciarán Lynch (Cork South Central, Labour)
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Well, I always advise members to speak to legals before they get into specifics but-----
Marc MacSharry (Fianna Fail)
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Yes, well, we might go back-----
Ciarán Lynch (Cork South Central, Labour)
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-----so I'll ask you to err on the side of caution, if you haven't spoken to legals.
Marc MacSharry (Fianna Fail)
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Can you comment on the solvency protection measures in force, and taken before and during the crisis, and the stress-testing exercises carried out with the financial institutions?
Marc MacSharry (Fianna Fail)
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And other solvency protection measures which were in place or in force?
Mr. Con Horan:
So, there was a stress test conducted in 2006, which was in conjunction with the IMF, who were carrying out their FSAP visit. It was a normal round of stress testing, albeit with the IMF involved. And the outcome of that process was that the belief was that in an adverse scenario, the banking system was going to still hold up strong. I would say around the same time, obviously, Deputy, the ... I was also proposing the measures towards September '06 to increase the capital requirements on the commercial real estate lending activity. So that was also another solvency measure that was being put in place to try to address the problems at the time.
Marc MacSharry (Fianna Fail)
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And, I mean, what was the regulator's view on the deterioration of properties' values and what implications did that have on the assessments in terms of stress tests? Did that come into it, the fact that property values were declining from, kind of, late 2006?
Marc MacSharry (Fianna Fail)
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Were there no further ones, no?
Marc MacSharry (Fianna Fail)
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Yes, well, what's your involvement with them then? Had you have an involvement with the stress tests?
Marc MacSharry (Fianna Fail)
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And would the concerns that you had to the extent that you were, you know, raising corporate governance provisions and raising loan-to-value issues and so on up to that date ... I mean, were you happy that these assessments could be accurate, on the basis that your suggestions had been rebuked by your own definition?
Mr. Con Horan:
Well, just to get the sequencing right: in 2005, the measures I proposed had not been accepted for increasing the capital on high loan-to-value mortgages. In 2006, February 2006, they were accepted. And towards the end of 2006, when the capital requirements directive was coming in we implemented another set of additional requirements on commercial real estate and ended speculative commercial real estate lending, which in effect gave us the most stringent capital regime in Europe for that type of activity. So, that was all being conducted around the time of the stress tests, but the stress tests were generally coming out in 2006 as broadly positive in terms of the capacity of the banks to deal with a downturn.
Marc MacSharry (Fianna Fail)
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We had been listening earlier to Mary Burke's testimony, and she spoke about resources particularly and said that requests for resources were endorsed by you as her line director, as prudential director, but rebuked higher up. Would you be in a position to outline for us who was responsible for refusing that request and why, in your view, that took place?
Mr. Con Horan:
I'll give you my recollection of the sequence of events around 2006. If I recall ... I'm not sure there was a request for additional resources in 2006, I may be wrong here, but one of the problems that was faced in 2006 was we had a huge number of vacancies in the organisation and the organisation was not capable of filling those vacancies. So I don't think there was a request to the senior ... to the budget and remuneration committee in 2006. There may ... there would have been one in 2007, which was a large request for, I think, over 70 staff and I think we got 25 in that particular situation. I may have my dates there wrong, Deputy, in terms, but-----
Marc MacSharry (Fianna Fail)
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And is that specific to the bank supervisory department?
Marc MacSharry (Fianna Fail)
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No, no, I'm interested specifically in BSD, I think ye call it?
Marc MacSharry (Fianna Fail)
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Or that's what it was referred to earlier on. So, Ms Burke was telling us how, and she had ... gave quite a vivid description of a chaotic scenario where people couldn't effectively do their job, that there were difficulties even in carrying out the requirements on the capital requirements directive of the banks and so on. So, in that context, she had made a ... what she said was a number of requests, certainly one of which was endorsed by you, in her own words, but that these were refused.
Marc MacSharry (Fianna Fail)
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And I'm anxious to know who refuses them?
Marc MacSharry (Fianna Fail)
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May 2008, I think, specifically we're talking to ... talking about. Thanks.
Mr. Con Horan:
Right, thank you. Well, certainly, yes, Deputy, I mean, I had come ... I had been head of banking supervision, so I had a particular sympathy for that department in terms of its resourcing, and was supportive of the additional staff in it. One of the problems that was faced ... I mean, the process worked in whereby each individual department put forward their requests for resources and then that proposal was made into the budget and remuneration committee of the bank. My recollection is that the budget and remuneration committee did not fully endorse the request from management for the additional staff, for a number of reasons. I think they felt that the ... there could be savings gained from some of our work. I think there was a broad belief that, from a technology perspective, we were very weak and we needed to improve in that area, to be more efficient and cost-effective.
Marc MacSharry (Fianna Fail)
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And was that consistent with your concerns generally in terms of the level of lending that was going on in banks at that stage? Of course we've had ... we'd have had the Northern Rock situation and so on that-----
Marc MacSharry (Fianna Fail)
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So, is it your testimony that you did all you could to secure the staff but the budgeting committee said no?
Marc MacSharry (Fianna Fail)
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Okay, all right, that's fine, well then we can bring that question on to tomorrow then. Can I ask, from 2003 to 2008, when you had obviously a very, very serious increase in commercial lending throughout the country, and you had very regular breaches in what you might describe as prudential regulation, that there was no enforcement actions taken against any institution in that period? Why is that?
I think it's useful just to kind of recall the approach and the strategy that was employed by the Financial Regulator. And I would say, Deputy, and I'm not trying to avoid the question, I wasn't a member of the board here, so some of these issues would have been dealt with within the board. My understanding-----
Marc MacSharry (Fianna Fail)
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But ... and I'm not holding you responsible, or anything. I'm merely asking.
Marc MacSharry (Fianna Fail)
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You were the manager, or the head of the bank supervisory department for 2003 to 2006, and then you were the head ... the prudential director.
Marc MacSharry (Fianna Fail)
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Isn't that correct?
Marc MacSharry (Fianna Fail)
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So, in that context. So I'm not ... you're not answering ... you're not answering for everybody here, just give me your view. Why was there no enforcement in that period?
Marc MacSharry (Fianna Fail)
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Could you just clarify one thing for me there, just for people watching at home? Is that ... when we say consumer things, is that things like overcharging on credit cards, and that type of thing, or-----
Marc MacSharry (Fianna Fail)
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As opposed to a bank transferring-----
Marc MacSharry (Fianna Fail)
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-----€6 billion from one to another, for example?
Marc MacSharry (Fianna Fail)
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Yes. Okay, okay. That's great, thanks.
Mr. Con Horan:
So the regulator had been set up in 2003. It had been set up, and my understanding was left the regulation of the ... prudential regulation was a key factor in the decision to leave supervision within the Central Bank structure. And the approach to supervision at that time was one of dialogue and interactive engagement. It was not an enforcement driven approach. And that approach was deemed to be suitable because there was a long record of safety within the banking system and it was also suitable to the development of the International Financial Services Centre.
Marc MacSharry (Fianna Fail)
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But on the other hand, were you not concerned to the extent that as soon as a new boss took over you were at his door to say "I'm concerned, you know, I want to implement this, that and the other", as we've outlined earlier in 2005. And then you actually did implement them yourself in 2006. I mean, was that not against a backdrop that far from being safe, this was a situation that had a culture of regulatory breach?
Mr. Con Horan:
Yes. I think just to get again the sequencing right. I think, again, I provided some documents to the inquiry. In advance, in 2004, I was making the case that we were structuring the organisation in the wrong way in that we hadn't set up dedicated inspection units to pursue administrative sanctions. I think that's a matter of record and I was very much in favour of setting up dedicated units at that time. And in preparation for moving ahead I had proposed corporate governance requirements in May 2005 to be imposed as a requirement on the licence of banks to enable us to take administrative sanctions, actions, against the banks, and some of the more difficult cases I was dealing with.
Marc MacSharry (Fianna Fail)
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Okay. In the period after 2006, then, you've got your stuff in place. How is it that there was no enforcement in the period 2006 to 2008?
Marc MacSharry (Fianna Fail)
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So, though we had the rules but just not the enforcement, was that-----
Marc MacSharry (Fianna Fail)
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Okay. I put it to your colleague earlier on, and I used a somewhat unfortunate football analogy, so I'll adjust it slightly for you today and say is it a case that the principles-based regulation that was being employed by yourselves at the time, when it came to prudential regulation was a bit like a football match and the FAI with no referees?
Marc MacSharry (Fianna Fail)
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So can you give me an example of one without one breach and one enforcement sanction without naming the bank or the individual involved?
Mr. Con Horan:
I think the best ... there is examples given in Governor Honohan's report, I think, where on one occasion and with a particularly difficult institution, in 2004, and I think again in early 2008, we increased the solvency ratio on the bank from - I won't give the numbers - but we increased it by 1%, which was a pretty significant, and I think Governor Honohan called it a noteworthy intervention.
So there were things that you could do, even though in 2004 we didn't have administrative sanctions powers, there were actions that we could take to penalise poor behaviour in banks and that, I think, is an example that would have had a significant impact on the institution. The institution involved appealed that but-----
Marc MacSharry (Fianna Fail)
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But materially, what would that have meant to the institution, just again for us lay people?
Mr. Con Horan:
Well, it sent a signal to them in terms of ... they needed to keep additional capital aside, so that they wouldn't have had as much capital available for additional lending. So the level of regulatory capital they had to keep was increased which kind of reduced the buffer that they had for other activities. And there were other things that could be done at that stage including sending in, you know, consultants to carry out work, etc., which was often very expensive and not something that the banks enjoyed. I think in another case we reduced the level of joint venture activity they could get involved in. So there were some measures within the structure that could be used but, as I say, that was in advance of the administrative sanctions regime which didn't come in ... I just make the point again ... I think until July 2005 and the guidelines were only issued in October 2005. So that explains a lot of that earlier period, I think.
Marc MacSharry (Fianna Fail)
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Okay, thanks.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Just to clarify two issues there on Senator MacSharry's questioning to you, there was two items: there was your comment on page 4 of your witness statement about your proposals for regulatory intervention being put forward in 2006 and then later in page 6 of your statement about holding contrarian views to the groupthink on property lending and so forth. And you elaborated to some extent on those two questions, Mr. Horan. But maybe what I'd like you to do now is elaborate on the influence or the role of the Central Bank in terms of how they responded separately from that of the regulator's office.
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. Con Horan:
-----I can't give you much insight into what went on from the Central Bank's perspective. I understood there was discussions between the Central Bank and the Financial Regulator at the time and the view was the measures were not necessary. In 2006, I understood that the chief executive had had a discussion with senior Central Bank officials who believed there's a potential for these-----
Ciarán Lynch (Cork South Central, Labour)
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Chief executive is the Governor now or the regulator?
Mr. Con Horan:
Sorry, of the Financial Regulator ... had spoken to senior Central Bank officials and the view was that, taking these actions at that time, had the potential to bring the market down and there was concern ... real concerns from a stability perspective that these interventions would cause a problem.
Ciarán Lynch (Cork South Central, Labour)
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Can you ... I want to kind of segregate those two, if you don't mind. You've given us a kind of ... a very understandable position as to what you saw the regulator's role was but can you tell us what the positioning of the Central Bank was on these matters?
Ciarán Lynch (Cork South Central, Labour)
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Central Bank level or the regulator?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Con Horan:
There were concerns that the measures would create instability in the market. But the reality was we decided to hold our ground on that and we went ahead and I believe the Governor gave his support to those measures at that time. So, there was concerns at official level ... at senior official level but in the end when the measures ... it took a number of meetings to get the measures through and in the intervening period, the Governor supported the measures.
Ciarán Lynch (Cork South Central, Labour)
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So you're saying both ... the Governor was both aware, cognisant and was in line with the measures and the position by the regulator?
Ciarán Lynch (Cork South Central, Labour)
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Yes, indeed-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman. Thank you, Mr. Horan, you're very welcome. I just want to move forward to 2007, if I may. You were a member of the domestic standing group?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Were there any deficiencies in the DSG's operating model?
Mr. Con Horan:
I think in early 2007 I wouldn't call it there were deficiencies in the model. It had only been set up in 2006 under EU legislation, this type of structure. So, I think, certainly for much of the time it was beginning to find its role and understand what its role was.
It probably wasn't as proactive in retrospect, given what occurred subsequently, but it was trying to find its feet in terms of preparations for crises and running crisis simulation exercises, etc.
Eoghan Murphy (Dublin South East, Fine Gael)
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Why was the NTMA brought in in 2008?
Eoghan Murphy (Dublin South East, Fine Gael)
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It was late 2008, sorry, when they came in it was-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Is that what you were saying, it was late 2008-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Would their absence up until that point be seen as a deficiency, do you think, in terms of the membership?
Mr. Con Horan:
I didn't believe so because, you know, a lot of what we were doing in the domestic standing group at that stage was just understanding what was going on in Europe, preparing documents, etc., within the three authorities - the Department of Finance, the Central Bank and the Financial Regulator - in terms of how well that group would operate in a crisis situation.
Eoghan Murphy (Dublin South East, Fine Gael)
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And was there any agency missing from the DSG?
Eoghan Murphy (Dublin South East, Fine Gael)
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You said that the level of contacts, interaction between both yourself and the Central Bank with the Department of Finance increased as a result of the establishment of the DSG. So did it increase to what would be seen as a normal level of activity or a heightened level of activity?
Eoghan Murphy (Dublin South East, Fine Gael)
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But prior to the establishment of the DSG, in your opinion, would have the interaction between Financial Regulator and the Department of Finance been sufficient?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. The simulation exercise that was conducted at the end of December, or, sorry, at the end of 2007 in December ... were you involved in that simulation exercise?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. I'm just wondering, how close to reality are these exercises? I mean, do the observations that are made in the simulation, do they translate to the real world?
Mr. Con Horan:
In reality, no. Being absolutely frank, I've been involved in these at a European level and I've been involved in them at a domestic level. And they are largely simulations around a small group of facts that are conducted over an afternoon or a full day with papers prepared and people able to read documents in advance of that. So, the reality is they do ... you do learn lessons and you do pick up issues in relation to how it would happen in reality, but, in effect, having experienced crises in Ireland and in Europe in recent years, the reality is always an awful lot more complicated and different.
Eoghan Murphy (Dublin South East, Fine Gael)
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One lesson learned by the Financial Regulator was that the ... there was insufficient contact between the regulator and the Department of Finance and the Central Bank's feedback was that finance was out of the picture. So was that in the exercise or does that reflect the reality?
Mr. Con Horan:
My recollection is that was that the exercise in that the simulation of the financial information in that exercise took a lot longer than expected in terms of the Central Bank and the Financial Regulator pulling together information. And the Department of Finance were not involved until very late in that process. So that was one of our lessons from that exercise.
Eoghan Murphy (Dublin South East, Fine Gael)
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In Mr. Hurley's evidence, when discussing the stress testing exercises, he said that "One of the conclusions was that there was too quick a movement to a guarantee in the context of the stress test''. Do you remember that?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Do you recall the 2005 crisis simulation exercise? You were working in banking supervision at the time.
Eoghan Murphy (Dublin South East, Fine Gael)
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Because one of the observations from that exercise was that there was a lack of clarity about the supervisory regime and the nature of information that would be available in a real crisis. That was following the exercise in 2005. Do you recall that at the time?
Eoghan Murphy (Dublin South East, Fine Gael)
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And would they have been acted upon?
Eoghan Murphy (Dublin South East, Fine Gael)
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But did that sentiment remain true into 2008 when the actual crisis emerged, that there was a lack of clarity about the supervisory regime and the nature of information that would be available in a real crisis?
Mr. Con Horan:
Well, by two thousand ... by 2008 we obviously had experienced the crisis and, you know, there was ... clearly the information you needed at hand when matters started to evolve was not sufficient. There was clearly a lot of work needed to be done to gather information. But I would say that's pretty consistent across the board and was a feature in an awful lot of jurisdictions - that the information you needed immediately was not at hand.
Eoghan Murphy (Dublin South East, Fine Gael)
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Sure, but the observation that was made from the exercise here in Ireland in 2005 still stood when the crisis emerged in 2008?
Mr. Con Horan:
I think that it's fair to say that that's correct ... that the nature of the crisis can ... the nature of a simulation exercise can never fully reflect what actually happens in a crisis, and every crisis is different so you'll always have a desire or a need for additional information than that which is on stream.
Eoghan Murphy (Dublin South East, Fine Gael)
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Of course. No, I think my point related to the feedback that was given after the exercise and then whether or not it was acted upon. But if we can look at the scoping paper that was prepared by the Department of Finance at the end of 2007 - were you involved in the preparation of that scoping paper? It looked at possible powers to be given to the Minister for Finance to guarantee the banks, to liquidate a bank ... it talked about a possible guarantee for all liabilities in the Irish financial system.
Eoghan Murphy (Dublin South East, Fine Gael)
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It came up with our discussions with Mr. Hurley. So when we look at the preparation or the agreement in early 2008, that legislation would be drafted to empower the Minister to guarantee the banks and nationalise financial institutions - do you recall that, those discussions?
Mr. Con Horan:
I don't think I was actively involved in it at that point in time. I became a lot more involved in the legislation around September 2008. So I think the outline of the legislation had been prepared at that stage, and then as events unfolded from very early in September, that was probably our key focus was getting the legislation prepared for a nationalisation.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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With Mr. Hurley we discussed as well the green jersey agenda where ... the Financial Regulator and the Central Bank Governor went to financial institutions and asked them to provide each other with funding support in order to maintain financial stability, given what was happening in international markets. Were you kept informed of this agenda, this action?
Eoghan Murphy (Dublin South East, Fine Gael)
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At the time?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And in your view was this agenda designed to support any particular institution?
Mr. Con Horan:
No. Certainly in the early stages it was international markets had frozen. We were aware that this was happening in other jurisdictions as well and it happened right across the board where interbank lending reverted to national borders and that continued for a considerable length of time afterwards. So it was relatively consistent with what was going on, that lending began. And people were probably more familiar anyway with some of the local operations.
Eoghan Murphy (Dublin South East, Fine Gael)
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And given what was happening in relation to the work of the domestic standing group in early 2008, and the approaches being made at the time by the Central Bank and the Financial Regulator, do you think that, looking back now, that the Government should have intervened in the banking system in March 2008, or closely after?
Mr. Con Horan:
It wouldn't be clear to me what the intervention would have been at that stage that would have made a significant difference. You know, at that stage I think certainly liquidity was running short. I think it might have been better if the ECB or someone had announced measures in terms of providing additional liquidity to the system at that stage, as they did in 2011-'12. But it's not clear to me, when you put your question, what that measure would have been around March 2008.
Eoghan Murphy (Dublin South East, Fine Gael)
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Prior to that, prior to the share difficulty that one institution ran into in March 2008, the domestic standing group was already talking about possibly guaranteeing all liabilities in Irish banks. It was already looking at legislation to potentially nationalise a bank, liquidate one.
So these concerns would have been there at the time, before then we had this extraordinary event in March 2008.
Mr. Con Horan:
Yes, so, so, you know, at that time, I mean, I would say from 2007, I mean, there were lots of issues being talked about in terms of how we might oil the wheels of the system and remove some of the liquidity stresses were ... that were there, and there was contingency planning going on at that time in terms of what might happen.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, let's move on to ... then, to July 2008. There was a domestic standing group meeting, and it's on page 124 and 125 of the booklet. The core booklet, Vol. 2.
Eoghan Murphy (Dublin South East, Fine Gael)
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Page 124. So you represented the Financial Regulator at this meeting?
Eoghan Murphy (Dublin South East, Fine Gael)
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And if we just go down to the ... the bottom paragraph, there's a discussion held concerning the increase risk of a general loss of confidence in Irish banks, and the international viewpoint provided at the meeting is that the banks will see significant loan losses and would need to raise significant capital, and would be disadvantaged in doing so on account of the delay in going to the markets. Do you remember who expressed that view?
Eoghan Murphy (Dublin South East, Fine Gael)
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Vol. 2.
Eoghan Murphy (Dublin South East, Fine Gael)
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That's correct, yes, and it's the paragraph at the bottom of the page, the large paragraph.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Eoghan Murphy (Dublin South East, Fine Gael)
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And there's ... an international review of the-----
Eoghan Murphy (Dublin South East, Fine Gael)
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An international viewpoint is provided, sorry, at the meeting, about risks ... significant capital risks facing the banks and potential for significant loan losses.
Eoghan Murphy (Dublin South East, Fine Gael)
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Do you remember that discussion?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, but, you know, who might be providing the international viewpoint at that meeting?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Can we just drop down, just to the final sentence, because that states that the Financial Regulator "reported a detailed line-by-line examination of its loan book by one of the major Irish banks which highlighted that even allowing for 'worst-case' loan losses, profitability would remain strong". You made that point.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Is it possible to identify which institution you had-----
Ciarán Lynch (Cork South Central, Labour)
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No, I would advise not to. There's no need to.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, well, I mean, how did that information come to you and did you verify it?
Mr. Con Horan:
So ... so that would have been part of the ongoing engagement at the time with ... with the institutions to see how they felt about their books in terms of what was ... was going on and the type of ... so they would have been doing their own analysis and contingency planning. I don't think that we went in to check that at that time, in July 2008, but it would have also been the case that around that time, rating agencies, etc., were looking at the Irish institutions and, you know, in most cases, I think, affirming their ratings in terms of their strength and their capacity to ride out the problems. So, there would have been a ... a view at that time, I think, even from international rating agencies, that the Irish banks were able to ride out the problems at the time.
Eoghan Murphy (Dublin South East, Fine Gael)
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And, so ... sorry, were you then expressing that view depending on what the rating agencies were saying?
Mr. Con Horan:
No, I think really what we were doing there is just giving feedback that we were getting at a time of heightened crisis, so we were ... we were well into the crisis at this stage. It would have been the feedback from the institutions in terms of their observations and their belief, in relation to their book.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, but not feedback-----
Ciarán Lynch (Cork South Central, Labour)
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Last question, Deputy Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair. Not feedback that you, as Financial Regulator, would have verified before bringing it to the domestic standing group, to overrule a point made by someone else as to the international viewpoint on significant loan losses, potentially, in the Irish banks?
Mr. Con Horan:
Yes, I mean, the nature of the domestic standing group was, you know, it was a forum for clearing views that we were picking up through our various contacts. And it was an open forum for engagement, so the Central Bank would bring information that it would pick up, say, from the ECB, we would bring information that we were picking up, the Department of Finance would bring in information. It wasn't an effort to overrule, it was just feeding into the system of what we understood at the time.
Eoghan Murphy (Dublin South East, Fine Gael)
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So, it wasn't a decision?
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Deputy, I'm going have to bring you in ... 'cause I have stuff to come back to here. I'll bring you back in the wrap-up.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair.
Ciarán Lynch (Cork South Central, Labour)
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I just want to stay with the domestic standing group but I want to come back to the nationalisation, or the, the ... in spring 2008, the Minister was proposing the legislation with regard to a financial institution. Now, in questioning, Deputy Murphy, you spoke about the events, but what was the analysis behind that, where ... what was the raison d'être, where was that coming from?
Mr. Con Horan:
I mean, there were very serious issues around March 2008. I think ... the famous St. Patrick's Day massacre, I think, it was known. So it was clear that there were institutions under significant pressure at that time and, I think, one of the contingencies that was being considered was preparing legislation in the event of it being necessary.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And was that discussed at the domestic standing group meetings?
Ciarán Lynch (Cork South Central, Labour)
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To be more specific, was it prominent ... was it a prominent item of discussion at the standing group meetings?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Just ... on earlier comments as well ... reports ... comments from known reports were quite agreeable that in the measure ... that the measures taken, you were talking about the measures for 2006 ... specifically the measures you were talking about today, such as increased weightings and high LTVs, loans and later on speculative commercial loans ... that these may have been too little too late. Ms Burke, in her engagement with the committee this evening, said really that after 2006 it ... any measure or any number of staff may have not actually been possible to actually avert the crisis. So could I put it to you or maybe ask you, Mr. Horan, that the measures taken maybe were showing the right way, but why was not more done to alert the banks more strongly and were you satisfied with the relativity moderate measures that were being taken?
Mr. Con Horan:
Well, I would make the point that I had tried, in 2005, to begin this process and I think, you know, the process of intervening in the market was going to be very important in terms of the signal it sent to the banks because there had been an approach over the years ... and, Chairman, I'd go back into the ... my view is the bubble commenced in the mid-'90s and there were letters going out requesting banks to control their lending, etc., but the rates continued to grow. My view was that we needed to do more than that and directly intervene with some capital measures to show we were willing to act. That's what I proposed in 2005. I think it would've been better if it had been introduced then. I think it would've been even better maybe if it was introduced earlier. But my concerns formed in early 2005-late 2004 and those concerns were based on my reading of what happened in the Scandinavian economies when ... researching that, they were saying that their growth rates were above 20% and that was indicative of problems. In Ireland we were growing higher than 20% - 25%-30% - and that's what was causing me concern and that's why I believed we needed intervention.
Ciarán Lynch (Cork South Central, Labour)
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When did you join the domestic standing group, Mr. Horan?
Ciarán Lynch (Cork South Central, Labour)
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And were you bringing these concerns to the attention of the domestic standing group?
Mr. Con Horan:
Well, I mean, obviously ... yes, because the measures were successfully introduced. From February 2006 onwards we began the process of intervening in the market. So it would have been very clear and we would've communicated that to all parties. People like the IMF supported those measures, etc., and the DSG would have known that we were proposing additional measures in September 2006. I had made it known to the industry in May 2006, which was three months after my appointment, that we were going to look at the commercial real estate sector at that point. So I was trying to send out a very clear signal that the process and the approach was changing.
Ciarán Lynch (Cork South Central, Labour)
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And with regard to the contrarian views that you have stated to the committee this morning, how were the domestic standing group receptive to those? Were they listening to them, acting upon them or were they just considered contrarian?
Mr. Con Horan:
Well, from 2006 I don't recall there was any objections from the domestic standing group because the measures were actually introduced. It wasn't that we had to pre-clear them, etc.
We did speak to the Department of Finance in 2006 to advise them of the proposals in February. I don't recall that they objected to them. They did question why they felt they were necessary, but nobody ... once the measures were agreed by the authority, there wasn't objections to them.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And just to finalise on this, I just want to return to the stress tests just for a moment. Were the stress tests from the banking supervisory teams ... or, sorry, were the stress tests moved from the banking supervisory teams to the Central Bank?
Mr. Con Horan:
What happened in, I suspect around 2005 ... prior to 2005, the 2004 stress test was ... again, they would always have been led by the Central Bank because they were largely economically-driven exercises. We would have been actively involved with them at that time. With the introduction of Basel, we hadn't got the resources to spend a lot of time on the stress-testing exercises, so we provided direct access to the economic people to our data so that they could extract information and then we were available to help. Our role was less at that time in the stress-testing exercise but we were still making ourselves available to assist.
Ciarán Lynch (Cork South Central, Labour)
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So who in the Central Bank was responsible then for the collection of the analysis and the analysis stress testing?
Ciarán Lynch (Cork South Central, Labour)
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And who had responsibility for developing the model when it moved there?
Ciarán Lynch (Cork South Central, Labour)
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And who checked the responses from the banks?
Ciarán Lynch (Cork South Central, Labour)
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Well, are you able to confirm this afternoon that the responses were checked?
Ciarán Lynch (Cork South Central, Labour)
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But, to your knowledge, do you know they were checked?
Ciarán Lynch (Cork South Central, Labour)
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Okay, tell us more about that. Tell us more about that.
Mr. Con Horan:
Well, the 2006 stress test was carried out in conjunction with the financial services assessment programme that the IMF were conducting on Ireland in 2006, so the previous ... so the financial services assessment process was essentially where the IMF came into a jurisdiction and looked at the approaches and the methods of supervision, engaged with the banks, etc., to find out was the system suitable in terms of protecting financial stability. As part of that exercise, they did the stress testing. They also analysed the system of supervision and they were directly involved in the process as well, so ... and they would have issued their report and commented in the financial services action plan assessment of Ireland. So, quite frankly, I'd no reason to believe that that ... that that wasn't conducted in a diligent way because, if I recall correctly, the IMF actually said that there was a richer level of information in 2006 than there had been previously, primarily because banks were developing their own risk models under the Basel process.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy Joe Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Horan, in September 2008, were you involved in any discussions in the Central Bank, or regulator, in relation to the potential insolvency of any financial institutions?
Joe Higgins (Dublin West, Socialist Party)
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There was reference this morning about a high-level meeting on 26 September, where the Taoiseach, the Minister for Finance, the Governor of the Central Bank and others attended, and there is a question comes out of that as to whether two particular institutions were insolvent at that time. Were you aware of any of that discussion?
Joe Higgins (Dublin West, Socialist Party)
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No, you don't need to refer to it-----
Joe Higgins (Dublin West, Socialist Party)
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-----just take my word for it.
Joe Higgins (Dublin West, Socialist Party)
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No, no you don't need to, Mr. Horan. I am just saying that, as a matter of fact, we have evidence of a high-level meeting and there is questions arising form the minutes of that as to whether two particular institutions were insolvent or not at that time. I'm just asking you if you were aware of that discussion?
Joe Higgins (Dublin West, Socialist Party)
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Did you have a view on 29 September as to whether any of the banks were insolvent with the advantage of the position you had?
Joe Higgins (Dublin West, Socialist Party)
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Okay. Mr. Horan, following the legislation of 2003 in relation to the Central Bank and the Financial Regulator, the memorandum of understanding between the Central Bank and the regulator dealt with the responsibilities of both sectors, if you will. Do you think there was clarity on which ... what was the responsibilities of the Central Bank, on the one hand, and the regulator, on the other?
Mr. Con Horan:
I believe there was clarity. I think I ... it was one of the first points I tried to address in my opening statement. I think the memorandum of understanding, if I recall correctly, the headings on it were the Central Bank had responsibility for financial stability. And the Financial Regulator heading is the Financial Regulator's contribution to financial stability. So the Central Bank was in lead on financial stability issues, and the Financial Regulator fed into that via the information it had from individual institutions.
Joe Higgins (Dublin West, Socialist Party)
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So, would you believe or not that the board of the Central Bank, therefore, retained a serious responsibility in relation to financial stability arising from what the regulator was in charge of?
Joe Higgins (Dublin West, Socialist Party)
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And, are you aware that that's a direct contradiction of what the former Governor of the Central Bank told the inquiry?
Mr. Con Horan:
Well ... I ... certainly, again, I go from the memorandum of understanding and my practices in there. I think the headings in the memorandum of understanding are very clear. One is responsible for the financial stability and one is responsible for contributing to it, so I think that it is clear. I would add, for instance, that the financial stability department was located within the Central Bank; it wasn't within the Financial Regulator. And I think that's pretty indicative of where the primary responsibility lay.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Was it significant that six or seven members of the financial authority board were also members, and, in fact, constituted a majority of members, of the Central Bank board?
Mr. Con Horan:
Absolutely, I mean ... and this was ... I mean the information coming from the Financial Regulator and the purpose ... my understanding of the ... I wasn't on the Central Bank board ... my purpose of ... my understanding of the purpose of those ... that cross-membership, was to ensure that the board of the Central Bank had prudential information to assist it in its role. And it was my understanding that prudential information, the prudential pack, etc., was given to the board of the Central Bank to assist it in its role.
Joe Higgins (Dublin West, Socialist Party)
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That was your understanding?
Joe Higgins (Dublin West, Socialist Party)
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Okay. Can I refer you then quickly to your statement ... written statement, page 4. And in reference to why so-called principles-based regulation and you refer to the IMF calling it light-touch regulation, why that was the case ... and you make reference to:
The ... Board was, however, concerned about generating instability and the risks attaching to shrill warnings. It also had concerns about the impact that regulatory intervention might have on the competitiveness of Irish banks.
This is to answer the question as ... as to why it was light-touch or principles-based regulation. And then you refer on footnote 11.12 to three sets of board minutes: July 2006, June 2006 and October 2007. What's that reference to? Where does shrill warnings-----
Ciarán Lynch (Cork South Central, Labour)
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I need to allow some time to reply as well because you're going to run out of time with your questions, so if we could maybe move to the question so I could allow Mr. Horan ... so I'll give you a few moments to wrap-----
Ciarán Lynch (Cork South Central, Labour)
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-----no, I ... just allow Deputy Higgins to wrap up the question and then I'll bring you in, Mr. Horan.
Joe Higgins (Dublin West, Socialist Party)
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Yes. In other words, this concern that regulatory intervention might damage competitiveness, might perhaps affect the IFSC, which was a subject of discussion with Mary Burke ... is it that those minutes that you have footnoted here refer to that?
Mr. Con Horan:
Yes, I think they give ... they give some examples of where the board ... for instance, when the Basel II measures were being proposed in mid-2006, I think one of the references at that stage was, you know, if you're going to do this, you need to be conscious of the competitiveness of the Irish banking system. So that was the sort of concerns that were being expressed at that time about the regulatory interventions.
Joe Higgins (Dublin West, Socialist Party)
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Okay. So the prudential information that was getting through to the board on a regular basis, which you said-----
Ciarán Lynch (Cork South Central, Labour)
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I'm going to have to wrap you up here quickly now with a question-----
Joe Higgins (Dublin West, Socialist Party)
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Yes, I am-----
Ciarán Lynch (Cork South Central, Labour)
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-----because you're way over time.
Joe Higgins (Dublin West, Socialist Party)
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Notwithstanding that, we still had this type of concern on the board about people who might be raising red flags about dangers in lending, etc.
Mr. Con Horan:
Well, I think there was a concern about the property market, you know, in that some of these ... and this was the argument that was being put to me, that some of these arguments ... this type of intervention could attract negative international interest in Ireland and, you know, we had to be very careful with that, and there were ... there are issues for the competitiveness of the Irish banking system as well. So, you know, they were reflected then, I think, in those minutes.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Yes.
Ciarán Lynch (Cork South Central, Labour)
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Senator Barrett.
Sean Barrett (Independent)
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Thank you, Chairman, and welcome. Do you believe that there were effective instruments available to deal with excessive credit growth and sector risk concentration?
Mr. Con Horan:
In terms of credit growth, I think the instruments ... and I hope the chart that I showed, showed that when we actually did intervene, there was definitely a change in market behaviour. I'm not saying it was entirely responsible for it. There were also interest rates, etc., that were effective at the time but if you look at mortgages, for instance, the speed of decline on the Irish growth rates was quicker than any European country after we introduced the measures. In relation to sectoral concentrations, clearly they would have been beneficial, but I think, again, I'd make the point that at a European level, issues like central ... sectoral concentrations were not part of the Basel process. While the Basel process did have specific limits on individual exposures, it didn't have anything on the sectoral front.
Sean Barrett (Independent)
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But doesn't that bring to one of our problems, Mr. Horan, that our banks seemed to do nothing else except invest in property at some stage? The remainder of the loan book was shrinking as a percentage of the total at a very rapid rate.
Sean Barrett (Independent)
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So we needed them-----
Mr. Con Horan:
Well, I think, just again, without getting into the technicalities of it too much, the rule and ... you know, was where you had an exposure that had a common predominant risk factor ... and the issue and the arguments that the bank made - and I would say, Senator, that this preceded the establishment of the Financial Regulator - was that if you had a hotel ... funding a hotel in Sligo and an apartment block in London or an office block in New York, they were not subject to the same common predominant risk factor, and that was the argument that banks were putting forward in terms of that they weren't exposed and weren't breaching the limits per se.
Sean Barrett (Independent)
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You said that the measures, on page 7 of your paper, that the measures were the most stringent capital regime in Europe, but the downfall was also the most adverse. How did the most stringent rules produce the worst outcome?
Sean Barrett (Independent)
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I see, yes. The opposition to the CRD requirements from within the industry, could you tell us something about that?
Mr. Con Horan:
Well, yes, I mean, the process was we went to public consultation, I think, around September 2006. So we'd gone through our internal processes internally, and we went to consultation and received back in the responses. And, certainly, the representative body of the banks believed very strongly that the measures were unwarranted, that they risked bringing negative attention to Ireland and jeopardising the property market.
And that view was also reflected in the comments of the individual banks, so they were clearly not happy because we were at least 50% more than most other jurisdictions, all other jurisdictions, and, in many cases, the level of capital being demanded in Ireland was three times the European level.
Sean Barrett (Independent)
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Your statement on page 11, does that contradict that or does it apply to all banks? What you say that banks were woefully under capitalised and what would they need to do to bring themselves up to the capitalisation of Google, say, for example?
Mr. Con Horan:
Well, the comment I have there is a quote from the chairman of the Financial Stability Board, who has a broad remit obviously across banking across the world. And I think this is one of the key problems that we faced was that simply the Basel accord completely underestimated the amount of capital that banks needed to have. If you compare 2007 with now, banks are holding probably in the region, to use his numbers, seven times more capital than they were at that time. If you can imagine the Irish banking system in 2007 or 2008 having seven times more capital at that point than it did, then the situation was obviously entirely different. So that's, that's the scale of the weaknesses in the Basel process from my perspective.
Sean Barrett (Independent)
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How much more capital did they need, double it?
Sean Barrett (Independent)
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Double to triple. Thank you very much. Thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator Susan O'Keefe.
Susan O'Keeffe (Labour)
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Thanks, Chair. Mr. Horan, on page 11 of your statement you say from a supervisory perspective these two issues are considered to be very closely related as liquidity issues in banks can quickly give rise to solvency problems and vice versa. I mean, in the context of this, every time we raise the word "solvency", everybody runs off into the distance, but when we talk about liquidity, we're all fine. So, you're putting them right beside each other there. So can you just tell us whether or not in those conversations about liquidity at the time, was solvency also being discussed? Or were you alone in this consideration?
Mr. Con Horan:
No, no, I mean, I think the issues of solvency and liquidity are very closely related in banking. If a bank has not got sufficient, to put it at its most simple, cash to do its day-to-day business, the assets it hold will, you know, will not be sufficient to enable it and it may have to dispose of assets, etc., impacting on its solvency. Equally, if a bank has not got enough capital and enough solvency, then the markets won't lend it liquidity on a day. So the two things are very closely related. A bank that runs out of liquidity will probably fail; a bank that has not got enough capital will probably struggle to get liquidity from the market.
Susan O'Keeffe (Labour)
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So at the time as it closed in through July, August, September, and it was clear that there were serious liquidity issues with many of the banks, and some more acutely than others, is it fair to ask then whether discussions that were being had with all levels, among all different groups of people, yourself included, I'm sure, were also considering the solvency of those institutions and whether they were ... that was at stake?
Mr. Con Horan:
Yes. Again, just to be clear, I'd say the dominant issue at the time was the liquidity issue. We had literally had the crisis from August '07 and there was a struggle almost on a daily basis to make sure the banks had sufficient liquidity and they were putting in place the proper measures. That was definitely the dominant discussion. But equally important in that discussion was, you know, their audited accounts, etc., coming out, their own views, you know, of the ... their management statements, etc., were they sufficiently capitalised? And at that ... certainly '07, etc., I don't think there was any problems being mentioned at that time. All their rating agencies were holding them up very strongly in terms of their capital and their international ratings.
Susan O'Keeffe (Labour)
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Given you'd had ... there was a liquidity crisis which, as you say yourself, roughly started around August '07 had now been running for a year ... I mean, does the length and depth of a crisis of that kind not escalate the fear of insolvency? I mean a liquidity crisis of a week you might say, "yes, yes that's fine", but this is a year?
Mr. Con Horan:
Yes. I mean, I think that's a fair comment, I mean ... as the Chairman pointed out, even in March 2008, you know, contingency planning was going on in case a bank ran into a solvency problem. So, you know, clearly ... I think the macroeconomic view that I was getting at that time was that the Irish economy was still relatively robust, commercial property sector was still holding up, vacancy rates, etc., were still good so there wasn't huge concern ... sorry, there was concern, but there was also belief that the overall economic situation was still enough that we weren't seeing solvency problems.
Susan O'Keeffe (Labour)
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We heard evidence earlier from Ms Burke about meetings that took place on the seventh floor, to use that expression, between senior executives from banks and senior executives within the Financial Regulator and Central Bank, I think. Were you ever party to those meetings, do you know what that's about, that these were meetings that were not minuted and were not discussed then, by and large, with the banking supervision department?
Susan O'Keeffe (Labour)
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No no, we're talking about earlier than that, she was talking about a period before that, 2006, '07, '08.
Mr. Con Horan:
I had worked in banking supervision up to 2006, so I was conscious of the situation where, at times, chief executives came in and met the senior executives and the banking supervision people wouldn't have been involved. I certainly would have tried to the extent, you know, to make sure that that didn't happen and, I'm not saying it happened on every occasion, but certainly, I mean, I wouldn't have been having meetings with banks without understanding the banking supervision position, and I certainly would have been meeting with the people in banking supervision on a very frequent basis, weekly, and more often than that.
Susan O'Keeffe (Labour)
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Okay. I think you said earlier that when you tried to introduce those measures about increasing capital for high loan-to-value mortgages in 2005-----
Susan O'Keeffe (Labour)
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-----you said you encountered the difficulty, environment of groupthink, I think was the expression that you used.
Susan O'Keeffe (Labour)
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All right, okay. Was there, I mean, you said I introduced measures in a "difficult environment of groupthink", I'm sorry, was that the only thing that was going on there, do you think, it was just groupthink, or was there other resistance to change, and if so, what might that resistance have looked like?
Mr. Con Horan:
I think groupthink is a fair description of it; I think there was a view that, the predominant view was that interest rates were going to rise, therefore, the market would naturally calm itself down and as an organisation, no further intervention was required, and in fact it was concern that interventions such as regulatory interventions may in fact disrupt the market and may send out the wrong signals internationally. Personally, I didn't subscribe to that; I believed it was appropriate that we would intervene, and I think one of the important things I tried to achieve in 2006 was to establish the principle, very early in my term as prudential director, that intervening in the market didn't necessarily mean we were going to have horrendous problems. And I think that was one of the benefits of the intervention in early 2006.
Susan O'Keeffe (Labour)
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Just finally, were you disappointed in 2005 when your attempts to intervene, if you like, were turned down?
Mr. Con Horan:
I was. Obviously, I had put a lot of effort into a paper and a lot of research into debt levels, international practices, etc., what was going on in other jurisdictions, so I tried to put out a fairly balanced and logical argument as to why we should begin the intervention at that point in time. There were other views that it wasn't necessary, and ... it didn't happen.
Susan O'Keeffe (Labour)
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And they prevailed.
Ciarán Lynch (Cork South Central, Labour)
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Listen, I'm aware that members are, nearly ten hours ago they came into the committee room this morning, but I would just remind them like that there ... that we do have to complete a line of questioning this evening, before we get through, because that's going to be quite extensive, if the line of questioning isn't followed up, as disciplined as we would usually do it. I appreciate it myself, I've been here since 9.30 this morning myself, like other members, and that can maybe create its own attention issues. Okay. Deputy Doherty, six minutes.
Pearse Doherty (Donegal South West, Sinn Fein)
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Thanks a million, I think the same question that I've been given has been dealt with adequately, and if not, I'll take direction from the Chair. Can I ask you, Mr. Horan, in relation to a discussion we were having at this committee with another witness in relation to a letter that you signed in March 2008, to a financial institution, which talked about ... an institution having no access to ECB monetary operations, not having access to wholesale markets for funding in recent months, and were relying on retail and corporate deposits initiatives for liquidity?
This was in, as I said, 2008. Would that not be a very serious issue if there was ... if it was an institution obviously ... there was, given your letter, of that nature, and what was the response by the office at that time?
Mr. Con Horan:
I don't think I have the ... I don't think I've seen the letter in my pack. I may have missed it, but I don't think it's in my pack. But, I mean, I can maybe imagine who the institution, or one of two institutions that it would have been. I mean, clearly that would have been a concern about access to liquidity but that was not unique to one institution. I mean, the markets in March 2008 had gone very, very bad. There was severe shortages and concern at that stage right across the board. So, you know, I talked about the St. Patrick's Day massacre, that was a really difficult time, and markets were going extremely frightened at that point.
Pearse Doherty (Donegal South West, Sinn Fein)
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And that fact that they would be shut out from ECB monetary operations and from the interbank market for a number of months, would that be more than just-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----you know, the liquidity pressures that were being felt across the financial sector at the time?
Mr. Con Horan:
Yes, I mean, certainly, I mean, at that time access to ECB financing was extremely important, and, you know, a lot of our work around that time was making sure that banks had sufficient collateral in hand to gain more ECB funding. So the fact that somebody was out of that at that point in time, I can't recall the specific, but would have certainly added to the problems.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Mr. Horan, I want to refer to the core document booklet, Vol. 2, page 134. It's a short reference anyway, but the document references the fact that towards the end of 2007, Irish banks had already lost between 30% and 50% of their value since the start of the year and that this was due to the exposure of Irish banks to the Irish property market. Would you agree or disagree with this analysis at the time that the banks' exposure to property and the knowledge within the investor circle was having a negative effect on the share price?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes. Was the perception of the Irish financial sector's overexposure to commercial and residential property a correct or incorrect perception, in your view?
Pearse Doherty (Donegal South West, Sinn Fein)
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And can we say or not that by the end of 2007, it was common knowledge in investor circles that the Irish financial sector was overexposed to commercial and residential property, and that this knowledge of the overexposure risk was being reflected in the share price?
Mr. Con Horan:
I think that certainly would have been one of the issues that was reflected in the share price. I mean, I think there were a number, there would be a number of drivers to that point in time, such as the liquidity strains, the size of the Irish banks, etc., they weren't able to compete in the same way as major globally systemically important banks would. So being a small jurisdiction with small banks would also have played on the pressures, but I'm not taking from your point in terms of the property market; it was the issue that was relevant and would have been commented on at the time.
Pearse Doherty (Donegal South West, Sinn Fein)
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Is it your view or not that, given that the share price had dropped significantly, as was said between 30% and 50% in the end of 2007, that the markets had already made up their minds in relation to certain financial institutions in this State?
Mr. Con Horan:
I wouldn't ... I wouldn't agree with that. I wouldn't fully agree with that. I mean, I think it's fair to say that right across the board at that stage, internationally, banking share prices were under huge pressure. I mean, we'd already had the ECB intervention on 9 August, and they were not ... that was not related to Irish banks, that was related to the banks in another jurisdiction who'd run into liquidity problems. So, you know, there was a lot of problems across the market. This was the feature of the Irish market. There were different features in other markets in terms of exposure to US securitisations, etc. Clearly, the US banks were in serious trouble at that stage as well. Northern Rock, one of the-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Horan, finally, before I run out of time, you mentioned about being vilified in the media. You mention in your opening statement that you believe you are a contrarian voice, and you've added evidence to the committee in relation to back up those assertions. In relation to being vilified in the media, can I ask you, because the Irish public would be very aware of your involvement in the Anglo tapes, your voice appearing on the Anglo tapes.
Pearse Doherty (Donegal South West, Sinn Fein)
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And-----
Ciarán Lynch (Cork South Central, Labour)
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You'll have to be careful now, Deputy.
I will and I'll take direction, and if Mr. Horan doesn't want to go down this direction-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes. The question I had to ask you was in relation to the sanctions, but it was being dealt with by Mr. MacSharry. But, the question then is if the Central Bank isn't given administrative sanctions - and I believe that the recording in the Anglo tapes was you suggesting to executives in Anglo, or senior bankers in Anglo, or a senior banker in Anglo, to act ethically, and to not kill the golden goose of the bank. And not to suggest that there was any unethical behaviour, but the comments that are in the public domain, and not to kill the golden goose of the guarantee. But there was subsequent recordings, which shows a bit of laughter and jousting and-----
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Deputy I'm going to have to pull you back because-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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-----we, we're right on the edge now, right on the edge, really. So, you're out of time.
Ciarán Lynch (Cork South Central, Labour)
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I'm not ... yes, I wouldn't even ... I don't even want to know what your inner thoughts are on this one, Mr. Horan, okay?
So I just want to return to one issue there. Why were the stress tests not effective in predicting the bank's failures?
Mr. Con Horan:
I think the most obvious reason is that the scenarios that were developed were adverse. You know, the adverse scenarios that developed in no way reflected the events that occurred in 2008. And quite frankly, if you had put those scenarios out in 2006 nobody would believe them. I mean, we have to recall that this was the period that the economists had coined as the great moderation. This was a period of stable interest rates, stable inflation, stable banking that had been going on for a decade. What actually happened in 2008 was simply not on the radar screen. If you had tested for that, the scenario that occurred if you had tested for it, I suspect would have shown failures of the banks, but I just think the scenario was not contemplated.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Deputy Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. Good afternoon, Mr. Horan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I just have a couple of questions. Firstly, I want to ask you to outline for the inquiry was there any internal guidance system or manual in operation as to how the regulator would handle breaches of principles or other regulatory breaches?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And what was the format like? Was it general guidance, or-----
Mr. Con Horan:
At two levels. So there was the general guidance coming from the authority at that stage was ... literally the administrative sanctions was coming on stream, and taking over a year to get developed and develop the systems. What each department was asked to do at that stage was to go through all the legislation that applied to their particular area and try and rank the issues in terms of actions where sanctions might be contemplated. But at that point, as I said earlier I think, was that the decision of the authority at that stage was we would focus on the consumer issues. The chief executive would prepare a plan as to how eventually things would be rolled out, but the prudential was not given the same prominence at that point.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So there wasn't really a formal document or-----
Mr. Con Horan:
There would have been. So there would have been board papers showing the approach with administrative sanctions, I think around May 2005. And then there would have been guidance coming from the legal people in terms of ... and an expectation as to what the ... what each department had to do.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I want to turn to your statement on the issue of corporate governance and proposals that you made in 2005, and I want to quote directly again, and you referenced it I think in some of the previous answers that you've given. You state:
In May 2005, I proposed to the Authority a corporate governance regime for banks and building societies. This proposal was to impose a formal condition on the licences of all credit institutions, thereby laying a strong foundation for the taking of enforcement actions under the administrative sanction regime that was being developed at the time.
If you could briefly maybe elaborate a little bit more on that particular proposal, and also elaborate as to why you believe that it didn't come to fruition?
Mr. Con Horan:
Yes. I mean, the origin of the proposal was ... well, one, I thought it was the proper thing to do in terms of the principles-based approach to regulation, corporate governance was at the core of what we needed to do.
And there was no real articulation of what the best practices were and I thought it was appropriate to put in a floor or a standard of corporate governance. I think the second point ... the second driver for me was that there were significant challenges with particular institutions in terms of their corporate governance and I wanted to put in measures that would enable administrative sanctions to be taken in the future against those particular ... circumstances. It was around May 2005 I made the proposal and administrative sanctions were literally coming on stream very soon after that. I did go the authority, I think, on two occasions that year with this particular paper. There was consultations with the industry in between but I think I've set out there my understanding of the ... the view was that the markets ... the institutions were overburdened with regulatory burden at that stage. The financial services action plan had just been going on a for a long time ... we had come out ... statements had been made that we weren't going to overburden the industry with additional rules at that point in time and it was just seen as a step too far, I think, is my opinion as to why it wasn't accepted.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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All right, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Just in following up to Deputy Phelan's question there with regard to internal guidance manuals and how to handle breaches of principles and other regulatory matters, you said that preparations were made in 2005, Mr. Horan, yes?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Did you not also say that there was one in place when you left in 2008? That there was similar type of-----
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Okay, all right. Thank you. Next questioner, Deputy Michael McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you, Chair. You're very welcome, Mr. Horan.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I start by asking did you judge the IMF country reports and OECD reports as an important information instrument to aid in banking regulation and banking supervision and financial stability issues?
Mr. Con Horan:
Absolutely, particularly ... I mean, the IMF was, you know, it's a hugely influential organisation in the context of supervision and the approach that's been taken. And, being honest with you, I, you know, I took great comfort from the fact that they had seen significant improvements in 2006 in the regulatory regime and the fact that they were recommending that the prudential director would be put on the board of the authority. I think ... so that was important and clearly the OECD's views on the market were also vitally important and influenced a lot of people.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you. There may be a view that the approach of principles-based regulation arose from the new structure in 2003 but you state in your opening statement "The core strategy of IFSRA was a 'principles-based' approach. It was a continuation of the approach to supervision, previously adopted by the Central Bank." So, can you clarify, in your view, since when - in Ireland - was there a principles-based approach to regulation of banks?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay and the origin of it ... the ultimate origin of it?
Michael McGrath (Cork South Central, Fianna Fail)
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Legislation, European guidance?
Michael McGrath (Cork South Central, Fianna Fail)
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Established practice?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. In your opening remarks - and I don't believe it's in the witness statement - but you made reference to an Irish Timesarticle which cited an instance of you knocking on the door of Mr. Neary when you became prudential director and highlighting concerns and looking for action. You quoted it, presumably from the perspective that it's accurate, so can you tell us in your own words what happened in that instance?
Michael McGrath (Cork South Central, Fianna Fail)
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Sure.
Mr. Con Horan:
Yes ... I mean ... when I became ... just to briefly recap again, I clearly made my proposals in 2005 for the increase in capital when I was head of banking supervision. I hadn't got it through. When I became prudential director, I spoke to the chief executive to say that this was the issue that I felt was the biggest risk we were facing in banking supervision and I really felt that we needed to do something to intervene into the market at that point in time because I ... I'd looked at other international cases and that was the driving force behind my desire to commence action immediately. And I spoke to him because I would have needed his support.
Michael McGrath (Cork South Central, Fianna Fail)
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And just to clarify, you felt that it was the most important issue and that issue being higher capital charges for high loan-to-value mortgages?
Mr. Con Horan:
Well, yes, I ... the market and the way the market was going ... the levels of growth in the market, I was not comfortable with. The immediate issue that we needed to deal with I felt was the residential ... the high loan-to-value ratio loan, but in the paper I put forward in February 2006, I also signalled to the authority at that stage that we were going to look at the commercial property sector as well.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. And apart from that paper which originated in August 2005, which at the time was rebuffed - it wasn't adopted at that point - are there other examples of measures you proposed during your time as head of banking supervision which you wanted to have implemented but which weren't implemented?
Mr. Con Horan:
I think that ... I mean, I think that at the end of 2004, I would have been arguing for the establishment of specialist units to pursue administrative sanctions. I didn't believe at the time the way we were structured was correct. I didn't believe it was really feasible for accountants and people who were trying to understand the Basel process to also convert themselves into people who could take sanctions cases maybe up as far as the High Court. I believe that was a specialist area and I argued for that in writing and I think that's one of the areas that we maybe looking back ... I think when the new regulator, when the new environment was established, we have now two enforcement departments and I think that's probably the right way of approaching that-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, did you take specific measures on concentration risk, on the risk of the banks lending too much to one sector? Did you propose and initiate specific measures on that concentration, key concentration risk-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay-----
Michael McGrath (Cork South Central, Fianna Fail)
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Finally, finally, Chair, if I may. And Senator MacSharry raised this but, can you just be as specific as possible on that May 2008 request by Ms Burke for additional staff resources. Where did that hit a roadblock?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes-----
Michael McGrath (Cork South Central, Fianna Fail)
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She said she had your support-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Who ... who was on that committee at that time? You were ... were you a member?
Michael McGrath (Cork South Central, Fianna Fail)
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Or the chairperson?
Michael McGrath (Cork South Central, Fianna Fail)
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I think that would be helpful.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Horan. Deputy O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman. Welcome, Mr. Horan. Do you feel that the level of European macroeconomic and prudential supervision was adequate in the years between '03 and '07?
Mr. Con Horan:
The European ... no. I mean, the answer is "No". It was a transitional period. Obviously '04, the Basel Accord was published.
It moved a lot more flexibility to the banks in terms of how they did things rather than to the supervisory authorities. That was the forerunner to the capital requirements directive which began to be put in place then. I think ... I don't think anyone will doubt that that was not a robust system and I think the fact that I made there - that seven years on we're still correcting those errors in the regulatory regime and trying to improve and strengthen it, is testament to how poor it was at the time.
Kieran O'Donnell (Limerick City, Fine Gael)
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Just on a quick note - on the night of the guarantee were you in any way consulted by your superiors?
Mr. Con Horan:
On the night of the guarantee I was in Dame Street and my role was to provide information if the principals needed it in the course of their discussions. It wasn't just me, sorry, we kept a team of people there to do it. My recollection is I don't think we got any inquiries that night for additional information.
Kieran O'Donnell (Limerick City, Fine Gael)
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So you weren't consulted as such-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just quickly - the stress-testing regime that was in operation, do you believe or not that the stress testing, proper stress testing, fell between two stools in terms of the regulator was in charge of in terms of mortgage, we'll say, stress testing, and, we'll say, the Central Bank took over stress testing from 2006 on. So did that process make for good stress testing? Did it compromise stress testing?
Kieran O'Donnell (Limerick City, Fine Gael)
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But wasn't there a changeover in 2006?
Kieran O'Donnell (Limerick City, Fine Gael)
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We were told by Mary Burke when she was in that the stress testing up to 2006 was carried out by the Financial Regulator and that the Central Bank stepped in and, under questioning from my colleague, Deputy Phelan, she did agree that, in terms of stress testing of the banks in terms of mortgage lending - residential mortgage lending we'll say - that the supervision department in the regulator would look for a 2% stress testing above the interest rate they are being charged. So the question I am asking is - and you have made reference previously - could you explain why the Central Bank took over? And it does seem unusual that-----
Ciarán Lynch (Cork South Central, Labour)
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Could you just ask the question to afford some time for a response?
Kieran O'Donnell (Limerick City, Fine Gael)
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I'm talking about ... the main one I want is prudential stress testing of the balance sheets of the banks.
Kieran O'Donnell (Limerick City, Fine Gael)
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And prior to 2004?
Mr. Con Horan:
I believe it was ... because it's macroeconomic modelling, my recollection is that form of stress testing has always resided in the financial stability side of the house. The stress testing you're talking about was a prudential measure, sorry the additional ... is a prudential measure that we opposed in 2007 to ensure that individual mortgages were stress tested because there was concerns that that wasn't happening in the market at the time.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I ... did you in your role as director of prudential, were you on the seventh floor of the building in Dame Street at that time?
Kieran O'Donnell (Limerick City, Fine Gael)
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Your colleague, Mary Burke, in her witness statement spoke about the disconnect between the seventh floor and the staff and she said that in a lot of cases that senior banking executives had director contact with senior executives without the knowledge of the supervisory staff. And she said that she tried to rectify that in October '06 but she said it had little or ... it was at it's most it had little or any impact-----
Ciarán Lynch (Cork South Central, Labour)
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Could you clarify the point you're making?
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose the point I'm making is, is that she stated that it led to undermining the work of the supervision department and more particularly the banks took advantage of it in terms of regulation.
Ciarán Lynch (Cork South Central, Labour)
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Just be mindful now that the transcripts aren't up online yet so people might be making an abridged version of it. If it's not coming out as a statement it's coming out as testimony this afternoon I would be inclined-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, I'm trying to be in the time limit.
Ciarán Lynch (Cork South Central, Labour)
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I know that but quoting can be difficult if you don't have the exact words in front of you. I can give you a bit of flexibility in that area, Deputy.
Mr. Con Horan:
Yes, I have ... I have the gist of the ... I mean, I had worked in banking supervision for a number of years, you know, as I said earlier on. I was conscious of making sure that that engagement continued and that we wouldn't have that disconnect. I would've met with banking supervision at the very least on a weekly basis and, I would have thought, in 2006, possibly on a daily basis, because I had been the previous head of the department-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And when you were previous head of the department, did you look for additional resources yourself?
Kieran O'Donnell (Limerick City, Fine Gael)
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Do you believe you were understaffed?
Mr. Con Horan:
Yes, we were very tightly staffed at the time. It was a huge ... I mean, not only had we ... I think, again, I've given evidence to say that in 2003 one of the big problems we ... we faced was that, with the establishment of the regulator, a lot of the staff in banking supervision were moved to other areas just because we were taking on additional functions. So we lost a lot of the staff and, I think, what I identified in 2004 was that the key risk that we had was developing expertise in basic supervision and we put a lot of effort, etc., into training and getting staff up and running. After that we had to get numbers and it was a very difficult time in terms of ... the Basel accord was coming on stream, needed mathematicians, etc., for some of the complexity around this ... it was very difficult to compete in that market.
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, I suppose, to finish with, do you believe-----
Ciarán Lynch (Cork South Central, Labour)
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Last question, Deputy.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes. Do you believe that you had a lack of the necessary skill base, both in terms of the quality of personnel, in terms of their experience and their ... and their qualifications, and the quantity of personnel, to properly supervise the banks or was the tail wagging the dog?
Mr. Con Horan:
No, I think with ... with the Basel accord coming through we ... we definitely struggled with the skillsets and being able to recruit them from the market. You know, I know that our head of Basel left just before the accord because it was ... you know, there was better opportunities in ... in the sector. So that was a constant problem of retaining the skills and being ... being honest with you, even now I'd say, looking back, we probably needed some additional skills that we hadn't got at that time that we didn't really think about. We were kind of prudentially focused in terms of the Basel accord but I think regulators are better ... better ... more efficient now with the credit experts and market experts and treasury experts - the people who've actually traded in the markets. So, I would say, yes, the construction and the ... the way you would set up a department now would be different, I think, to 2003 and '4.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator Michael D'Arcy. Senator.
Michael D'Arcy (Fine Gael)
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Thank you, Chairman. Mr. Horan, thank you for coming. In the DSG reports there's a lot of mention of ... this is the quotation "highlighting the inherent strengths of the Irish financial system and economy". Was the frequency of this particular stance not a cause of concern by members of the group?
Mr. Con Horan:
-----I mean, the ... the view ... the macroeconomic view at that stage was that the economy was still in good ... good shape or at least should come through it. The GDP-GNP was going to continue to grow and the macroeconomic view was that even the commercial property sector, etc., was holding up despite the problems elsewhere. I'm not an economist myself so I have to rely on the economists to give me that sort of information, but that was ... that was their analysis around that period of time.
Michael D'Arcy (Fine Gael)
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Can I ... can I ask you ... if you go to booklet ... Vol. 2 of your booklets, Mr. Horan, please, page 136. I believe this is 33AK redacted, so it won't be coming up on the screen. At the bottom of ... of page 136, the "International investor views and the share price of Irish banks have continued to fall". Am I allowed read this, Chairman, and exclude names of banks?
Ciarán Lynch (Cork South Central, Labour)
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Yes, just be general in the institutions, okay?
Michael D'Arcy (Fine Gael)
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Yes, okay.
Irish bank share prices have continued to fall and have lost between 30% and 50% of their value since start of ['07]. Notwithstanding the posting of good results by [a bank] ... its share price fell by 6% that day, at one point falling 8%, perilously close to the 9% figure at which trading in a share is temporarily suspended. The decrease in value of Irish bank shares has been greater than in other countries. There is a general discount in the value of Irish banks as there is a perception internationally that they are exposed to property market - reinforced in a 7 November report from [another institution] setting out a negative perspective in the Irish banking sector because of property exposures.
Now that was in a report to the DSG, of which you are a member, I believe.
Michael D'Arcy (Fine Gael)
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Can I ask you, which was the bigger difficulty? Was it a bigger difficulty that financial broker firms had decided that the Irish banks were in serious trouble because of their loan book or the liquidity crisis? Which came first? Which was the biggest problem?
Michael D'Arcy (Fine Gael)
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You were the banking supervisor.
Mr. Con Horan:
I accept that but I would have had my own perspective. My own perspective at the time would have been it was largely liquidity driven but as I mentioned earlier on, liquidity and solvency are two fairly closely related issues. So to the extent that the international market was extremely nervous at the time and was wondering where it would invest its money, clearly one of the issues of concern to them would have been ... sorry, the major issue of concern to them would have been property, the Irish banks' exposure to property.
Michael D'Arcy (Fine Gael)
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Which was the biggest issue? I suppose what I am saying is the liquidity crisis ... this is almost a year, it is ten months before the guarantee. The liquidity crisis, while there was contingency planning for events, this was the November 7th report from a major player in the international markets stating quite clearly a negative perspective on the Irish banking sector because of property exposures, almost a year before it, before the guarantee. Which was the bigger issue? There was liquidity for other institutions at this stage. What I am trying to ask is, had the international brokers decided that the Irish banks were in trouble at this stage, as early as this and as a result of the losses, 30% to 50% of their share value in ten, 11-month period? Did one lead to the other?
Mr. Con Horan:
I would disagree with what you said, that the banks were getting liquidity. November 2007 was a very difficult time in terms of ... they may have been rolling over liquidity but it would have been extremely short term, so that was a very difficult liquidity period in the run up to the year end. I won't, I can't overstate that. That was a huge issue.
Michael D'Arcy (Fine Gael)
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But it was available, liquidity was available.
Mr. Con Horan:
It was available at very short tenures and lines were being cut probably at that stage as well, because everyone was being careful coming to the year end. Additionally, on top of that what was the big issue they were looking at in the Irish institutions was they were exposed to the property market so I'm not taking from your ... that was the issue that was added on top of that to cause the concern and walk away and sell shares.
Michael D'Arcy (Fine Gael)
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Were they more exposed than anybody else?
Mr. Con Horan:
I think some of the analysis around that time I recall on sectoral concentrations was that the Irish market was less concentrated than some in the property and more than others that we were in. In 2007 I think there was a financial stability report which said we were around the average, there were certainly countries more exposed and countries less exposed.
Ciarán Lynch (Cork South Central, Labour)
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Last question, Senator.
Michael D'Arcy (Fine Gael)
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Can I just conclude then, there was a financial stability report in November '07, which stated that the Irish citizens were indebted, now the most indebted people in Europe, up to 248% of GNP and they also stated the difficulty in relation to the CRE sector. Again, the coincidence of the FSR report, this report that you had sight of and a further ten months down the line. Did the banks' balance sheet exposure lead to the liquidity crisis?
Michael D'Arcy (Fine Gael)
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Was ours worse than anywhere else?
Michael D'Arcy (Fine Gael)
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Just to finish-----
Michael D'Arcy (Fine Gael)
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-----was ours worse than anywhere else?
Michael D'Arcy (Fine Gael)
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In terms of liquidity.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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I just want to wrap up now, just with a couple of matters and I just want to come back to just an earlier question, I think it was with Senator Barrett you had, Mr. Horan, and it was to do with the issues of excessive credit growth and particularly sector risk concentration. And I'll go on to a question in regard to the auditors later, but I think this kind of is an auditing related question anyway. Were there clear guidelines about the different sector definitions issued by the banking supervisors and, for instance, in property; everything seemed to be in the property basket, whether it was a buy-to-let, a mortgage for oneself, a residential mortgage, or somebody was developing a big shopping centre?
Mr. Con Horan:
So, you're absolutely correct. I mean, it was categorised under "Property" depending on, you know ... that was the allocation, so people were put into buckets at that stage. The reality was, underneath that, then there were all sorts of different risk exposures and I'll go back to my earlier comment about what was the common predominant risk factor. A property in, I think, Sligo was the example I used, versus one in London, are not subject to the same common ... at least they wouldn't have been pre-crisis, common predominant risk factor. So it did require an analysis of the book to see where the exposures were at that time.
Ciarán Lynch (Cork South Central, Labour)
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I'm trying to establish were there guidelines actually sent out by you and your sector that provided clear definitions and different definitions by banking supervisors?
Mr. Con Horan:
Yes, the answer to that is "No", Chairman. Quite frankly, I don't believe it's possible, even now, with the new regime, I'm not aware of anybody who has that sort of capacity to delineate the entire economic sector into buckets that automatically are ... so that's the way it is under-----
Ciarán Lynch (Cork South Central, Labour)
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Okay. So, by your own statement, because it wasn't actually set out, was it potentially then possible that the interpretation of sectoral concentrations, that that was really left to the banks who could interpret those concentration levels subjectively?
Mr. Con Horan:
Well, I think the approach, as I recall it, was to the extent that banks were over those limits, there was a process of engagement went through to just see where their exposures were. So, if the book was split between the UK and Ireland and the US, you might say, "That's diversified enough". If it was one in development land, another in-----
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. Con Horan:
-----the approach is a case-by-case analysis of the banks. The banks must make their own adjudication on their sectoral concentrations. They must put aside capital for that and the regulators must always ... to see are they comfortable with it, but I don't believe internationally there's anybody has a structure that they just apply for sectoral concentrations.
Ciarán Lynch (Cork South Central, Labour)
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But in continuous testimony here, and even in your own engagement this afternoon, it wasn't banks investing in start-up companies, it wasn't banks investing in IT, it wasn't banks investing in dotcoms or tulips or anything else like this, it was banks putting shed loads of money into the construction sector in one manifestation or another. So, in your opinion, should clear guidelines have been issued by the Financial Regulator to get this area defined, because it was very much a holistic interpretation? Should clearer definition lines have been there?
Mr. Con Horan:
I mean, I think the ... I think it would have been extremely difficult to have a clear definition around that. I mean, I'm not taking from the fact that, clearly, the sectoral concentration and the exposure to the property market is the kernel of the problem we had. Predefining that, I think, would have been difficult without banks being able to ... and, I think, Governor Honohan has acknowledged this in his report, that this sort of structure was too easily evaded and, quite frankly, if you did it, it would have impacted significantly on the IFSC, etc. As I say, internationally I don't believe anybody has that structure currently.
Ciarán Lynch (Cork South Central, Labour)
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Okay. I'm just going to move on. In your statement, its in your opening statement there, it's in the very last line of it actually or the last paragraph of it, Mr. Horan. You say that "Audits and other forms of analysis undertaken failed to identify the looming issues that emerged in 2008 and 2009." And just giving our earlier conversation, can you explain why you think this was the case?
Ciarán Lynch (Cork South Central, Labour)
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In your statement you suggest ... its in the very last line of your statement:
The solvency of credit institutions was an issue of concern throughout the crisis. It was vitally important to the management of the crisis and was, therefore, subject to ongoing consideration within the CBFSAI. The various audits and other forms of analysis undertaken at that time were suggesting that the banks were meeting their solvency obligations.
So, in that regard, we had auditors in here last ... they didn't pick up the crisis that was coming down the tracks. In fact, all the banks that they were auditing, each and every one of them, were on record as saying that it came as a huge surprise to them. None of them saw it.
Ciarán Lynch (Cork South Central, Labour)
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And I'm assuming that the ... was the crash ... well, I won't assume I'll ask ... I'll ask you the question, was the collapse of every bank in the Irish State in one way or another a surprise to you?
Ciarán Lynch (Cork South Central, Labour)
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So can you explain why that is the case?
Mr. Con Horan:
Yes, I mean you're absolutely right in your analysis. I think auditors were going in and ... and let's bear in mind in 2008 auditors were sending in larger teams than normal to do additional analysis of the individual banks, didn't see what was happening. Rating agencies right up to mid 2008 were commenting on, going back to your earlier point, that the banks were reasonably well diversified to be able to handle the problems.
Ciarán Lynch (Cork South Central, Labour)
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Yes. Yes.
Mr. Con Horan:
My own view is that the scale of the deterioration post-Lehmans in September 2008, was on a scale that none of us imagined was going to happen. And when you have massive withdrawals of liquidity out of the entire global banking sector, all asset values dropped far more significantly than you could ever have imagined before.
Ciarán Lynch (Cork South Central, Labour)
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Okay. I'm aware of the rating agencies and all the rest of it. But, kind of, in analogist terms, they're living down the road. You were in the house. You weren't living next door, you were meeting with these institutions. You were engaging with them on a day-to-day basis. You weren't abstractly removed or you weren't, kind of, taking a macro overview from a distance. You know that somebody up the road everything looks okay because there's a reasonably new car outside the door, the children are going out to school every morning. You were inside in the house.
Mr. Con Horan:
I absolutely was. But let me just put some perspective on that, you know. The directors of the individual banks where primary responsibility lay, were even closer to those institutions. The risk managers in those institutions with you know large staffs, etc., the internal audit functions, they didn't see those problems coming ... or certainly they didn't come to us to identify that there were problems. So those who are actually ... yes, we had a perspective and we saw what was going on across the board, but that perspective is always going to rely, to some extent, on the institutions and the control systems that they have. It's always going to rely, to some extent, on the audits and what's being produced from there. And I can only go on those facts as presented to me and the facts at that stage, together with the macroeconomic analysis, was that it wasn't as significant as it clearly turned out to be.
Ciarán Lynch (Cork South Central, Labour)
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Senator MacSharry, wrap up please.
Marc MacSharry (Fianna Fail)
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Great, yes thanks. Just two quick ones. In October 2008, did you watch Mr. Neary on "Prime Time"? That was the one where he extolled------
Marc MacSharry (Fianna Fail)
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Okay. So you never saw it back or-----
Marc MacSharry (Fianna Fail)
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Around the time like or-----
Marc MacSharry (Fianna Fail)
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You were aware ... were you aware or not of his-----
Marc MacSharry (Fianna Fail)
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-----extolling the solidity of the capitalisation of the banks?
Marc MacSharry (Fianna Fail)
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Yes, but just the content of it. It's, I suppose, a quite famous ... the content was very much that the banks were very, very well capitalised. "The best in Europe," I think was the quote on the night. Were you aware of that content at the time?
Marc MacSharry (Fianna Fail)
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October 2008.
Marc MacSharry (Fianna Fail)
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And what would have been your view at the time?
Marc MacSharry (Fianna Fail)
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Did you agree with it?
Mr. Con Horan:
I think in terms of the capital of the banks, I don't think that we were the highest in Europe that I'm aware of, but we believed at that stage that the banks were capitalised or at their solvency ratios. They were clearly, though, under enormous pressure, and it was a very difficult message at that point in time in terms of how you presented that message without exacerbating the problems that were already there. So, again, I can't look at the ... I actually don't believe that I've looked at the actual wording, but it was a very difficult and challenging time to get the message-----
Marc MacSharry (Fianna Fail)
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But you wouldn't use "The best in Europe" as ... in your own words?
Marc MacSharry (Fianna Fail)
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And just------
Marc MacSharry (Fianna Fail)
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Was Mr. Neary your line manager from 2003 on? Did you report directly to him?
Marc MacSharry (Fianna Fail)
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So he was the director of prudential when you were manager or head-----
Marc MacSharry (Fianna Fail)
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-----of bank supervision and then he became CEO and, presumably, you reported to him then.
Marc MacSharry (Fianna Fail)
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Okay. Did he rebuke your advances in terms of the regulatory improvements that you sought to make?
Marc MacSharry (Fianna Fail)
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But before that, as head of banking supervision.
Marc MacSharry (Fianna Fail)
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So to the extent that you can judge, he was supportive but he came back with the message that, "Look, this isn't working."
Marc MacSharry (Fianna Fail)
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And then in his new role and your new role, he was supportive of what you sought to introduce.
Marc MacSharry (Fianna Fail)
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And very finally, do you recall that when the remuneration and budgeting committee were considering the approaches which you felt were justified, having been in the position yourself, for more staff for bank supervision, do you recall was Mr. Neary involved in that decision?
Marc MacSharry (Fianna Fail)
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Okay. Thanks, Chairman.
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, Mr. Horan. I just ... to conclude, I want to look at one document, if I may, and it's in Vol. 2 of your booklet, page 127.
Eoghan Murphy (Dublin South East, Fine Gael)
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This is a meeting on 26 September, so it's the Friday before the guarantee. And at this meeting, three representatives from Merrill Lynch are making a presentation to five others, including the Minister, and including yourself.
Eoghan Murphy (Dublin South East, Fine Gael)
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Is this the domestic standing group meeting?
Eoghan Murphy (Dublin South East, Fine Gael)
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This meeting continued on the Sunday, the day before the night of the guarantee. Were you at the meeting on the Sunday?
Eoghan Murphy (Dublin South East, Fine Gael)
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You were. Okay. And just on the second last paragraph on that page, it says, "On a blanket guarantee for all banks - ML felt could be a mistake and hit national rating and allow poorer banks to continue." What was the reaction to that? And was there any discussion at that point in time about partial guarantee, either for five banks or for four banks?
Mr. Con Horan:
I don't recall that there was. I think ... my recollection - and it's a long time ago at a very difficult time - is that that was their initial reaction. So they were putting out their views at that stage to the attendees in terms of what the various options and what their perspective was, and we continued in that discussion the following morning.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And when that discussion continued, the possibility of a five-bank or a four-bank guarantee, was that discussion held, given what was stated there at that meeting on a blanket guarantee?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. You would not have thought so.
Mr. Con Horan:
I wouldn't have thought so, but, again, I ... I ... I'm ... being honest with you, I cannot actually remember the meetings themselves, so what happened ... I remember there was a meeting in the NTMA the following morning, that Merrill Lynch came in and gave their views, if I recall correctly, on what they'd seen in individual banks.
So there was an elaboration on the work they were doing but, to the best of my knowledge, we didn't get into specifics on guarantees and things like that.
Eoghan Murphy (Dublin South East, Fine Gael)
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Do you remember then if Merrill Lynch, at that follow-up meeting, was sticking to the warnings against a blanket guarantee?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, and just as a final question then. So, you don't participate in the follow-up meetings on a Monday and a Monday evening in terms of being in the room, as you were then, so have you briefed Mr. Neary in the interim as to what is happening? And do you ... did you brief him with the recommendation?
Mr. Con Horan:
I mean, I've no doubt I would've briefed internally in the bank, both Mr. Neary, the Governor and other people in terms of what was going on. These were clearly important meetings at the time. My role would have been to participate in them, because I had knowledge of the banks, and then report in to the principals in terms of what was being discussed.
Eoghan Murphy (Dublin South East, Fine Gael)
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With a recommendation ... would you brief with the recommendation as to a view?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, and you didn't keep a minute yourself of this ... of these meetings?
Mr. Con Horan:
I ... I don't think I did at that stage. I mean, meetings were happening literally every minute of every day around that time and, you know, we were working 18 hours or longer every single day at that point in time. So, yes, you know, there would have been somebody ... I mean obviously there were people keeping note of the meetings at that point.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you very much.
Ciarán Lynch (Cork South Central, Labour)
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Okay, I just want to wrap up with just getting an overview ... maybe ... situation from you, Mr. Horan, in regards to the IFSRA's view of liquidity situation of the Irish banks. And ask you did you get any sense of urgency or concern from the banks as regards their funding or liquidity positions in the three months immediately prior to the issuance of the guarantee?
Ciarán Lynch (Cork South Central, Labour)
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I just want to take you ... this won't be displayed, but it's Vol. 1, page 93.
Ciarán Lynch (Cork South Central, Labour)
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Yes, indeed. And it's a letter from the regulator's office to a financial institution. And in that correspondence ... are you familiar with it?
Ciarán Lynch (Cork South Central, Labour)
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It's page ... it's actually 97 and 98 in my document here ... it's the ... sorry, I'll just put it up for you there now. Page 97 in the core document.
Ciarán Lynch (Cork South Central, Labour)
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93, so I might've mis-referenced that there. Are you familiar with that correspondence, are you?
Ciarán Lynch (Cork South Central, Labour)
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Were you familiar with that correspondence at the time of its issuance or there ... or some time afterwards?
Ciarán Lynch (Cork South Central, Labour)
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When would you have seen this correspondence for the first time?
Ciarán Lynch (Cork South Central, Labour)
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Okay, was the contents of that correspondence at any time discussed at any meeting that you were in attendance to?
Ciarán Lynch (Cork South Central, Labour)
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Looking at it now and given that we were speaking about the three months before the guarantee that there was a liquidity crisis ... that there were liquidity issues in the sector, was this indicating ... or did this have potential to indicate that it was more than once ... in fact it was over a year beforehand, that there were significant liquidity matters that were on the radar of the regulator's office at the time?
Ciarán Lynch (Cork South Central, Labour)
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Yes, yes.
Mr. Con Horan:
My reading of that letter was that we had just introduced, in July 2007, new liquidity requirements for the banks. So there was a whole set of liquidity requirements came into effect, I think it was 1 July 2007. When I read this, my view was that this was teething issues with the reporting system around that at the time. It was a new set of regulations and this was ... problems with the reporting to the regulator at that time.
Ciarán Lynch (Cork South Central, Labour)
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Are you describing this as a teething problem?
Ciarán Lynch (Cork South Central, Labour)
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I know, but you can have difficulties with new legislation, new measures come in, because people have to get up to speed and all the rest of it, which are kind of teething issues. Are you saying that this is a teething issue, and it's not a liquidity issue?
Mr. Con Horan:
My reading of the first three bullet points is that the ... there were some, we had noticed some errors ... that there was manual interventions needed in the reports, and they needed extra resources to generate proper reports. And we were just advising them at that stage was that the liquidity requirements were statutory requirements that had been imposed as a condition of their licence. So it doesn't read to me that it was indicative of stresses in that bank's book at that time.
Ciarán Lynch (Cork South Central, Labour)
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Finally, just to ask you, Mr. Horan, by means of closing comments, I give you the opportunity to close this evening's engagement. In your opinion, what steps could have been taken to avert a crisis, and what would it have been, and at what time would you have made those interventions?
Mr. Con Horan:
I mean, I've obviously thought about this quite a lot over the years. My view, looking back on it now, is that from the early ... from the mid-1990s right up to 2001, 2002, the market was very active at that stage, the lending was very high, and that continued obviously into 2003 to 2006. My view is probably at that stage, at the earlier stages, before the system became dependent, almost, on the property market, that the interventions, maybe regulatory interventions, from an earlier stage would have curtailed it, and we should have had some targets in our mind as to what was acceptable levels of growth right throughout the period. So, I think it was a ten-year property bubble, and I think it's ... we left it too late in terms of the intervention.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. So with that said, I'd like to thank you, Mr. Horan, for your participation today, and for your engagement with the inquiry, and now to formally excuse you, and to propose that the meeting is adjourned until 9.30 a.m. on Thursday, 28 May. Is that agreed? Thank you.