Oireachtas Joint and Select Committees

Thursday, 11 June 2015

Committee of Inquiry into the Banking Crisis

Nexus Phase

Central Bank-Financial Regulator - Mr. Liam O'Reilly

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We have a quorum, the Committee of Inquiry into the Banking Crisis is now in public session, is that agreed? Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. I would like to welcome everyone to the 32nd public hearing of the Joint Committee of Inquiry into the Banking Crisis. Today we continue our hearings with key figures from the Central Bank of Ireland and the Financial Regulator who had key roles during the crisis period. At this morning's session we will hear from Mr. Liam O'Reilly, former CEO of the Financial Regulator. Liam O'Reilly was assistant director general of the Central Bank of Ireland from 1998 and had been responsible for all of the Central Bank's financial supervision functions. He was appointed interim chief executive at the Financial Regulator in November 2002, and chief executive in May 2003 until he retired in January 2006.

Mr. O'Reilly, you are very welcome before the inquiry this morning. Before we commence proceedings I wish to advise you that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence.

You're 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 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 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 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. 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 and will be relied upon in questioning and form part of the evidence to the inquiry. So with that said, if I can now ask the clerk to administer the oath.

The following witness was sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Once again, welcome, Mr. O'Reilly, this morning, and if I can invite you to make your opening remarks to the committee, please.

Mr. Liam O'Reilly:

Before beginning my oral statement this morning, I would like to make the following two corrections to my written statements to the inquiry, dated 14 May 2015.: at page 2, section 1.2, paragraph 2, the second sentence should read: "The other directors consisted of six Financial Regulator board members, together with five other members appointed by the Minister for Finance"; (b) at page 5, section 2.5, last paragraph, the first sentence should read: "Modest increases in capital requirements were agreed by the board in 2006 subsequent to my departure."

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Sorry, Chairman, I can't find the second one.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just reference the second one again, Mr. O'Reilly, please.

Mr. Liam O'Reilly:

Page 5, section 2.5, last paragraph. Yes, the first sentence should read, instead of "a 1%", "Modest increases in capital requirements were agreed by the board in 2006 subsequent to my departure".

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, Mr. O'Reilly, whenever you're ready to go so, please.

Mr. Liam O'Reilly:

Thank you for the opportunity to provide you with my perspective on the matters under review by the joint committee. First of all, I'd like to talk about principles-based regulation. The approach of the Financial Regulator was that of a principles-based regime. Such a regime was also the standard approach throughout Europe and was in line with the Basel capital requirements. The approach was well known and enunciated by the Financial Regulator, and by Government, and publicly accepted. It was the centrepiece of strategy of the Financial Regulator from the beginning. The policy laid a heavy responsibility on the boards and senior managements of banks. It demanded of them that they had high standards of corporate governance, a clear business risk policy, and risk controls in place to monitor and control that risk. Resources in the Financial Regulator were based on that premise. The Financial Regulator's main focus at the time was on determining the quality of corporate governance, including risk controls, within the bank. An important aspect of corporate governance regime was that non-executive directors had a controlling role in the audit committee and remuneration committee. The regime required direct reporting lines between both the internal auditor and external auditors to the board audit committees.

The Financial Regulator asserted its influence by requiring a financial institution to take remedial action as a result of findings of inspections or as a result of other issues that came to light or in some other way. For example, issues might arise in the course of a review meeting with the bank during themed inspections, by a bank itself reporting a problem or by information supplied by the external auditor, the internal auditor or members of staff. There was a view that taking over-aggressive action might cause reputational damage to a banking institution, with possible consequent contagion effects. In general, the foregoing measures were seen as appropriate at the time. The approach then adopted by the Financial Regulator in line with our principles-based approach was to expect a board would implement the necessary changes and in an expeditious manner. With the benefit of hindsight, it is now clear that this system did not work. More robust and intrusive measures should have been taken.

At the time, the Financial Regulator was of the view that enforcement action would be more effective if there were in place a set of legally based codes and if administrative sanctions were applied for breaches of such codes. The appropriate legislation for administrative sanctions was enacted in 2004. The use of such sanctions was viewed as a more effective and lower key way of keeping non-compliant institutions in line. The system of codes was well developed in the consumer area and where a set of consumer codes were being finalised in 2005, towards the end of my tenure. Administrative sanctions would apply to breaches of the codes. A sanction could range from an official caution to monetary penalties or a disqualification of a service provider. In the prudential area, it was planned that sanctions would be imposed on institutions in the event of breaches of corporate governance codes and other codes. Updated requirements were being developed in relation to being a fit and proper person to hold a senior position in a credit institution. Directors' compliance statements were also being developed. These were to be implemented following an extensive consultative period.

Resources in the Financial Regulator devoted to regulation were determined by the principles-based approach which was not as intrusive as the present system. The idea was that the internal audit departments, risk committees and external auditors were to be leveraged to fulfil the role of the Financial Regulator. The Irish principles-based system was endorsed by the IMF FSAP report published in 2006. That report provided a favourable conclusion as to the adequacy and effectiveness of this system. However, it is now internationally recognised that the principles-based regulatory system was flawed. It failed, not only in Ireland, but worldwide. As a result, regulatory systems are now more intrusive and aggressive. Greater responsibility is being taken by financial regulators to ensure that adequate systems are in place to measure and mitigate risks. The Basel II initiatives have also been completely revised to ensure that capital is adequate to cover for adverse and unforeseen circumstances.

The interrelationship between the Central Bank and the Financial Regulator: it was clearly set out in a memorandum of understanding between the Central Bank and the Financial Regulator that macro-prudential stability was the primary role of the Central Bank and micro-financial stability, i.e. the soundness of individual institutions, was the role of the Financial Regulator. Both of these parties were determined to make this system work. This was our mandate under the law. One of the most important elements for its success was to ensure that there was adequate information exchange. To achieve this, the following mechanisms were in place: the CBFSAI board, chaired by the Governor, consisted of six Financial Regulator board members and five other board members. The secretary of the Department of Finance was on the board.

All board papers of the Financial Regulator were circulated to senior management in the Central Bank and board minutes would have been made available to board members. A paper entitled, "Financial Regulator update", which reported on the activities of the Financial Regulator, was an item on the agenda of the monthly meetings of the CBFSAI board. All pertinent areas of concern of the Financial Regulator were communicated orally to the board and board minutes on these items were recorded. The offices of the Governor, the director general of the Central Bank, the CEO of the Financial Regulator and the prudential director were physically in close proximity to each other and day-to-day concerns would have been discussed as a matter of course. The channels of communication were always kept open. If any significant action was being contemplated, be it against a given bank or banks generally, such matters would have been brought to the attention of the Central Bank before implementation.

The effect of EMU on financial regulation: after the establishment of EMU, the Central Bank, the Financial Regulator and the banking system operated in an environment characterised by a strong exchange rate and low inflation, low interest rates. Cheap credit was available to the banking system from Europe. The control of credit growth, through changes in domestic interest rates, was no longer possible. Because credit was cheap, there was an over-reliance on short-term lending from the EMU interbank market. Customer deposits is usually the more stable source of liquidity as a proportion of balance sheets continued to contract. Increasing reliance was being placed on large, commercial depositors which, by their nature, would have been more mobile. EMU was formed without the provision of mechanisms for measuring and controlling risks, arising from aggregate euro credit flows, in terms of their destination and-or a concentration in certain sectors. Therefore, the inherent risk of a financial stability problem on a pan-European basis, due to the build up of credit risk in certain sectors or countries, was neither being monitored nor controlled. This was a fundamental flaw of the EMU system at its inception. It was thought that individual countries could look after their own regulatory affairs and markets would do the rest. This flaw has now been rectified. Without the use of the interest rate tool, Ireland depended on euro interest rates changing favourably, changes in fiscal policy and moral suasion to rectify the situation over time. By way of a macro-prudential policy instrument to replace interest rates, two options had been mentioned in the Honohan report and in evidence to this committee: change general capital requirements to reflect the increase in risk and the application of sectoral limits on a mandatory basis. Subsequent to my departure, increases in capital requirements were applied to high loan-to-value mortgages and speculative property development in May 2006 and January 2007, respectively. However, in terms of their effectiveness, to quote from the Honohan report, "The measures were in reality also rather modest in their likely [effect]."

Concerns about credit growth: the Central Bank and the Financial Regulator regularly voiced concerns in its publications, quarterly bulletins, annual reports, financial stability reports, about credit growth and the increase in personal indebtedness, particularly in property. Concerns about commercial property lending were also voiced. The following are two examples of public statements made by the Financial Regulator. On 29 July 2005, the Financial Regulator warned about 100% mortgages, saying that they had to be appropriate to each borrower. Clearly such mortgages were not appropriate to first-time buyers. At the time, 100% mortgages were a very low proportion of mortgages provided. A warning also was given on 26 July 2005 in the Financial Regulator's press statement at the launch of its report for the period 2003-2004:

There is an increasing debate about the rapid growth in credit in the economy and I want to address this area as a matter that could cause concern in the future. Along with the Central Bank, we are concerned about the rapid rise in the level of indebtedness in the economy and are well aware that if conditions changed adversely, many people could be severely affected. ... It is the responsibility of each financial institution to ensure that their credit standards, provisioning policies and levels of capital are appropriate to provide not only for today but in the event of a future downturn in the market. ... In short, institutions should only advance loans where they are confident [that their customers are ... have an] ability to repay. They have the responsibility to inform their customers about the risks they are taking on borrowing large amounts of money and that they retain some flexibility to cope with changes in their personal circumstances like unemployment and higher interest rates.

It is important to emphasise that, in making that statement, the Financial Regulator had no evidence that conditions might deteriorate to such a level that the banking system would succumb to a traumatic shock of the magnitude that occurred in 2008.

The following were the factors which provided comfort. There were demographic and other structural reasons for the need for increased activity in the construction sector and the increase in the level of credit necessary. However, a view emerged that property was becoming overvalued and there was a need for correction. At the time of my departure, that correction appeared to be in train. Fiscal policy was moving in the right direction - through the removal of incentives in the building industry - interest rates in Europe were set to rise and house prices were stabilising. The regulator had no serious or imminent concerns about the solvency of any particular financial institution. As the IMF Article IV report emphasised, Irish banks had sufficient buffers of capital to meet any shock that faced the system. Annual stress tests reinforced this view. Moreover, the general consensus in the market was that the Irish banking system was well capitalised and the Irish economy was healthy and growing.

General conclusions. In hindsight, the principles-based approach to regulation had major shortcomings. The Financial Regulator can no longer place the same degree of trust which it previously did in the boards and senior management of banks. In future, the Financial Regulator must adopt a more intrusive and aggressive approach. Moreover, the regulatory system did not appreciate the full extent of the credit exposures. I deeply regret that these failures in the system were not recognised during my tenure in office.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. O'Reilly, for your opening statement. We now commence questioning and let me invite our first questioner this morning, which is Senator Sean Barrett. Senator, you have 25 minutes.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Chairman. And I ... Mr. O'Reilly, you're welcome. I echo the Chairman's welcome for ... to you earlier. In a general question, you mentioned in your papers that you studied in Queen's in Kingston, Ontario. The World Economic Forum has rated Canada's banking system the soundest in the world seven years in a row. And, I think, in 2009 we were ranked 121 out of 123 countries - i.e., at the awful end of the scale. Did you pick up anything in your Canadian studies of economics that would help you in seeing what the difference between the two rankings is?

Mr. Liam O'Reilly:

Well, when I was in Canada I was studying small open economy economics, I wasn't dealing with regulatory economics or regulatory systems. So, I wasn't conscious at that time. All I can say is that I would say that the ranking in Ireland plummeted from what it was in 2006 to where it was in 2009 as a result of the crisis.

Photo of Sean BarrettSean Barrett (Independent)
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And, in your 39 years ... I think, 1967 you went to the Central Bank was that-----

Mr. Liam O'Reilly:

Yes.

Photo of Sean BarrettSean Barrett (Independent)
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-----until 2006, did you see the corporate culture of Irish banking change from being one of the most conservative to being, as you said there, one of the most lowly rated of 123 countries?

Mr. Liam O'Reilly:

Sorry, Senator?

Photo of Sean BarrettSean Barrett (Independent)
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Did ... yes, in your dealings with banks did you see them changing at all? Were they different from the ones you used to meet when in you were in the Central Bank first in 1967? And, what happened sub ... in 2006, '7 and '8?

Mr. Liam O'Reilly:

When I was in the Central Bank first, I would have been dealing with them, first of all, in relation to money market operations - I was operating markets - and also in the foreign exchange area. And I found that the relationship was professional and there were pressures from day to day. I was around during the currency crisis. You can imagine what sort of, if you like, frenzy there would have been around that period. My interaction with them during the time when I was in a regulatory position, I didn't ... I didn't notice any difference there at that time. There were issues that were arising, like the Ansbacher issues, like ICI in 1986, like the Rusnak issue. And these sort of issues, I think, had a wake-up call for most of the institutions. In ... AIB, for instance, would have been one of those. And there was a whole range of changes to corporate culture. And I remember, particularly when we were involved in the overcharging issue and the issues of inappropriate deal allocations, that there was a whole programme of work that we required within AIB to improve that sort of culture.

Photo of Sean BarrettSean Barrett (Independent)
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And yet the ... it cost us in 2007-'08 40% of GDP ... after Iceland, you know, the most expensive bank rescue any place. I mean, did you see anything that ... were their lending standards lower in the '80s than they were in the '60s?

Mr. Liam O'Reilly:

Well, I wasn't involved in the '80s or the '60s and AIB, I would have thought, at that time were ... were a pretty compliant bank. I suppose there was a change in their strategy, which was a business strategy - I think they went more into property than other institutions and that may have caused their losses to be greater.

Photo of Sean BarrettSean Barrett (Independent)
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Were you acquainted with the arguments over the McDowell report? Did you participate in that? He recommended completely separate regulation and the Central Bank and the Department of Finance didn't like it much and a row ensured.

Mr. Liam O'Reilly:

I was ... I was peripherally involved in it.

Mr. Liam O'Reilly:

And the reason I was peripherally involved in it ... it wasn't felt appropriate that someone who would be working in financial regulation should be involved. So it was the director general of the Central Bank at the time involved himself, but that didn't mean that we were ... were not involved in discussions. And I know that there were discussions about worries that if the Central Bank functions of lender of last resort, of money market operations, of providing liquidity ... if there was a separation between that and actual day-to-day regulation, it could have caused disruption problems in the event of the institutions being separated.

Photo of Sean BarrettSean Barrett (Independent)
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Having won the battle, did ... was the war lost, because an organisation of 1,200 staff or so combined put only 35 of them into the prudential regulation of banks?

Mr. Liam O'Reilly:

Thirty five people were in the regulation of banks. I think it was 32, I think, in 2000. It had increased to, I think, 45 in the ... in 2005. The principles-based approach was not one that was new to the Financial Regulator. It was ... it was actually one that was continued on from the Central Bank culture, I would have thought. And not alone that, but this was an approach that was being taken in all countries and the Basel accord and Basel requirements were setting out that that was the way that things were moving.

Indeed, the Basel II arrangements were going to be giving more autonomy to banks in determining how much capital they should hold by ... by stating that if you have your proper models in there, maybe you can reduce your capital. So, unfortunately, there was a mistaken view taken at that time as to who should be regulating banks and to what extent they should be self-regulated as opposed to having a full intrusive, aggressive system in place.

Photo of Sean BarrettSean Barrett (Independent)
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Do you know was there ever parliamentary authority for that? Because here, I've never heard in my short time, a law being brought in and you can ... be implemented by principles, there are no penalties; say, you can, kids can go to school or not if they like, you can drive fast or slow if you like. Was Parliament expressly consulted on this non-statutory regulation of financial institutions, which cost us €64 billion afterwards?

Mr. Liam O'Reilly:

I'd say that the Government's White Paper on good regulation certainly coloured how this matter evolved. For instance, it did approve of the principles-based regulation system at the time, it said that there had to be a lot of consultation between ourselves and the banks, and I must say during my term in office, it slowed down the the way in which we could implement things that we wanted to implement in a faster manner, and this whole idea of over-regulation was over-emphasised. And that was all part of Government policy.

Photo of Sean BarrettSean Barrett (Independent)
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When you mentioned it slowed down we found extremely slow correspondence between banks and the regulator. In one case that ... in the Honohan report, I think, a bank was felt to be problematic - Bank A, I think, he called it - in 2000, and it collapsed in 2008. Why was it taking so long to achieve regulatory control over that particular Bank A?

Mr. Liam O'Reilly:

Well, would you like me to talk about I think it's called Bank X-----

Photo of Sean BarrettSean Barrett (Independent)
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The example I'm looking for is ... did people take much notice of when you were drawing matters to their attention in the Irish banking sector? And that's an example, an extreme one.

Mr. Liam O'Reilly:

Would it be useful at this stage to tell a story about Bank X?

Mr. Liam O'Reilly:

We, as the Financial Regulator, inherited a problem with Bank X. There were corporate governance issues early on, and those corporate governance issues we felt had been resolved by the appointment of a new chairman and two new directors, and as well as that, a chief operating officer. And, unfortunately, within a year - the beginning of 2003 I think it was - the chief operating officer didn't, didn't stay. He gave his ... his reasons at the time as he had personality differences. Also, which we were aware at the time there were continuing corporate governance issues. I suppose, the ... matters came to a head for us in early 2004, with the arrival of a management letter from the auditors of the institution, and concerns that we had as regulators at the time. As a result of that, we instituted a detailed investigation of that institution and we hired a firm of auditors to do that job. As a result of that, a set of proposals came from that institution, and the institution was required to carry out certain tasks. As well as that, I have been hearing in the inquiry here that there have been no sanctions.

In that case, a sanction was applied to that institution and during the following year, we had two sets of audit firms within that trying to rectify the problem. And at the end of my tenure, I thought that progress had been made. Quite obviously, in hindsight, it wasn't enough.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you. Chairman, that's in the core documents, Vol. 3, for this and it's on page 8, the story of Bank A, and if it's of assistance to Mr. O'Reilly, it will come up on his screen and I thank him for his account. But, so if Bank A was seriously problematic from 2000, "persistently problematic", says Honohan, from the year 2000 onwards and "prosecution ... was given detailed consideration", it says at the end of box 4.2, "but other less intrusive prudential measures were taken. Ultimately, however, these proved to be ineffective." So what else could've been done over those eight years-----

Mr. Liam O'Reilly:

Well-----

Photo of Sean BarrettSean Barrett (Independent)
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-----to get-----

Mr. Liam O'Reilly:

Well-----

Photo of Sean BarrettSean Barrett (Independent)
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-----that-----

Mr. Liam O'Reilly:

In hindsight-----

Photo of Sean BarrettSean Barrett (Independent)
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-----Bank A compliant?

Mr. Liam O'Reilly:

In hindsight, I think, the regulator and it could be said it was part of the principles-based report, was too patient and too dependent on the board and that's who we were addressing at the end of the day, the board, to solve these problems, including the, the urge, if you like, of the stick of applying a sanction which was vehemently opposed by the institution. But, when I look back on it now, and I've seen what happened, it is a regret that I didn't just put a condition on the bank at that stage.

Photo of Sean BarrettSean Barrett (Independent)
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Was there consensus at the board level between the Central Bank and IFSRA about the regulatory approach to banks?

Mr. Liam O'Reilly:

Well, let's put it this way - if we were going to move against an institution, at any stage, that ... we would've felt being banks, they have, they have the tendency to have contagion effects. An example I've seen in the inquiry is the one of the night of the guarantee, where there was a worry that if any question was raised about any bank, it could have huge effects on the whole system. It was that sort of attitude that was around, to a certain extent. That's why we felt we would be better with an administrative sanctions system and I can talk a little bit later about that. But, at the time, we should've applied a condition to the institution.

Photo of Sean BarrettSean Barrett (Independent)
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Were pressures put on you by the Department of Finance in relation to compliance statements and corporate governance guidelines?

Mr. Liam O'Reilly:

I was there in 2006 and I was developing this architecture going forward. As a matter of fact, before I had become Financial Regulator, I had set up a regulatory enforcement and development department, which would try and work out a policy as to how we would deal with recalcitrant banks. Another example, by the way, of actions that we took, were in the case of the AIB overcharging and other issues. We've also forced institutions to carry out their own inquiries and pay for them themselves on our ... and we would have specified the jobs. So, it isn't that actions weren't taken, but I think at that time, we should've taken a much more clear action. So, you asked me the question about the Central Bank-----

Photo of Sean BarrettSean Barrett (Independent)
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The Department of Finance.

Mr. Liam O'Reilly:

Was it the Department of Finance or Central Bank?

Photo of Sean BarrettSean Barrett (Independent)
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The Department of Finance, did they have misgivings?

Mr. Liam O'Reilly:

The Department of Finance, I don't ever remember being involved in saying, "Don't do this" or "Don't do that". No.

Photo of Sean BarrettSean Barrett (Independent)
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So, they didn't object to your directors' compliance statements or your corporate governance guidelines.

Mr. Liam O'Reilly:

Well, sorry, as I've said, the directors' compliance statements had been developed towards the end of 2005. It had gone into a preliminary consultation and I think it did run into the sand in 2006 after my departure and I really am not privy to exactly why.

And I know that the Honohan report has given some reasons, but since ... I'm just taking someone else's evidence. I have no straightforward or direct evidence of anything in that front.

Photo of Sean BarrettSean Barrett (Independent)
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Did you find it difficult to get the banks to comply with sectoral concentration ratios?

Mr. Liam O'Reilly:

I think that there was a confusion in the area of sectoral concentrations. To be quite honest, it seemed to fall into abeyance before the Financial Regulator came into place, and they seemed to be guidelines that were not applied. And just to say that during my term of office, we were searching around for what could we do to dampen credit. And I ... during my term of office, and I'm part of this, I never got a proposal that maybe we should bring to the board the idea of applying mandatory sectoral limits. Now-----

Photo of Sean BarrettSean Barrett (Independent)
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How do you mean you never got a proposal? Could you not have made the proposal?

Mr. Liam O'Reilly:

Well, what I'm saying is it didn't occur to me, but there is a second element to that. These limits ... we were in what was called the market paradigm period, where it was better to apply a price rather than to be trying to apply quantitative limits that can easily be got around, and I think the Honohan report did mention the fact that these sectoral limits could be too easily got around. So the concentration at the time, I seem to remember, was on how exactly could you apply capital ratios to increase ... to measure the increased risk that would be involved in this lending activity.

Photo of Sean BarrettSean Barrett (Independent)
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Ms Burke wrote to a bank saying that they were outside what she regarded as the correct ratios, and they replied, "We're comfortable." Did you have difficulty in getting across to banks that they were over-concentrated in the property sector?

Mr. Liam O'Reilly:

Well, the major element at the time, I think, was the ... the major instruments of macro policy, it seems to me, at the time. And even when capital limits were increased in 2006 there were several options, and the options seemed to vacillate between moral suasion and capital requirements. Now-----

Photo of Sean BarrettSean Barrett (Independent)
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A similar, if I may say, non-response to correspondence about loans-to-deposits, that some banks said, "Never mind, we can borrow from our parents in other countries." You know, there seemed to be a view that the regulator could be dismissed by the banks when he expressed concerns?

Mr. Liam O'Reilly:

I would say that we were in this market paradigm period where people bid for funds, and markets would work smoothly, but that isn't what happened. Markets ground to a halt, and all of a sudden there was a freeze, and interest rates increased at a very, very large rate at that time.

Photo of Sean BarrettSean Barrett (Independent)
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Could I bring you to page 40 in Vol. 3, a report of the financial stability co-ordination committee in 2004, and the financial------

Mr. Liam O'Reilly:

What's the page?

Photo of Sean BarrettSean Barrett (Independent)
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Page 40, Mr. O'Reilly. And the second paragraph refers to yourself, "The Financial-----

Mr. Liam O'Reilly:

Yes.

Photo of Sean BarrettSean Barrett (Independent)
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-----Regulator indicated his view that the banks were not convinced that there was an incipient risk building up in the banking sector." Was that not your job? I mean, the people at the party aren't going to object in the famous metaphor about taking the punch bowl away; they want the party to continue. Your job was to stop the party, not to ask them did they want the party to continue.

Mr. Liam O'Reilly:

The question again was what instrument he used ... what was the instrument we could use to actually effect a change?

And as I say, it seemed to me at the time that the policy, generally, in the authority and in the ... in the Central Bank particularly, was that we could talk them out of it. That, in hindsight, was just not effective enough.

Photo of Sean BarrettSean Barrett (Independent)
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Like, should you not have insisted then, "Look, the overall growth of credit is going to build up risk in the Irish banking system, that's my job, I'm in charge here, and I'm telling you that, whether you think so or not, there's an excessive risk building up", which we now know exploded three or four years later? What's the regulator for if he's not, you know, refereeing the match as he sees it?

Mr. Liam O'Reilly:

Well, I suppose there are two answers to that. We should have done more; there's no doubt about it, in hindsight. But ... but, second of all, there was ... the second issue was that if we were doing this, we felt that this was an aggregate problem, it was a macro problem, it was a problem that permeated the banks and it would have had to require an action against all the institutions. And, therefore, it wouldn't have been just me, as the regulator, that would have been making this suggestion. It would have also had to go through the Central Bank and financial services authority board, and ... that was it. It just wasn't-----

Photo of Sean BarrettSean Barrett (Independent)
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Could I bring you-----

Mr. Liam O'Reilly:

Yes.

Photo of Sean BarrettSean Barrett (Independent)
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-----in the final question of the thing, Mr. Reilly, on this session, to page 42, just over the page. The financial stability co-ordinating committee 2006 were getting closer to the crisis. The first item in the second minute is: "It was noted that the ratings agency Fitch had placed Irish banks on lower-rated category for macro-prudential risks".

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

Photo of Sean BarrettSean Barrett (Independent)
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"This downgrade would be discussed at the next Financial Roundtable." I don't get any impression of urgency. The banks had just been downgraded and we're saying, "Yes, we'll discuss that the next day."

Mr. Liam O'Reilly:

Just so say, Senator, I ... I was gone at that stage. I went in January 2006.

Photo of Sean BarrettSean Barrett (Independent)
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Okay. Thank you very much, Mr. O'Reilly. Thank you, Chairman.

Mr. Liam O'Reilly:

Thank you very much.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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With that - and I'll just bring Senator D'Arcy in a minute. By January 2006, Mr. O'Reilly, were ... was the crisis already embedded by then?

Mr. Liam O'Reilly:

In hindsight, I'm being told by all the "wise men", including Patrick Honohan and others, that it was. I didn't have that sense as I left the Financial Regulator, that we were in ... in ... in the beginnings of an imminent crisis. And as-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, but that's Patrick Honohan's view. What's your view?

Mr. Liam O'Reilly:

Yes.

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

Mr. Liam O'Reilly:

Well, my view then ... are you asking about ... for my view then-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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No, no.

Mr. Liam O'Reilly:

-----or now? Now?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Were we embedded in a crisis already by January-----

Mr. Liam O'Reilly:

In hindsight-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Or any-----

Mr. Liam O'Reilly:

-----in hindsight, it looks we were, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. That's your view, all right. I just want to return to a couple of issues there, just following on from Senator Barrett's questioning. When you ... when he was asking you about the McDowell report and, sure, you didn't have any input into that, and that may have been appropriate.

Mr. Liam O'Reilly:

Sorry, it wouldn't be true to say that I didn't have any input into it.

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

Mr. Liam O'Reilly:

But the direct input would have been carried out by the director general, but he might have been asking for papers and various documents to support his view, but they were generally done by other members of staff. I wouldn't have been, if you like ... I came into financial regulation in 1998 for the first time, so there were a lot of technical stuff that would have been dealt with with staff. But I did have a concern about one thing only, and that was that financial stability and prudential ... macro-prudential stability is very difficult to operate if it's not within the system of regulatory-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And that matters. My next question to you, Mr. O'Reilly, is that we know that a ... that from the McDowell report ... and there was an argument for a different model and that the Central Bank, Government, and Department of Finance were against recommendations that were in the McDowell report. The model, however, was developed and it was put in place and you headed it up. So can we ask you for what your views are on the model that was actually agreed?

Mr. Liam O'Reilly:

I thought that it was a construct that was very difficult to operate. It was a construct that was awkward and, therefore, it was something that I thought we were given the job to operate but, if it had been up to me, I wouldn't have started from there myself, personally.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay and what way would you have started it from?

Mr. Liam O'Reilly:

I think that either you had a very, very clear view of having a single regulator for prudential matters for all financial institutions in one institution and if you wanted to separate out the consumer elements and consumer protection, you could have had a sister organisation of that sort, either within the CBFSAI or separately.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I just want to return to return to-----

Mr. Liam O'Reilly:

But ... but just, sorry-----

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

Mr. Liam O'Reilly:

-----to say that the concerns at the time was that the Central Bank didn't seem to care about consumers and, as a result of that, we have to take that whole area away from consumers. Whereas, I think it was in about 1996, a lot of the consumer elements had been taken away voluntarily, I think, from the Central Bank under the governorship of Maurice Doyle. So, what I'm saying is, if you have a financial crisis, you'd better be near the people who are providing the liquidity.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just on another matter - and it goes back to an earlier question from Senator Barrett as well - and that is the implementation on compliance which was first contemplated in 2004 but it took until 2006 to 2007 to be completed. Why was it ... why did it take so long to actually implement that?

Mr. Liam O'Reilly:

Well, in my opening statement I think I mentioned about delays in consultation. I think that the consultation process, which was imposed in law, gave very little ... in some sense or other it all the time seems to be ... seemed to be applying a brake to the system. I think that the Financial Regulator nowadays can get things done much more quickly. I seem to remember Mr. Horan talking about, in his submission, that he had decided to go and make a change in capital requirements, without consultation. And it was the right thing to do but there was a censure immediately from the industry for having done it.

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

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Thank you, Chair. If I could start, Mr. O'Reilly ... the memorandum between the Central Bank and the Financial Regulator dealt with responsibilities of the CBFSAI and IFSRA. Was there clarity in what should be dealt with by you, as the regulator?

Mr. Liam O'Reilly:

I found clarity. I was very clear that we were responsible for micro-prudential supervision and we were responsible for communicating issues in relation to micro-prudential supervision to the Central Bank. But the Central Bank was responsible for macro-prudential supervision.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And, with the clear analysis of each person's roles, was there any crossover or should there have been any crossover in a formal or an informal manner?

Mr. Liam O'Reilly:

Well, the crossovers occurred in two ways. As I said earlier, from the point of view of organisational structure, there were six Financial Regulator board members on the board of the CBFSAI. So, there was an immediate crossover. A second one was that there was a financial stability committee and I, as the CEO, was a member of the financial stability committee. If there were weaknesses, I think that they were at an organisational level and I think that Professor Honohan mentions in his report that the ... there seems to have been a cultural issue generally. And he didn't just single out the Central Bank of Ireland, he said it seemed to be a culture in every central bank that economists and accountants find it very difficult to talk to each other in the same language.

And I think if there was a lack, I think there should have been a financial stability unit, if you like, permanently attached to the banking department. I ... I ... when ... in my time ... appointed an economist as a deputy manager in the banking department for that very reason. But I think we needed much more organised structures and much more communication about issues so that if there was a recognised ... a recognition, in some sense or the other, of the issues that were arising as a result of the growth of credit, on one side, on an aggregate basis and then, on the other side, the individual banks, if that had been put together more, I think we would have been in a better position at the end of the day.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. O'Reilly, on Vol. 2 of your documents, page 44, the Nyberg report-----

Mr. Liam O'Reilly:

What page?

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Vol. 2, page 44. Mr. Nyberg was talking about the Central Bank and yourselves - the interaction between you both. The very last line of 4.2.2: ''it was even suggested that detailed enquiries by the [Central Bank] regarding the basis for the [Financial Regulator's] assessment ... could have been regarded as an unacceptable intrusion into the autonomous status of the [Financial Regulator]''. Do you think that that was the clear position of the crossover that should have been there, or not?

Mr. Liam O'Reilly:

Sorry, just to ... to find it here again. It's 4-----

Mr. Liam O'Reilly:

4.4.2, is it?

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Oh, sorry, 4.4.2. Sorry, sorry.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's on the screen in front of you there, Mr. O'Reilly, if you wish to look at it.

Mr. Liam O'Reilly:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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The last line on 4.4.2. Would you have felt it an unacceptable intrusion into the autonomous status of the Financial Regulator if the Central Bank - the Governor - had proceeded?

Mr. Liam O'Reilly:

Certainly not. Certainly not. I would've felt relieved if some other part of the Central Bank came and said ''Is ... this is ... this is what we should do here now''.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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So what you're saying is that ... that does not apply to your period as CEO of the Financial Regulator?

Mr. Liam O'Reilly:

No. I don't believe so.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You would have felt relieved?

Mr. Liam O'Reilly:

In the sense that there was a credit issue. We all knew about the credit issue. If ... if there was a macro instrument to be used and we were searching around for what sort of ... of macro instrument should be used if ... if someone had come from the economist side to propose a macro instrument, I would have been quite ... I would have been quite-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Are you aware, in the Honohan report, where Professor Honohan states that there were tools ... tools available that were not used?

Mr. Liam O'Reilly:

Well the two tools that were available were ... well, there were four, he said, in his ... his statement. He said, one was moral suasion, which was used a lot. A second was-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Did it work?

Mr. Liam O'Reilly:

Obviously not. The second was capital ratios and-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Did they work?

Mr. Liam O'Reilly:

The capital ratio. Well, there were two. Really, the way it was applied in the end was capital requirements were ... were required. And it seemed to be too little too late. And I know that - I might as well mention it now - that in on the 15th ... or some time in August 2005, Con Horan came to, well through Pat Horan ... Pat Neary, came to me with a suggestion on this. And I brought the idea to the director general of the Central Bank and the reasons for not applying it at that stage were that at that stage house prices were stabilising, interest rates were set to rise and property prices were stabilising. So ... but, generally, it ... they were brought again very quickly after that and they were applied. But, as Professor Honohan says, they were not ... they were not effective. And I suppose, just on a theoretical basis, the biggest problem was ... and I think capital ratios were the way to go - increasing capital ratios or capital requirements. The question was: what was the precise relationship between a 1% or an X% in the capital ratio and how it would affect credit? And I don't think enough work had been done on that relationship. And there would've been a danger, unless that work was done, that it would've ... it would've been either too easy or even ground the system to a halt. And there was a question of how that should be done and that comes back to my point that, I think, if there had been a unit in between of economists and accountants and maybe call them financial accountants ... financial economists ... if that had of been there, it would have been useful. As a matter of fact, the Larosière report says that the word "macro-prudential policy" didn't seem to enter the English language in any real way until after the crisis.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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But the usage of those tools, Mr. O'Reilly, and ... and the attempt to apply them, what sanctions were available to you to use if they were not adhered to by the financial institutions?

Mr. Liam O'Reilly:

Well, just to say, the sanction ... the major sanction that we could've used was to put a condition on their licence. But that-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Did that happen?

Mr. Liam O'Reilly:

That never happened.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Never happened.

Mr. Liam O'Reilly:

Never happened. Another one was-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Should it have happened, with hindsight?

Mr. Liam O'Reilly:

Well, I've already mentioned one case in where it should have happened, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Should it have happened on more than one occasion, with hindsight?

Mr. Liam O'Reilly:

I think condition is very, very strong. I must say, the best set of proposals and the best way of dealing with it was the use of administrative sanctions. And the administrative sanctions - I heard Mr. Horan's evidence on that ... the administrative sanctions system had been ... the actual law and the infrastructure had been built. I was the head of a project team in 2004 which was dealing with this. And in the case of the banking department, there is a document - and I think you have it in your ... in your store of documents provided by the Central Bank - there was a whole list of legislation that could have been turned into the codes. Now, I've been told that the reason it wasn't been done was there wasn't enough resources to do it. I think that was a pity.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Did the Governor of the Central Bank ever try to influence the approach in relation to sanctions?

Mr. Liam O'Reilly:

No.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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No. You-----

Mr. Liam O'Reilly:

Sorry, I wanted to say that we apply a sanction. We increased the capital ratio of a particular institution at one stage.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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From zero to-----

Mr. Liam O'Reilly:

And as well as that, sorry, the AIB one, which is in the public domain, we ...we ... while we didn't use any sanctions, we were able to force AIB to pay a lot of money back to customers. You could call it moral suasion, whatever, but we ... we used our powers to do that. Our powers of investigation, our powers to ... to go into the institution and find out what happened. And we did make findings in that situation. And ... and that was actually a job that covered both the prudential side, which was involved in it from the point of view of the deal allocations, and the consumer side, from the point of view of the overcharging.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. O'Reilly, you're ... there's only been two CEOs of the Financial Regulator isn't that ... yourself and Mr. Neary.

Mr. Liam O'Reilly:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. Neary is the public face of the Financial Regulator. Now, would it be fair to say that you're not the public face of the Financial Regulator?

Mr. Liam O'Reilly:

I was the public face of the Financial Regulator from 2003 to 2006.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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What was your guiding philosophy as how the role should be performed in order to achieve the objectives, the goals of the Office of the Financial Regulator?

Mr. Liam O'Reilly:

Well, there was the style of regulation which was agreed by the board ... principles-based. I was building an organisation at the time. We were putting together insurance, credit unions, consumer areas from the Director of Consumer Affairs. There was a lot of work in putting together an organisation, unifying that organisation and making sure that they worked cohesively. I felt I had done a good job in that area. I felt by the way, when I left the regulator, I thought I left it in a good state. Obviously, in hindsight, the issues were just an iceberg that I didn't see at the time.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Can I refer back to Vol. 2 of your documents on page 3? And I believe this is a 33AK document, it's an aggregate of the documents, I'm not sure if it's going to come up on the screen ... can it come up on the screen? But I'm going to read from it, Mr. O'Reilly. And this is a meeting in April 2004, you were in your job 12 months:

X reported under Financial Stability Matters on recent discussions at the boards of ... CBFSAI and IFSRA. He suggested that the CBFSAI had not convinced market participants that there may be "systemic risk" building up in the banking sector.

Do you recall that meeting?

Mr. Liam O'Reilly:

I do, well, sorry I don't remember the meeting but I've read the documents so it brings it back, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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It brings it back. In terms of ... this was discussed at both boards, am I correct?

Mr. Liam O'Reilly:

No, this was discussed at the financial stability ... sorry, the message that I brought back was a message that was coming from the joint board meeting that was always held about the financial stability report.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And in 2004 we were in the throes of the large growth of the bank balance sheets?

Mr. Liam O'Reilly:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Were you concerned by the large growth of the banks' balance sheets?

Mr. Liam O'Reilly:

I was concerned but as I said later, there were other ameliorating factors certainly at the time of my departure, but I was concerned about, to use an analogy, that the party was going on and no-one was listening. And I just felt that there was a need to get out there and to try and get people to listen. The major outcome of that was the forum of people that we got together every year, the executives of the banks and the economists in those banks. And as the Honohan report says, there seems to be a kind of a different memory emerging as to what was being said, as to what was being heard but I remember saying at that meeting that if, somewhat like I said in public in 2005, "if a shock hits this system are you ready for that shock, have you adequate capital for it?" And given the growth in credit and the growth in corporate credit at that stage even I think it was, that was in 2004.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Can I just follow on in that paragraph:

Indeed, he indicated there may be a "degree of euphoria building up in the property lending markets and that the boards and management of banks are being myopic about the potential risks." X outlined a work programme including a "roadshow" designed to convince the bank boards of the "rationale to curb lending" no [direct] regulatory action was [recommended].

The "rationale to curb lending" we know certainly didn't happen because we know from the banks' balance sheets not alone did they not curb lending but they actually grew at a faster rate. Did this matter come up subsequently to April 2004, that there was a concern about systemic risk between both boards, between the joint meeting?

Mr. Liam O'Reilly:

I think that this was a constant theme in the financial stability reports, the growth of indebtedness in the economy but it always came down at the end of the day - even up to 2008 when I wasn't involved - that there was adequate capital buffers to deal with the issue and that was mistaken.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There is a phone in proximity there, can I just ask members to put their phones on safe mode if they are not actually in possession themselves, because it does travel on.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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If you turn the page Mr. O'Reilly, at page 4, and again I think this should be able to come up, it's an aggregate document. Minutes of the meeting of the IFSRA regulatory authority 2003 to 2004.

Supervision agreed at the November ['03] meeting to put in place a ... Task Force to address [the issue] of corporate governance and commercial lending that had arisen following [the discussion] with former executives of an institution. The results of this Task Force have not been seen. [And it follows on that in] December 2004 meeting that work had now been completed on putting in place appropriate reporting of consolidated large exposures in another large bank.

One of the criticisms that is ... that has come from some of the bankers was that, while they were aware of their exposure to individuals, the only people with the consolidated data with the authority to request the information on the large exposures of individuals across the banks and could have seen that multiple banks were exposed for multiple hundreds of millions, were yourselves.

Mr. Liam O'Reilly:

Yes, and that's when I-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Was that information ever compiled by IFSRA?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Give Mr. O'Reilly time to respond now Senator.

Mr. Liam O'Reilly:

I have already said this, that we did not, and I really regret it, we did not recognise the exposures at my time in office, for the commercial property lending and, particularly as we have seen in this forum, to individuals. I think it wasn't until 2007 that these issues began to be recognised and again I think it comes down to this whole idea of compartmentalisation, if you like, of work - where on the one side, you have economists working on aggregate data and on the other side, you have regulators dealing with individual banks. There should have been something in the middle where there was a team working on the aggregate position and how it evolved. That wasn't there at the time, it was a failure in the system.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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So just to be very clear, developer X had a billion with bank A, developer X had another billion with bank B and your staff never collated that?

Mr. Liam O'Reilly:

Never, it was never red-flagged and that just is something that I have to take as responsibility, as the CEO, that the organisational structure did not bring that forward.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Were you surprised when the information came out that 19 lenders within NAMA had €22 billion worth of loans?

Mr. Liam O'Reilly:

But that would have been in ... in the later years, well beyond the time that I had retired, but I was flabbergasted.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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But it would have started in your period, the build-up?

Mr. Liam O'Reilly:

Yes, I'm sure it did to a certain extent, but as I'm saying ... I ... we didn't recognise it at the time, and I think that that's said in the Nyberg report.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It is about three minutes now Senator.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. Thank you, Chairman. What changes would you have introduced, going back to that period? What would have been the two major changes that you would have introduced into the model of regulation and enforcement?

Mr. Liam O'Reilly:

Two things, two things. I think that the major, the major change would have been a more intrusive form of regulation with more resources to carry out that intrusive regulation. I think all the ... and I think I heard Cyril Roux talk about this yesterday, or maybe it was Mary O'Dea, you can have a lot of ... of sanctions, but the first thing to do is you have to have the information on which to base the sanctions. But second of all, I think that the administrative sanctions should have been put in at a much earlier date for prudential supervision. So, they would have been two things, and then the third thing would have been a much closer relationship between economists and financial regulators, sitting together, in a technical team, all the time watching how aggregate positions were evolving and how the aggregate risk was being recognised.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Again, just to conclude, Mr. O'Reilly, Vol. 2, page 36, there's a letter to you from Michael Buckley, AIB chief executive. Is this allowed to be shown, Chair? This is not allowed to be shown. Section 33AK. It should be in front of Mr. ... page 36, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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This is a letter, is it?

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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It's a letter, yes.

Mr. Liam O'Reilly:

Yes, have it.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And the letter is December '03.

Mr. Liam O'Reilly:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I put to Mr. Buckley, during previous testimony ... I asked him was the risk appropriate for his period as chief executive officer of AIB and he felt it was. Can I ask ... put that question to you, as the regulator, for all of his period of ... as chief executive of AIB.

Mr. Liam O'Reilly:

Well, all I can say is that if I feel some sense of responsibility, having left office six months after Mr. Buckley, I would have said that there should be some sense of responsibility there as well.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Senator. Just, coming back to just an earlier engagement there that Senator D'Arcy had with you, Mr. O'Reilly, in regard to the memorandum of understanding between the Central Bank and the Financial Regulator's office. Could you maybe explain to us, was there sufficient clarity on what should be dealt with by the regulator and was there an expectation that the Governor should invoke his rights and intervene with the Financial Regulator and did that happen on occasion?

Mr. Liam O'Reilly:

Well, the ... the relationship was a very good relationship and I don't think that, if the Governor had come with suggestions to me, as to what I should be doing, he wouldn't even have to have given me guidelines, we would have worked on it because any macro issue would have been dealt with through the CBFSAI board and we would have complied with it.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And at any time did the Governor come to you and say, in his responsibility, or his duty of care, which was the stability ... the financial stability of the State ... did he at any time come to you and says that we have stability concerns here and we would like to maybe examine the possibility of some regulatory matters that might assist or deal with the stability of the banks?

Mr. Liam O'Reilly:

I just remember one incident a long time ago, and I'm depending on memory, where the Governor came back from an ECB meeting, where he said that the Spanish seemed to be increasing or being allowed to have a different regime for capital ratios, could we look at it here. And, I remember looking at it and it seemed to me that the reasons for it were very unique to, to Spain, and we were in a northern European environment where we had France and the UK and other countries who were applying a full, I think it's the IFRS, is it? The accounting standards. And there was certainly a feeling, at the time, that we could not deviate from that, at that time. Now I think-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And that was coming from where?

Mr. Liam O'Reilly:

Sorry?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Coming from the Central Bank or coming from Government or from finance? Where was that feeling coming from?

Mr. Liam O'Reilly:

I can't say it was coming from anyone but a discussion we had within the bank.

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

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat a Chathaoirligh agus fáilte roimh an tUasal O'Reilly. Can I ask you, in relation to, and it's been touched on already, in terms of the statutory objectives of the Financial Regulator, was the promotion of the financial services industry in Ireland ... can I ask how did the Financial Regulator's office reconcile the objective with its prudential role as regulator?

Mr. Liam O'Reilly:

With difficulty, I think. There was an issue that we ... we did always insist that the only way that we could promote the idea of the financial services centre was that we were operating a stringent regulatory system that applied to all. And I insisted there that people went out, that's the only way we could promote it.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Was there a two ... two-track regulator system in place, one for the financial IFSC firms?

Mr. Liam O'Reilly:

No, I think there was a determination to have a ... a one track, and it ... and it might have been one of the reasons why we ran into problems with the sectoral limits, where we weakened our regime to a certain extent, I think, because in the case of the financial centre there were a lot of monoline banks where it would have been impossible to set sectoral limits, and as a result of that it became a kind of a policy that we had to have the same system in both places.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Can you clarify the "a kind of a policy"? Was there a policy within the Financial Regulator, at the time, that sectoral limits were being abandoned as a result of the monoline firms within the Irish financial services centre?

Mr. Liam O'Reilly:

I can only ... I can only say that the ... while I was in the regulator at the time before 2003, when the Nyberg report states, I think, that ... its a footnote somewhere, that it had stopped long before. Sorry, the policy, if you like, was being abandoned long before the Financial Regulator came into office. I would have been there before that so only ... I can only give you the perspective there and the-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Sorry, Mr. O'Reilly, I want your perspective. As Financial Regulator, from-----

Mr. Liam O'Reilly:

As Financial Regulator-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Sorry, just let me finish.

Mr. Liam O'Reilly:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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From the period that you were Financial Regulator did sectoral limits exist or not, is the first question, to be clear? And then the second thing is, did you apply those sectoral limits to all institutions, including institutions in the Irish Financial Services Centre?

Mr. Liam O'Reilly:

No, quite the opposite. There were guidelines issued and they applied, it seems and I've been following the, the debate here. They seem to have been used, if you like-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did they exist, first, is my first question. Did sectoral limits exist when you were Financial Regulator? When you took over in 2003, did sectoral limits exist?

Mr. Liam O'Reilly:

The guidelines were still around, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So they existed?

Mr. Liam O'Reilly:

Yes. Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Did you apply them?

Mr. Liam O'Reilly:

And, they were guidelines to banks and they were not applied in the sense that they were rules that had to be obeyed. And ... and, just to say, that in the second-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But if somebody breached them you would write to them, flagging up that you've breached the guidelines?

Mr. Liam O'Reilly:

Yes, that we noticed that you have, you have breached the limits. But-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. And did you write ... did you write to firms within the Irish Financial Services Centre to ... on all occasions, if there were occasions, where they breached those guidelines as well?

Mr. Liam O'Reilly:

No, what I'm saying is they never applied to the IFSC.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. You've told me that there was no two-tier regulatory system, we're correct?

Mr. Liam O'Reilly:

Yes. Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You told me that ... concentration limits existed when you were in 2003, but now you're telling me that they only existed for domestic banks and not for the IFSC-----

Mr. Liam O'Reilly:

No, sorry-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So that seems to me that there is a two-tier regulatory approach here.

Mr. Liam O'Reilly:

Well, what I'm saying really is that it was difficult to apply. Maybe can I just go a little bit forward and then I will come back? In 2004 I think it was, there was a move towards the Basel II limits and there seemed to be a crossover between which system should be used, but at no stage were there mandatory limits.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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We're well aware of that; we understand.

Mr. Liam O'Reilly:

Well if you want to put it that way, my understanding and I'm only saying what my understanding is at the moment, would have been in that sense, there would have been a two-tier system.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So there was, okay in that sense there was a two-tier system. How much of your time was spent promoting Ireland's financial services sector proportionately?

Mr. Liam O'Reilly:

I would say, proportionately, it's very hard to say. But, basically, it involved making speeches to conferences where international companies would be coming here. And we would be talking about the regulatory system and we would be telling them how we operated and we would be telling them how we wanted everyone to operate.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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On your monthly hours that you put in, would it be 5%, 10%, 20%, less, more?

Mr. Liam O'Reilly:

I would say less than 2%.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Less than 2%, okay. Were there any pressures applied to the Financial Regulator's office to maintain a more favourable view of the Irish banking and financial services sector?

Mr. Liam O'Reilly:

Sorry, in what sense?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Was there any pressures applied to have a more favourable view? Was there pressures applied from politicians, from industry, from constructions developers, from friends, from people that you might have been out golfing with, any of that stuff?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Or from the Department of Finance or the domestic standing group?

Mr. Liam O'Reilly:

No.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Never a pressure put on you in terms of more favourable approach? Okay.

Mr. Liam O'Reilly:

Sorry, maybe I should put it this way though. We had these panels, okay. We had a consumer panel, we had an industry panel and they put pressure on, but this was part of the legislation and it was difficult to get things done in them circumstances. The legislation in a way set tasks for us which sometimes was pretty impossible.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In relation to, just to clarify this here, in relation to your own relationships, did you have any personal relationships with senior bankers of financial institutions that you would be regulating, none of those kind of social events that you ... you know ... outside of your duty?

Mr. Liam O'Reilly:

The duties ... outside of my duties no.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Can you explain the term "constructive ambiguity" and how it impacted and supported your tenure in the role of Financial Regulator?

Mr. Liam O'Reilly:

I think "constructive ambiguity" is not a term used by regulators. I think "constructive ambiguity" is a term used by central banks and it relates to the fact that if you are a lender of last resort, you don't want to be saying to banks, "We'll look after you in the end", because if you say that, then banks will behave as if they are going to get the money and take the risks as a result of it. So constructive ambiguity, as far as I'm concerned, is about the ambiguity to ensure that you're not promising anything so don't depend on us to bail you out.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. I just want to ask a question here because I noticed you mentioned the FX trading scandal or the overcharging in AIB, which was exposed to the public by very valuable reporting done by RTE in 2004. There has been evidence given to other committees in this House. I'm not sure ... I don't think you have ever been before them but given you're here under oath, was there ever a suggestion made to you in 2001 in a meeting and, in 2002, in a meeting, as has been suggested by an internal auditor of AIB, that there was an overcharging issue in terms of exchange in AIB going on at that time?

Mr. Liam O'Reilly:

What ... I am reluctant to get into this but, you know, in terms of my take on the situation was that I knew nothing about any overcharging issue that occurred and was uncovered in the investigation in 2004.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I just want to clarify this here because it is in our evidence books in terms of the report of the overcharging. It says a whistleblower informed the Financial Regulator in, I think, it was May 2004. The question I want to ask you just particularly is: did a whistleblower or an internal auditor from AIB make you aware of issues in terms of overcharging in this form in 2011 and 2012? Because that is testimony that is out there in the public domain and I just want you to answer that if you can.

Mr. Liam O'Reilly:

Sorry in 2011 and 2012?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In 2001, sorry, in 2001 and 2002. There were meetings with yourself in 2001 and two meetings in 2002.

Mr. Liam O'Reilly:

The answer is emphatically "No".

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No. Okay. The minutes of the meetings, do you have access to the minutes of those meetings?

Mr. Liam O'Reilly:

The access ... I have no access now.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. I assume that the committee can get access to those.

Mr. Liam O'Reilly:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The last thing I want to ask you is-----

Mr. Liam O'Reilly:

Can I just say that in 2001, just to give a little bit of background, the internal auditor of AIB left AIB on sick leave and I was concerned about the fact that there was no auditor involved, so I called this internal auditor in. He made certain statements but the statements related to issues that we were dealing with at the time. The issues related, the issues talked about in 2004 which were none of those issues, were ever talked to me about in 2001.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Or 2002?

Mr. Liam O'Reilly:

Or 2002.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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That's fair enough. You've made that clear.

Mr. Liam O'Reilly:

Not alone that but maybe I could just say that ... I just want to get this ... I want to say it carefully ... I don't know whether I can ask you a question.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I don't think you can. You can try. I can tell you I know nothing about this. I know that there's allegations that have been made before a committee.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sorry, Deputy. I will invite you to ask a question and we will see how it goes.

Mr. Liam O'Reilly:

What is your perception of who the whistleblower was in 2004?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I have no understanding of who the whistleblower was in 2004 to the Financial Regulator or, indeed, to RTE, which exposed this programme to the nation and I believe resulted in, the following day, a formal inspection of AIB. My concern is the testimony that's been given to an Oireachtas committee here, which states categorically that you were put on notice of not just the events, not the overcharging that was leading up to 2001 but the exchange overcharging which was investigated in 2004 at meetings in 2001 and meetings in 2002.

Mr. Liam O'Reilly:

I think you will find that the records of the whole story, which was told by two people from the regulator at the time to the committee, plus letters to that committee, are all available here.

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

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right. Thank you very much. Okay so, are now going to break, I propose we will break... It is coming up to 11.10 a.m. so we can break until 11.25 a.m. if that is agreeable, please, with members. With that said, I would like to remind the witness that whilst we break you are still under oath and that any engagement must be dealt with in that regard. So with the agreement so, I propose that we suspend and to resume again at 11.25 a.m. Is that agreed?

Sitting suspended at 11.09 a.m. and resumed at 11.33 a.m.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I now propose that we go back into public session. Is that agreed? Agreed. And in doing so, I'd invite Senator MacSharry. Senator, you have ten minutes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Thanks very much, and thanks, Mr. O'Reilly. Can I ask you was it appropriate that the domestic financial institutions were regulated in the same manner as the international institutions? I know this was touched on earlier. In your view, were the regulatory institutions of the State focused on non-labelling of the IFSC as an offshore haven instead of ensuring the domestic banks were regulated in a sufficiently robust manner to mitigate against financial stability risks arising from the domestic sector?

Mr. Liam O'Reilly:

I would say, in hindsight, that too much concentration was being put on the equality in terms of the way we dealt with everyone as opposed to looking after domestic exposures. Yes, I agree with ... I would say that, yes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Did you feel that there was sufficient staff numbers and skill sets after the implementation ... or after the passing of the 2003 Act for CBFSAI to ensure that the regulation and supervision procedures were enhanced in line with the original intentions of establishing a totally new and autonomous regulatory authority?

Mr. Liam O'Reilly:

Okay. I suppose that question has two parts. One is the consumer area and building up a whole consumer infrastructure and, certainly, it took us a while to build up that structure. In the case of insurance, we felt that it needed to be increased as well. In the case of banking supervision, certainly, what was happening was that the staff were ... were ... needed to be very specialised and, as a result of that, it was very, very difficult to continue to maintain the level of specialised staff. It's a constant battle to keep good people on board. In terms of numbers, I can say that, in 2000, the number of people in banking supervision was 32, I think; in 2005, it was 46. Was it enough? That kind of begs the question of was the regulatory regime a success? It would have been enough if principles-based regulation was a success. It wasn't a success; it was a failure. We needed more resources to do the job that eventually we recognised that needed to be done. Just to say finally that it was a constant battle to actually get specialised staff. I remember we'd just got an expert in Basel II in. He worked in the Bank of England and he was gone within a year to another bank. Competition was very, very tight to get specialised staff and to retain them. So to answer your question: did we ever have enough staff? I would say it was a constant struggle

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And the skill set of those you had, was it sufficient?

Mr. Liam O'Reilly:

The skill set to do the job of a principles-based regulator, yes. Perhaps we could have ... we could have put in more people of the economist persuasion within this central unit that I'm talking about. That would have helped a lot. But with a principles-based regulatory regime, the kind of staff that the regulator is looking for today, like people drilling down into loan books, etc., we didn't have them at the time and it wasn't seen to be needed because we were using this system.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Would ... would the staff make-up in the Central Bank have historically been, kind of, civil servants-based, that they went in, maybe like yourself, at the beginning of their career and stayed there? Was that-----

Mr. Liam O'Reilly:

I would say-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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-----or were people coming and going all the time from the private sector, from different-----

Mr. Liam O'Reilly:

I would say that if the flow was any way it was from the Central Bank to the private sector, because the skills that they were learning within the Central Bank were skills that were needed outside. So I would say, to be quite honest, that the flow was in one direction. I tried to, at times, moot the idea ... and we did it, at times, get seconded people from the ... from the ... from the private sector, from the banking sector. There were issues of secrecy, etc., but we seemed to get over them. And if we needed extra staff at the end of the day - and we did - we did employ firms of accountants to do special tasks for us, like in the case of the AIB investigation and in the case of other investigations that we carried out.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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In terms of career path, in your experience over quite a long time, and I'm not asking about your own specific case, because that wouldn't be fair, but was there a sense that seniority equalled promotion?

Mr. Liam O'Reilly:

No. I would say that there were plenty of people left behind, if you know what I mean. I think it depended on qualifications, experience, diligence, and people who took responsibility, they usually got promoted.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Was there-----

Mr. Liam O'Reilly:

It wasn't "my turn" sort of situation.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay. Was there, a situation where, all things being equal in terms of qualification and experience, the practice of not questioning one's superiors?

Mr. Liam O'Reilly:

I've never found that. I've heard that being mentioned, and I decided to look over notes, for instance, of meetings that we would have had with banks, and I just saw that I was at it, the prudential director was at it, and either the manager of the banking department was at it, or if he wasn't there, on occasion the actual inspector who dealt with the institution was at the meeting.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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We had testimony from Mary Burke and Con Horan. Con Horan described himself as the only dissenting voice, I think. Can you recall him being a dissenting voice?

Mr. Liam O'Reilly:

Con Horan was a very good member of staff and I valued him in the job he was in. And, as I said, he would have been a man that wouldn't have been slow about voicing his opinion. But I think one of the jobs of a manager is to listen and to be carefully listening, I ... I may have disagreed with him at times and taken different decisions, but I always gave him a hearing voice, and my memory of my time in the regulatory office was that my door was open to anyone that wanted to come in.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Were there ever dissenting voices that you, with the benefit of hindsight, feel you should have listened to, and was he one?

Mr. Liam O'Reilly:

I think maybe in relation to that capital ratios, capital requirements thing, maybe it should have been applied earlier. But, having said that, as Professor Honohan said, it was really ineffective in ... in making any change to the thing.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Do you feel in your role as CEO that you had absolute plenipotentiary independent status to take a decision on behalf of the regulator, or did you look to the Governor as higher authority?

Mr. Liam O'Reilly:

Well, as I said earlier, if a matter came up with a bank, for instance, if we were going to take very firm action against that bank, and if we were sending a very sharp letter out to that bank, and if we were going to increase a capital ratio in that bank, I certainly would have been consulting with the Governor, because of the potential financial stability implications.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay, just two final questions of it's okay. Just very, very quickly, as CEO did you ever refuse a request for additional resources in the banking supervision department, in particular?

Mr. Liam O'Reilly:

No.

Mr. Liam O'Reilly:

You know at this stage, I think from looking at earlier, there was a process, the process was that, at the end of the day, it was the ... the budget and remuneration committee that decided on ... on staff numbers. And my abiding memory of that was that there were times when we had not filled our complement and the board said, ''Well, how can we say you need any more when you haven't even got what you asked for in the first place?''

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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It was a difficulty getting the quality or the specifics-----

Mr. Liam O'Reilly:

Exactly, exactly.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Very last question then. Yesterday we had some testimony from Mr. O'Connell, who, I know, was on the Central Bank side of the house and was the chief economist. But you served on the board of the authority for about six years, isn't that right? Three years?

Mr. Liam O'Reilly:

Mr. O'Connell?

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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No, you did.

Mr. Liam O'Reilly:

Oh, I did?

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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You did, yes. He mentioned to us how difficult he found it to-----

Mr. Liam O'Reilly:

Sorry, the authority I served on it for ... 2003-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Three years.

Mr. Liam O'Reilly:

Three years.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Three years, sorry, yes. He was mentioning to us how difficult he found it to get his dissenting voice and points of view to the board level. He stated, that in his view, this was down to the political and property interests at the board. In your experience, at the board, did you feel there were political or property interests promoting an agenda, or suppressing another agenda?

Mr. Liam O'Reilly:

Well, first of all, I'll say that if, if Mr. O'Connell was going up a line, he'd be going up to the Governor; that's the side of the building he was on. But I was a member of the Central Bank and Financial Services Authority of Ireland board, and I never saw a board member making any comments but those in the public interest.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Senator. Just in addition there to Senator MacSharry's question with regard to your request for additional staffing and resources, could I invite you, Mr. O'Reilly, to maybe comment upon the statement that Mr. Hurley gave that no request for staff was refused in a testimony here earlier and also to Mary Burke's statement that her department was under- resourced and request for additional staff were, were refused? Do you have any observation or comment you'd like to make on those two remarks?

Mr. Liam O'Reilly:

Well, on the first one I ... I ... the Governor never refused staff. The way the matter operated was that staff requirements were set by the authority, and our budget was approved by the Minister. That's the way that worked. I never worked with Ms Burke at all so I can't make any comment on that.

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

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you, Chair. You're very welcome, Mr. O'Reilly. Can I start by asking you, in relation to the banking crisis, and I suppose the fact it happened is the ultimate measure of the effectiveness of the use of supervisory powers but, in your view, essentially what went wrong and who was responsible, given the fact that banking supervision from 2003 to 2008 failed to prevent an unprecedented systemic crisis? What do you believe are the essential factors that led to that crisis and what went wrong?

Mr. Liam O'Reilly:

I think, No. 1, the risks were not quantified properly and the financial stability reports and the IMF reports were all too sanguine even after my term in office - much too optimistic. So, I would say that that certainly didn't help in getting a sense of readiness or a feeling of danger around the place, okay. That's the first thing I'd say. The second thing I think I could say is that the system itself was not ... was not conducive to digging down into ... into detail enough. So the principles-based system didn't work. The Basel accord was not fitted in terms of what it required in terms of capital-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Basel II is it?

Mr. Liam O'Reilly:

Basel II.

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

Mr. Liam O'Reilly:

And even Basel I. The actual Basel system was not ... not fitted in terms of having enough capital available. And then on a personal level, I suppose, the ... and that might be to do with not having enough resources to dig down ... not recognising the extent of the exposures that were around at the time.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But can I put it to you, Mr. O'Reilly, that, you know, according to the evidence from Cyril Roux yesterday, principles-led regulation doesn't necessarily have to be non-intrusive, that it doesn't have to be light-touch, as such. Could principles-led regulation have been implemented better by the authority during the years in question?

Mr. Liam O'Reilly:

If ... if on the condition ... it really is a question of definitions, etc., what's principles-based and what's rules-based, but, basically, you have to have principles, you have to have rules. I think it's the way you implement it, and the dependence that you place on the internal auditors and the external auditors of institutions, the risk committees of institutions. No longer can you trust those, and if you have to do the job then, the resources is the issue and, certainly, the way we had set up our system we didn't have enough resources. If we had had enough resources and, and applied ... I think whether it's principles-based or not, it's more about intrusive, aggressive, or, if you like, depending on boards too much. So, I think, principles-based plus intrusive, aggressive plus resources, I would agree-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But is it the case that principles-led regulation could have been done differently, that it could have been more aggressive, it could have been more intrusive?

Mr. Liam O'Reilly:

If it had the resources to do it. That, that-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Did you ever request resources and were refused?

Mr. Liam O'Reilly:

No, because the style of principles-based regulation that operated not alone in Ireland, but in Europe, was that it did put too much dependence on boards and did put too much dependence on the internal control systems.

And that's the difference today. Now, people go in and they ask more questions.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Governor Honohan, in his report, reached a central conclusion in relation to regulation and he said:

... a regulatory approach which was and was perceived to be excessively deferential and accommodating; insufficiently challenging and not persistent enough. [It] meant not moving decisively and effectively enough against banks with governance issues. It ... meant that corrective regulatory intervention for the system as a whole was delayed and timid.

Do you accept that?

Mr. Liam O'Reilly:

I naturally dislike words like "timid" and "deferential"-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I'm sure you do.

Mr. Liam O'Reilly:

-----but I would say that the system and the style was such that there was supposed to be, if you like, an agreed approach between boards and regulators as to how to do the job. I think, from now on, it has to be the regulator doing the job and the board-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But I suppose, Mr. O'Reilly, people sometimes get frustrated when the word "system" is used. You know, there are people in a system. People operate a system. People are responsible for a system. People can change a system.

Mr. Liam O'Reilly:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So, you know, is it adequate to blame the system?

Mr. Liam O'Reilly:

Well, let's put it this way: what I'm saying is the system was there, we operated a system, we didn't have the sense of danger that was required at the time. So, as a result of the fact that we didn't have a sense of danger, we didn't, at the time, recognise that there needed to be a change in the system.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And with the full benefit of hindsight - looking back now - what could you have done during the years that you were the Financial Regulator-----

Mr. Liam O'Reilly:

Well-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----with the powers available to you at the time?

Mr. Liam O'Reilly:

Well-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What could you have done which might have----

Mr. Liam O'Reilly:

I think that-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----changed the outcome?

Mr. Liam O'Reilly:

The ... I don't think ... well, sorry ... first of all, I think that the administrative sanctions should've been ... well, it couldn't have been implemented any quicker than when I had it because it ... they really ... we were only ready to start applying them at the end of 2005. But let's take the whole period. I would've said that there was an urgent need, within the system, to ensure we had a comprehensive set of administrative sanctions for the prudential side and I think that that should've happened. We would've had ... we would have requested more resources to do that. And-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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When exactly did those administrative sanctions become available? Was it 2005?

Mr. Liam O'Reilly:

The administrative sanctions were enacted in 2004-----

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

Mr. Liam O'Reilly:

-----but there was a need then to translate the processes and procedures ... fair procedures, etc., had to be developed. They were developed during 2005 and the first codes were being introduced towards the of end of 2005 in relation to consumer codes. What I'm saying is, there should've been a parallel attack on the prudential codes. And, I suppose, one of the central ones that I was very disappointed never happened was the corporate governance codes, which I think would've been the centre of getting to grips with things.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Just to clarify, when exactly were sanctions against banks on your desk and available for use?

Mr. Liam O'Reilly:

They wouldn't have been available, I'd say, until early 2006, if the resources had been available-----

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

Mr. Liam O'Reilly:

-----to do it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So they weren't available at all during your tenure?

Mr. Liam O'Reilly:

No, no. We had built the architecture-----

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

Mr. Liam O'Reilly:

-----we had talked about director's compliance statements, we had talked about corporate governance codes, we'd talked about banking standards, we'd talked about fitness and probity of individuals and, not alone that ... but we had a project team which I'd put together for banking supervision - and it's in your documents, I can give you the reference later - of all the legislation that could've been translated into administrative sanctions.

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

Mr. Liam O'Reilly:

And it required resources ... the resources weren't used. I'm disappointed with that.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But you didn't request additional resources.

Mr. Liam O'Reilly:

Well, it wouldn't have been something that I could've done because we were only at the stage of ... I think it's ... I was on the project group where we went through every department, every department set down pieces of legislation that could be translated into codes and it was at that point that we needed to put more resources in.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And can you comment-----

Mr. Liam O'Reilly:

And I think Mr. Horan said and Mr. Neary said that there seemed to be a board decision that said "We'll prioritise the consumer codes" and I think that was a mistake.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Can you comment, Mr. O'Reilly, on the rapidly expanding balance sheets of the banks and was there a requirement, as a result of much more intrusive supervision, than what they actually experienced from the regulator for the period '03 to '06? Why did you not embark on more stringent intervention in light of this?

Mr. Liam O'Reilly:

Well, I would divide the issues into two. There were some micro issues and I think I've talked about them. But I think that the major issue was that before EMU, if credit started rising, the Central Bank would've increased interest rates. It wasn't there anymore. And there was this whole quandary as to what can you do if you don't have the major instrument to quell credit. And I think it took a while to actually realise that what was needed was what's called macro-prudential supervision, which was what instruments do you use now to quell credit and credit growth. And we've talked about these capital ratios, sectoral limits, etc., and I think that the whole process of developing that and making sure you had the quantitative work done behind it, so that when you had an instrument, in certain ... for instance, in terms of interest rates, there would've been models that said if you increase interest rates by X, that's the effect on credit; if you increase capital ratios by Y, what is going to be the effect on credit? And there was a need for that sort of work to be done.

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

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Just before we go onto Deputy Murphy, maybe just put one question to you, Mr. O'Reilly. You are familiar with Mr. Neary's testimony?

Mr. Liam O'Reilly:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And in that regard, would you say that your approach during your tenure to a principles-based regulation, both in terms of interpretation and application, were similar or differed from the approach taken by Mr. Neary during his tenure?

Mr. Liam O'Reilly:

I would've said that it would've been the same.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So it would've been a continued ... continuity of the same approach, same model, both in Mr. Neary's term and yours?

Mr. Liam O'Reilly:

Well, just with the proviso that I did ... I was conscious of the fact that there was a need for sanctions and there was a need for sanctions to be applied quickly. Now I don't know what constraints Mr. Neary was put under but certainly there seemed to have been some sort of putting on the long finger of doing consumer legislation before prudential. But, if I had been there ... but it's very easy to second guess at this stage, hindsight, but I would've hoped that I would've been pushing for the implementation of administrative sanctions for prudential supervision.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And, earlier this morning, when you were talking about your tenure coming to an end at 1 January 2006, you were of the view that the factors related to the crisis were embedded at that stage. Were you restricted in taking any actions in your tenure?

Mr. Liam O'Reilly:

Was I restricted in taking any actions? No. All I would say is I always was of the view that any actions I took that involved a macro-prudential dimension required consultation with the Central Bank.

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

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you, Mr. O'Reilly, you're very welcome. I'd like to look at Vol. 3, page 40, in the evidence books. It's 33AK, but in the summary document. Senator D'Arcy touched upon this earlier on. It's a meeting of the financial stability co-ordination committee in April 2004.

Mr. Liam O'Reilly:

2004, yes?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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You have that?

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Great.

So what we see in front of us from the summary of that meeting is the Financial Regulator stating his concerns in relation to banks being blind to risks building in the banking sector, and euphoria existing in property lending markets, which we heard earlier. And it says, in bullet three: "He proposed roadshows so that CBFSAI's concerns could be communicated to senior management and boards of banks." What's a roadshow?

Mr. Liam O'Reilly:

Well, I think it ... that was a kind of a term used in the board itself, and we scratched our heads, "What does that mean?" You can't go down to, let's say, ploughing championships and start talking about these things, like you can with consumers. So I would have said that, and the way I interpreted it, was that we needed to start communicating directly with chairmen and chief executives of institutions, and the ultimate piece that emerged ... and remember I was saying this to the financial stability committee, and they then had to work out some sort of strategy, and the major strategy that arose out of that was that we meet the banks, the chief ... the big executives in banks in the forum that we had, and the first one took place at the end of 2004, so that we could communicate our concerns.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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This was following the financial stability report?

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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It was at that forum?

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. I'll come back to that in a second, if I may. If we look at bullet four it says, on that same page:

The Committee also agreed to follow up:

- the stress testing exercise,

- detailed analysis of the housing demand, and

- a study of previous crises versus current conditions in Ireland."

Did any of that happen? And did it ring any alarm bells?

Mr. Liam O'Reilly:

I wouldn't have been in the areas that would have been dealing with that because they were responsibilities for the financial stability department. And I know of ... research papers would have been written about this. I don't know whether it was written before or after this. There was one research paper that talked about us being ... what were the factors, which led to the question: were we in equilibrium prices? Were prices overpriced or not? And I know there was econometric work done in that area.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But given the serious concerns expressed-----

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----at this co-ordination committee, stability co-ordination committee meeting-----

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----and the committee agreed to follow up those three items-----

Mr. Liam O'Reilly:

Yes. Well there was ... there were stress testing done later on that as well.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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When did that stress testing, the follow-up stress testing occur? Was that the stress testing in 2006?

Mr. Liam O'Reilly:

No, I think the ... I haven't got ... I think that they occurred much more frequently than that.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. But what about then the detailed analysis of the housing demand and a study of previous crises versus current conditions in Ireland?

Mr. Liam O'Reilly:

Well, I never eventually saw a paper on that, I'm afraid.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, I mean, the reason I ask is because in the Regling and Watson report, on page 29, they spoke about the problem laying in plain vanilla property lending, and the quote that they have is: "...lending trends in the Irish banking sector – especially from 2003 onwards – feature a pace of expansion, and a rise in asset and funding risks, that should have rung alarm bells."

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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This is the stability co-ordination committee-----

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----concerned about systemic and stability risks, talking about doing the kind of research that perhaps could have rung those alarm bells, and you're not sure if it happened or not?

Mr. Liam O'Reilly:

That's right. I'm afraid not. I can't remember at this stage. It's ten years, 13 years ago, and I can't ... and I looked through documents. As you know, there are a lot of documents to look through, so I didn't come across any and I can't remember it at this stage.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, well then let's come forward to the end of 2004.

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And the financial stability report, and in the round table that you had. At that point in time were you able to have an input into the financial stability report, in co-operation with the Central Bank?

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay.

Mr. Liam O'Reilly:

And I think that financial stability report did talk about the problem of personal indebtedness in the property sector. It talked about commercial lending problems. So it did go through-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Your concerns made it into the financial stability report?

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. And you met with the banks then to discuss these concerns.

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Did the banks ignore these concerns?

Mr. Liam O'Reilly:

Well, I read the Honohan report and there seems to be a difference of opinion as to what happened at those meetings, and unless we weren't speaking the same language, I don't know, but I remember making a statement in the 2004 report that the economy was exposed if there were an external shock to the system. We didn't envisage any internal, sort of, turmoil but I do remember making a statement of that ... to that effect.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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You sit down with the banks at the end of 2004, and it's clear in the financial stability report your concerns about the property lending that's happening in the banking system. And in that same year, and I'll take one bank that's come up in evidence, Bank of Ireland, they have changed their income multiples, they've changed their loan-to-value policies, they've introduced First Start mortgages, and they've introduced more flexibility for seasoned multi-property borrowers. So they've done that in 2004. And at the end of 2004, you're warning them about this problem building. And then in 2005, they turn around and introduce 100% mortgages in response to moves by key competitors, First Active, Ulster Bank and PTSB.

Mr. Liam O'Reilly:

And-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Did they ignore you?

Mr. Liam O'Reilly:

And just to repeat what I said in my opening statement, I made a statement in July saying that if you're giving away 200 ... 100% mortgages, you shouldn't be giving them to people that can't afford them. And I said that the banks must make sure that the ... that the ... that there is an ability to pay, etc., etc. So we were concerned, we were ... continued to be concerned. I suppose the big problem all the time is: what instruments were we using to put a stop to this? And, even in 2007, there seemed to be an awful lot of soul searching as to what could be done. And moral suasion and capital ratios ... or capital requirements were the two things that were being mentioned and they had little effect.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But did the banks ignore that statement that you made in 2005?

Mr. Liam O'Reilly:

Well, I think it goes back to the euphoria. We failed, I suppose, to convince the banks that there was an issue.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Failed to convince them?

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But could you not have done more than try to convince them? Could you not have actually-----

Mr. Liam O'Reilly:

Well, that's-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----interceded, given the concerns, the systemic concerns you'd raised in 2004-----

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----which you had raised with them again in the financial stability report-----

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----in the forum. They then go and introduce this new product, which we'd never seen before.

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And you're worried about it. You make a statement, it fails to convince them.

Mr. Liam O'Reilly:

Yes, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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What then?

Mr. Liam O'Reilly:

But just ... just to be clear, the whole idea of new products, etc., was a consumer issue and the consumer people felt that there was a need for making sure that if there was innovative products, they should be made available to people, but they also said that there needed to be an affordability, and not alone that but there was a code which said that you will be sanctioned if you mis-sell a product.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Taking all that-----

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----and taking that the consumer regulation-----

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----of course, is underneath the Financial Regulator, if we go back to 2003, in July, you wrote to Bank of Ireland after doing an examination into their mortgage lending policies and you said "The examination raises questions about the maintenance of lending standards in your institution, and about your ongoing monitoring, management, and control of risk in relation to residential mortgage credit." So what gave you any confidence in Bank of Ireland to responsibly administer this new product of 100% mortgage lending in 2005?

Mr. Liam O'Reilly:

Just ... just 2003? What date is that?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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That was July 2003. It was a letter to Bank of Ireland.

Mr. Liam O'Reilly:

Yes. And another letter issued, I think, in ... on 24 December 2000 and ... sorry, 2003 or 2005?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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2003.

Mr. Liam O'Reilly:

2003. And we got a reply from the Bank of Ireland in February 2004 saying that they were complying with all policies. And we entered into some discussions with them about that and eventually the management letter from PwC came in saying that they were quite happy with all their lending policies. So we were still cynical. We were still trying to convince banks. There is still a question, and I agree with you: what instrument should we have been using? Eventually the instrument that was used was to increase the capital requirements in relation to the 100% loan-to-mortgage and to commercial lending. That would be 2006.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It'll have to be supplementary now.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes. Thank you, Chair. But just coming back then to 2004.

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And in the 2004 financial stability report-----

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----you also raised concerns about commercial property lending: "The persistent increase in the rate of lending to some parts of the commercial property sector is a concern."

At that very moment in time, Bank of Ireland had set up a dedicated property unit responsible for managing relationships with a total group exposure in excess of €30 million, to write higher risk-higher return property transactions.

Mr. Liam O'Reilly:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Did you raise this with Bank of Ireland in the round table in 2004?

Mr. Liam O'Reilly:

I didn't raise that particular issue-------

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Were you aware-----

Mr. Liam O'Reilly:

-----I raised the general issue. I ... at this stage, and at this distance in memory, I don't know whether I was aware of it or not.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. But were you aware that at the same time as you were warning about these risks, banks were making moves in relation to commercial property lending that were going in the opposite direction of what you were warning against?

Mr. Liam O'Reilly:

I wouldn't have been aware of particular issues. All I can say at this stage, and at this distance in time ... that I was cynical about whether they were applying the policies that they said they were applying. And, from that point of view, moral suasion seems to have been the only action that we took. We should have done more, in hindsight.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much Mr. O'Reilly. I just want to deal with a couple of matters there and one is in relation to loan-deposit ratios. The targets now are in and around 120% and lower. Why was this not a target during the 2002 - 2008 period, when it reached as high as 176% in Bank of Ireland and you think the level of loan-deposit ratios in the various institutions was appropriate during your tenure?

Mr. Liam O'Reilly:

I suppose we were ... we were worried about it all the time and the question all the time was: in a market economy can you actually start putting in quantitative limits into ... into institutions? And, in hindsight, it was a mistake that we didn't go further.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Thank you. And can I also ask you with regard to the increased reliance on wholesale funding from 2003 onwards to finance growth in the various known portfolios was significant, were you aware of the issues and did you regard this as a fundamental risk?

Mr. Liam O'Reilly:

I did. And I seem to remember around that time there were measures being taken by the ... by the regulator and, I think, they came into fruition eventually to have a whole new regime of liquidity management, which seemed to hold the banks in, well, good stead during that period. The problem, I suppose, was that again the market paradigm seemed to be working whereby if you could get cheap credit, you should use that cheap credit. The question of exposures, I suppose, was far from the mind because in some sense there didn't seem to be a consciousness at all that credit markets could freeze up and all of a sudden you're in trouble, and I think that that was a problem.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And on the liquidity issue, Mr. O'Reilly, what was the IFSRA's role in analysing and overseeing the liquidity and solvency risk of the banks?

Mr. Liam O'Reilly:

There was a set of rules that were set out and they were being monitored regularly and, as far as I know - because I wasn't there at the time, during the ... the crisis period and pre-crisis period, - there was a constant monitoring of where people were in terms of liquidity, how much liquidity had left, what ... what sort of risks were about. And the system, I seem to remember Dermot Gleeson saying that it was one of the most conservative in Europe at the time in terms of liquidity provision.

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

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thanks Chairman. Welcome, Mr. O'Reilly. For the purpose of an internal review, I'm going to document Vol. 3, page 40, which is effectively, it's a section 33AK document but it's ... it's in the aspect, really, of the internal view of the first crisis simulation exercise in 2005 that in a crisis scenario there is a limit in the type of information that can be provided by a principles-based regulator. Can you comment on this and how was this reflected in the next exercise?

Mr. Liam O'Reilly:

Well, that was my last exercise, so I can't say what happened in the next one. But the idea behind it was that a principles-based regulator, with the level of staff that they had, wouldn't be able to cope with the demands that there would be around at the time of a crisis. And as a result of that there was a need to make sure that there were contingency plans in place to either get experts in, like, for instance, Merrill Lynch, or PwC, to make sure that we had people on stand-by, to be able to sit in banks who might be in trouble, and be there at the time of the crisis. And I think that that was the fundamental idea behind saying that you need more in the time of crisis in terms of staff.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You would have been on the board of Merrill Lynch when they were appointed as advisers to the Irish Government.

Mr. Liam O'Reilly:

Not the branch that ... it was completely different unit. From the US, I think, they came in. It ... there was a separation there.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What unit were you a member of the board?

Mr. Liam O'Reilly:

I was a member of the board of Merrill Lynch Ireland. As far as I know, the specialist team came from abroad.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And how did you come to be appointed to the board of Merrill Lynch in Ireland?

Mr. Liam O'Reilly:

I was asked to become a member of the board of Merrill Lynch in 2007. As I've said in my CV, I took a year of purdah. I didn't need to. It wasn't in the rules. I decided to and I will continue to be subject to the 33AK. And I thought, just with my experience, I might be helpful on the board.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was that a paid position?

Mr. Liam O'Reilly:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And how did you come to be on the board of Permanent TSB?

Mr. Liam O'Reilly:

In September 2008, again, I was approached-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Before or after the crisis broke?

Mr. Liam O'Reilly:

In the middle of the crisis. I can tell you that I ... I was not keeping up with ... with information as to what was happening, and I landed into this crisis, and you can imagine, I said "What am I getting myself into?", but beforehand I thought it could be a help, and afterwards I felt I had a responsibility to continue in the role.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was that a paid position?

Mr. Liam O'Reilly:

It was, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And did you feel that you ... there would be a conflict of interest in any way by going on the board of Permanent TSB, a bank that you had regulating ... had been the regulator of a short time previously?

Mr. Liam O'Reilly:

It wouldn't have been a short time previously. It would have been four years.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well it was ... well you were a regulator up to January 2006.

Mr. Liam O'Reilly:

Six, two years

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So it would have been-----

Mr. Liam O'Reilly:

Two years. But I was very careful as to what institutions I got involved in and I made sure that any institution I ever got involved in there were no issues around the time that I was a regulator. And, you know, there were very few issues in that case.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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For what purpose were you brought on the board of Permanent TSB?

Mr. Liam O'Reilly:

They felt that I would be useful from a point of view of my experience about corporate governance and about the whole regulatory compliance area that I might have been of some help to them in that area.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you want ... did you interact with the Financial Regulator on behalf of the board-----

Mr. Liam O'Reilly:

Never.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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------at any stage when you were on the board?

Mr. Liam O'Reilly:

Never, no.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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How would you describe your relationship with the banking institutions? In hindsight, were there any aspects of these relations that you consider inappropriate?

Mr. Liam O'Reilly:

I always acted with integrity with ... with the banking institutions, dealt with them with integrity and professionally.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Chairman, can I refer FRG Vol. 1, page 102 in that context, and specifically the second last paragraph, and it says "Indeed, the Financial Regulator's record[s] of the meetings is incomplete". It was about meetings with the banks. How often in your time from 2002 to 2006 would you have met with the CEO of banks?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What's the page number there, please, Deputy?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Page 102.

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

Mr. Liam O'Reilly:

I'd say rarely: five or six times.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In that period?

Mr. Liam O'Reilly:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And would you have met them on your own?

Mr. Liam O'Reilly:

I ... I would have met them, I think, with the chairman when we would be having ... one of the times might have been at the time of the warning banks about their ... their positions.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Which banks did you meet? When would you have met them?

Mr. Liam O'Reilly:

It's a long time ago at this stage but I think ... I seem to remember a minutes that we met ... we met the Irish Life & Permanent people and we also met, following the AIB problems of 2004, we met to have a review of what lessons we both could learn from that issue. They're two ... but they were always business meetings-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Would you have met ... did you meet with any of the other banks? Bank of Ireland? Anglo?

Mr. Liam O'Reilly:

I was invited to speak to the Anglo board-----

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

Mr. Liam O'Reilly:

That would have been in 2000 and ... I think 2005.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In what context?

Mr. Liam O'Reilly:

The board were, in some sense or other, trying to get behind what the chairman is saying about his relationship with the regulator and what the regulator's take on it was.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So it was a ... it was a bonding exercise?

Mr. Liam O'Reilly:

It wasn't a bonding exercise. It was an interrogation exercise.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I just go to, Chairman, page 71, Vol.1, FRG? And you were speaking at a ... at a ... you were the guest speaker at a financial Dublin conference ... page 71. I just want to quote you said "Finally, let me assure you [this was in 6 April 2005] ... let me assure you that we, as [a] Regulator, will not introduce or impose unnecessary regulatory burdens that will effect the continued competitiveness of our financial industry and minimise the impact of such burdens coming from Europe." And, I suppose, the question I want to ask: do you still stand over that statement and furthermore-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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When was that made, Deputy, there?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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That was made on the ... that was made, Chairman. I'm conscious of time.

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

Mr. Liam O'Reilly:

2007?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No, 6 April 2005.

Mr. Liam O'Reilly:

2005.

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

Mr. Liam O'Reilly:

Sorry, where on that page? Page 71, you're saying?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Page 71, last paragraph. "Finally, let me assure you that we-----

Mr. Liam O'Reilly:

Well, it says here "As we look back on 2007 ...", is it?

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

Mr. Liam O'Reilly:

Am I missing a page?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It's delivered on 6 April 2005. Vol.1, FRG, a conference you spoke at "The Future of Financial-----

Mr. Liam O'Reilly:

Vol. 1, page?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Vol. 1, FRG.

Mr. Liam O'Reilly:

What's FRG?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Page 71.

Mr. Liam O'Reilly:

I'm looking at page 71 here.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's on the screen in front of you there but I'll just stop the clock for a second there just to give you time. The speech or statement refers to the "Finance Dublin Conference - 6 April 2005", heading of the presentation is "The Future of Financial Regulation: Principles or Rules - Issues for the Irish Financial Services Sector [addressed] ... address by Liam O'Reilly, Chief Executive, Financial Regulator."

Mr. Liam O'Reilly:

Okay. I can answer that question. We had a mandate, under a Government policy, to follow what was called best financial regulatory practice or something. I forget the name of the document but it was a policy document about good regulation and one of them was you cut ... over-regulation was not a thing we should be doing. And it was in that context ... and it would have been generally in the context of what would be principles-based regulation. Now, would I ... would I do that now? Should I have done it? Certainly, in hindsight, we need to be more intrusive and I think over-regulation is a rule for the future.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Chairman, can I go to page 60 of that same document?

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

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And it's dealing with principles-based regulation and the fact ... I suppose, what I really want in the context ... you received an internal memo in August 2005 where ... effectively during your tenure, where there was ... you could have had a very modest increase in the capital requirements for new high loan-to-value mortgages. Now, this wasn't implemented until 1 May 2006. So the question I'm asking is two questions: under principle-based regulation, what was to stop you - with your officers - going into the banks, looking at the process by which loans were granted? Not the process ... so ... to look at the type of securities they had and so forth. And furthermore, why didn't you implement this particular proposal during your tenure because it took nearly eight or nine months before it happened?

Mr. Liam O'Reilly:

Six months.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Six months. Well, August to ... it happened after you left and it said that the ... that ... why wasn't it put through? And, looking back now, based on the type of regulation that was in place with the Financial Regulator, were the banks regulating themselves?

Mr. Liam O'Reilly:

Just to say on that particular item, I think I mentioned it earlier in my testimony, what happened was, I saw the issue as a macro-prudential issue. I discussed it with the director general of the Central Bank and, after the discussion, the general conclusion was that at that stage house prices were stabilising, interest rates were set to rise and the fiscal incentives that were in ... and which were actually inflating house prices, were all being reduced. So, it just was a timing issue. If you're asking me now, should we have done it earlier - yes. But, as the Honohan report says, the actual measure was modest in its effect. It really did have no effect on what happened afterwards, it didn't control the situation.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Final supplementary there, Deputy.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, in hindsight, with the fact that the principles-based regulation we've had, were the banks, in essence, regulating themselves?

Mr. Liam O'Reilly:

Well, as I said, there were plenty of controls within the system. The major control was ... if you were saying "Were the management of bank controlling the situation?", I would say no because what we said was that the non-executive directors had a direct line to the internal auditors, we had a direct line to the non-executive audit committee and we ... and ... the internal auditors had a direct reporting line. So, what ... that was a kind of a control in place. It wasn't enough because, at the end of the day, it looks like non-executive directors, to a certain extent, were being led by management too much. There was a need for much more intrusive regulation.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, I suppose, in hindsight, could it be said that the type of regulation ... the principles-based regulation you had in place, was naive?

Mr. Liam O'Reilly:

And a failure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Deputy ... sorry, Senator Susan O'Keeffe. Senator, you've ten minutes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Thank you, Chair. Mr. O'Reilly, what was the nature of the discussion at board level - of the Financial Regulator and the Central Bank - in relation to internal contrarians in both the Financial Regulator and the Central Bank?

Mr. Liam O'Reilly:

Internal contrariness-----

Mr. Liam O'Reilly:

Contrarians, sorry.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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I beg your pardon.

Mr. Liam O'Reilly:

Well, first of all, about contrariness, there was some tension about the supply of technology and the supply of people. And the Central Bank were ... and that was the biggest bone of contention. But there were some contrarians and we did have very robust discussions and we came to a consensus in the end. But the contrarians were listened to and ... reflected, to a large extent, I would have thought, in the financial stability reports. The problem, I suppose, was that the consensus was balancing risks, etc., that things were going to lead a soft landing whereas maybe certain contrarians were saying "Well, you know, you may say that but this could end in disaster". But, certainly, the contrarians would not have been a majority or anywhere near a majority on the board.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Mr. O'Connell gave evidence yesterday that he had at one point been asked by somebody senior to him to ring Frances Ruane in the ESRI to remove the reference to the fragility of the banks. I know that this wasn't during your time but not only ... that seems to me to be beyond, if you like, the Central Bank, that was asking another institution to change. How or ... was that ever ... did that occur in your time? Did you ever ask anyone to make such an intervention, either within or without your own office?

Mr. Liam O'Reilly:

Never, never. And, just to say on that front, that would have been a Central Bank line in the sense that the line would have been economists writing a report and economists talking to economists. They were all on the Central Bank side. I ... I ... having said all that, I can't believe that it happened in that way but if the man says that, the man says that.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Can you describe the channel of communication between you and the Department of Finance while you were the CEO of the Financial Regulator? And how did you deal with emerging material issues before the domestic standing group was established, which, of course, occurred after your tenure?

Mr. Liam O'Reilly:

There were very few ... the only early meetings I had with the Central Bank about ... about prices was the consciousness within the group. And this would have been in the early 2000s. It wouldn't have been during the Financial Regulator. It was that the Central Bank could not lend to an insolvent institution. So, therefore, if there was to be a saving of an insolvent institution, the Government had to be involved. So, I certainly felt at that stage "We need to get the Department of Finance involved in this process as quickly as possible." That ... that's the only one now in terms of crisis. Otherwise, we would have been talking about progress in legislation. For instance, there was an issue once about the building societies Act and this thing about, you know, demutualisation of building societies and there was an anxiety to see that that progressed. The administrative sanctions legislation, we would have been up there trying to get it passed as quickly as possible. And even in the case of the 2003 Bill, I remember being involved with the Department of Finance just talking about it. So general business issues to do with the progress of legislation, I think, more than anything else. Of course, as well as that, when our budgets started to go to the Department of Finance, we would have had an interaction with them then. But just to emphasise on that side, there was never an issue about, you know, cutting budgets or anything like that. It was more about how are we going to fund this? Should we get it off from the industry first or should we divide it between public or private funding? But these were the type of issues that we would have been talking about.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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In relation to your own office in 2003-2004, the budget that you had for your ... to run your office was €39 million. Is that correct?

Mr. Liam O'Reilly:

Yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And how much of that budget was given ... was paid by the financial institutions themselves?

Mr. Liam O'Reilly:

I can't remember at this stage but I think it might have been half.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. How did it arise that the financial institutions themselves were funding their own regulator?

Mr. Liam O'Reilly:

I think there was a general view at the time that they should pay for it, but it certainly was a matter of payment and not a matter of "We won't pay the budget if you don't go easy on us". It wasn't that sort of relationship. It was going to be a legislative requirement that they pay the money.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Who paid the rest of the budget?

Mr. Liam O'Reilly:

I think it was financed by Government or maybe the Central Bank funds but one is the same as the other.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Did you do anything during your time to increase the amount of money or decrease the amount of money paid by the financial institutions for the running of your office?

Mr. Liam O'Reilly:

No, no. I was there for, I think, two years of the budget funding. I don't know whether I was there for a third year but even if I was, it went ... we had a finance department that dealt with the Department of Finance and there was an interaction between them and the Department of Finance. I don't ever remember issues arising of a policy nature other than that one about, you know, proportions.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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You were at the Central Bank during the Ansbacher period, the National Irish, the Tony Taylor business. You were yourself when you were a director at Merrill Lynch you had ... there was a serious fine levied. So you would know about banks and financial institutions, if you like, getting into trouble, doing things wrong, breaking the rules. How then, with that level of knowledge, could ... could you have faith in the so-called principle-based system when you know and you knew every day that banks were breaching all kinds of regulations? I'm sure the Financial Regulator's office is stuffed with, you know, letters and correspondences about banks breaching regulations. How could you, in all conscience, allow that to be the system it was run by?

Mr. Liam O'Reilly:

But ... but I think-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just make the question how is it doing it. We'll-----

Mr. Liam O'Reilly:

Yes-----

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

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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How could you ... how could you stand over that-----

Mr. Liam O'Reilly:

Yes, yes, I understood the question. I think that's why I say that the major dependence we had was with the internal audit departments and the audit departments and the external auditor for checking out what banks were doing. We weren't necessarily trusting everything that the banks' management were doing.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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With all due respect in your own statement you say "The policy laid a heavy responsibility on the boards and senior management of banks''. You knew that; that's what the policy was about.

Mr. Liam O'Reilly:

I did. But I think I go on to say that the major dependence was between the internal auditor and the non-executive board.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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But you had clear evidence of breaches on a constant basis. Your whole life had, you know, as a man in that position-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Senator, you are getting very leading here. Will you just ask a question, please?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay, okay, I'm sorry. You had seen, had you not, in your job, lots of breaches by various banks? How then would you have faith that banks could be in that position to ... to be responsible?

Mr. Liam O'Reilly:

Well, let's just take them one at a time. You mentioned the NIB-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Well, no, I wasn't looking to go into detail. Because, with due respect, I'll be stopped. And I don't actually want to. It's about the ethos, I think, I'm talking about.

Mr. Liam O'Reilly:

Okay. Just to say, in terms of ethos, what I found generally, when there was ... when there was a problem. it wasn't a problem ... there were some culture problems, no doubt about that. And, for instance, in the case of, let's say, the Ruznak affair and the overcharging affair, there was an examination of conscience again and there was a new corporate governance structure put in place. But generally, we found in institutions there was a very strong willingness to comply. The compliance problems didn't occur generally as a result of misbehaviour by senior executives. There were always problems within banks because someone did something wrong, either because it was a mistake or in the case of ... well, in the case of the tax issue, I think that that was a big issue and I remember saying at the time that if someone was to have found to have evaded tax, they were not to be made a fit and proper person for banking.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay, so just finally-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Final supplementary now quickly.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So there was no ... would you say then that there was no push-back ever from financial institutions if they were asked about ... I mean we have heard evidence of push-backs so-----

Mr. Liam O'Reilly:

Sorry, maybe I should say-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Yes, I think-----

Mr. Liam O'Reilly:

------there were actual times when we said that a certain person cannot be a director of this board or we have said that person has to be removed from that board.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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I'm talking about the push-backs from the banks themselves, though, in relation to your you know, interventions or your observations or your asking for change-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The question is made, Senator. Mr. O'Reilly, then I'm moving on.

Mr. Liam O'Reilly:

I suppose, you know, just to answer the question. Banks are very proud of their own risk management systems and they don't like to be criticised. And when we find fault, they sometimes push back. And we push back. Now, I think that ... that's ... that was the principles-based approach. I think that the system now is "I don't care what you say, do it."

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you. I just want to deal with the financial stability reports there just for a moment with you, Mr. O'Reilly, and in respect of the preparation of them and the manner in which internal and external contrarian economist views were considered. Were the concerns around supervision that grew over the period given adequate consideration and if not, why not?

Mr. Liam O'Reilly:

Sorry, say that again?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In respect of the preparation for the financial stability reports-----

Mr. Liam O'Reilly:

Yes-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----and the manner in which internal and external contrarian economist views were considered, were the concerns around supervision that grew over the period given adequate consideration and if not, why not?

Mr. Liam O'Reilly:

I would have been communicating with the Central Bank and Financial Services Authority board about issues that were arising throughout all the period with problems we had with certain institutions. I would be doing the same in the financial stability committees. They were all taken on board.

The bottom line in all cases was, from our point of view, were these institutions solvent and were they ... and what was their loan loss capacity and were they having losses ... loan losses? And I would say as well as that, I would have been heartened by the FSAP report about our system, I would have been heartened about the IMF assessment. Now, they were wrong but, as a result of those, they may have swayed the issues that we might have had with financial stability ... sorry, financial supervision problems.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And, as part of that assessment, how was the shock absorption capacity of the banks assessed?

Mr. Liam O'Reilly:

The shock absorption of the banks was assessed - and this, I suppose, is another weakness that I didn't mention ... the shock absorption of the banks was assessed by stress testing the institutions. But we see now that there were weaknesses in the stress tests, number one, but much more important I think, there was ... the stresses that were being put on the banks in the stress tests were not stringent enough.

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

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. Mr. O'Reilly, you're welcome.

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

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's not mine.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's in proximity to you.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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A couple of brief questions. And to start ... to continue on from where Senator O'Keeffe asked about directors, can you outline for the inquiry the system that existed within the regulator during your time for reviewing the skill sets required for both executive and non-executive directors of banks that you were regulating at that time?

Mr. Liam O'Reilly:

There was an IQ - in other words, a form - that had to be filled in and they had to make statements about various issues, their qualifications, etc. As well as that, had they got a criminal record, whatever. These were all filled in. Then they were interviewed and it was in that process it was decided whether a person was a fit and proper person to become a director. And those criteria were being updated. There was a major weakness in the system and that was: what about follow-up reviews? And I'm afraid ... and I think it's there now today, but once you became a director you know, how do you ... it's a bit like when you get in to a job, it's much easier to remove a person before they come in than when you have them in there.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Well, some jobs are a bit different than that. You said also earlier, in answer to one of the previous questioners, that you felt that - and I don't want to misquote you - but I think you said non-executive directors were being led by executive directors. What did you mean by that?

Mr. Liam O'Reilly:

Well, sorry ... when a board gets together there's a certain amount of loyalty between the board members and the question is to what extent can you have ... and I think most non-executive directors had it, a sense of detachment and a sense of independence from the institution.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay but did you have specific examples?

Mr. Liam O'Reilly:

No, that's just a feeling I have about the thing.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I want to refer now to core document Vol. 1, at page 45, I think, the annual report-----

Mr. Liam O'Reilly:

Sorry, what core document?

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Vol. 1-----

Mr. Liam O'Reilly:

Vol. 1.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----page 45. Yes, it's the annual report from 2003. It's a reference in the middle of that middle paragraph about aggregate private sector credit:

... aggregate private sector credit increased strongly last year - the increase ... being almost 16 per cent - and the rate of increase has accelerated into 2004. There is clearly a limit to the extent that borrowers can sustain rates of credit growth that are substantially above nominal increases. [And it further goes on to state that] In the light of this, the Irish Financial Services Regulatory Authority will continue to liaise closely with the banking sector to ensure that [the] adequate [...] that adequate account is taken of lending risks.

Can you outline for the inquiry what form that liaison took place?

Mr. Liam O'Reilly:

That, again, is 2003.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's on ... the annual report of 2003.

Mr. Liam O'Reilly:

Yes. I would say that the major ways in which we would have been doing that was that ... in testing mortgage lending criteria. And when an inspection would be done of a bank, looking at the loan book, making sure that they were following best lending standards which we had introduced - like affordability - stress testing it for-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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My time is limited and I don't want to cut you short but I get what you're saying. But that ... would you characterise that as a warning or a flag, at least, that there was a bit of an issue with private sector credit in 2003?

Mr. Liam O'Reilly:

Yes and remember this is a published document meant to be communicated to individual banks and banks should have been reading these, along with the bilateral discussions we would have been having with them about these issues.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Well in ... Mr. O'Reilly, in the three subsequent years private sector credit increased by over 30%. Can you explain for the inquiry how, when the organisation that you were chief executive of - in an annual report - had made this ... raised this concern in 2003, that not only does it appear no action was taken to remedy the situation but that the ... the situation got worse to the tune of over 30% in the subsequent three years?

Mr. Liam O'Reilly:

Well, just ... this is just a matter of information. This is the Central Bank annual report?

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

Mr. Liam O'Reilly:

But, be that as it may, the following year - well, certainly on my departure in 2005 ... when there seemed to be an increase in interest rates, financial incentives were being discontinued in the building sector and house prices were stabilising and we were getting these comforting statements from the IMF, these all, I'm afraid, led us astray in terms of our sense of danger.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You made ... in the very first set of questions Senator Barrett asked, you made a statement which I think many people watching would find extraordinary and I'd ask you maybe to clarify it if you could. You stated that "during my term of office we were searching around for a method to dampen credit." Now, I think people would have expected that the chief executive of the regulator would have found, within a three-year period, a method of dampening credit.

Mr. Liam O'Reilly:

Well, first of all, it is the role of the Central Bank to dampen aggregate credit, not the regulator.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You ... but you were a member of the joint board-----

Mr. Liam O'Reilly:

I was a member of the authority and ... and I agree with that. And what I'm really saying is, that we were in a new paradigm. All of a sudden interest rates disappeared. The Larosière report, which came out in 2009, actually states that entering in to the language of regulation is "macro-prudential" regulation and-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I have only two and a half minutes left and I want to keep it short-----

Mr. Liam O'Reilly:

No, but I just wanted to say it isn't something that was hard ... sorry, this was a hard question: what do you do?

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I understand ... I understand that and I accept that but I'm just saying ... and I understand that interest rates ... that facility was lost. But there are other methods you know, loan-to-value ratios-----

Mr. Liam O'Reilly:

And the two methods-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----and income multiples and other methods that could have been used that just weren't used, despite the fact that in 2003 this was flagged in the annual report of the Central Bank as an issue.

Mr. Liam O'Reilly:

Yes. Yes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Why did it not happen? And, outside of yourself, why did no action come from this?

Mr. Liam O'Reilly:

Well, as I said, and, you know, I'm looking at it back, and I've been thinking and thinking about it ... why did it not happen? And I think there was great faith in moral suasion and ... it's not enough.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you have anything to say to people who borrowed in those years who are now struggling. Like, there's a lot of people, potentially even watching here now-----

Mr. Liam O'Reilly:

I've already said in my statement that ... that I deeply regret not recognising the exposures that existed on the credit side.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I just, finally then ... and Deputy O'Donnell touched on it, when, a year and a half to two years after you left your role, you became a member of the board of Merrill Lynch-----

Mr. Liam O'Reilly:

Yes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----could you imagine how, to a member of the general public, that would look like a conflict of interest for somebody who had worked their entire life in regulation and Central Bank and got to the position of chief executive of the regulator, retired on a substantial pension paid for by the taxpayers, and then ended up taking a position on the board of Merrill Lynch and, subsequently, on the board of Permanent TSB?

Mr. Liam O'Reilly:

Well I ... I must say, Deputy, that I never, ever, in my life worked to make a lot of money. I was a public servant so financial gain was not top of my mind. What was on top of my mind was that I might be of some use, and that's why I did it.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The question I asked though was the perception of the conflict of interest between the chief executive of the regulator then going, as it were, to the other side of the fence.

Mr. Liam O'Reilly:

Well ... well, all I'm saying is, you know, I can understand that people have that perception, but, I suppose I'd just ask, when one retires, what is one to do? Am I to go down for the bread in the morning and have a cup of tea and-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I'm not making any accusations against you personally, Mr. O'Reilly, but ... but that perception exists.

Mr. Liam O'Reilly:

Yes, but, you know, that's ... yes, and I can understand the perception, but I ... I think it's still a constitutional right, the right to work.

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

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. Mr. O'Reilly, what role did the regulator undertake in analysing the financial accounts of the banks?

Mr. Liam O'Reilly:

The regulator itself had adequate information because every month it was getting in accounting information from the banks.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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What was the nature of that information?

Mr. Liam O'Reilly:

It was their balance sheets, their profits, their liquidity position, it ... it was a comprehensive set of information.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Was the concentration of credit on ... in property, and was the extent of individual customers' borrowing included?

Mr. Liam O'Reilly:

In ... in the reports there would have been large sector ... large concentrations, large exposures, all that information would have been available, yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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The chief executive of NAMA, Brendan McDonagh, in evidence, said that they took over 772 debtors' loans, which totalled €74 billion, and within that, 12 of those had over €1 billion each, and that 12 had €22.2 billion between them. A further 133 borrowers took between €100 million and €999 million, each having a total of €16 billion. Why didn't that ring massive alarm bells in the regulator when that level of concentration was being shown?

Mr. Liam O'Reilly:

Well, all I can do is talk to 2006 and what happened to January 2006. And I've said, Deputy, that it is a huge regret of mine that it wasn't recognised ... the aggregate position was not recognised at that time.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But, pardon me, Mr. O'Reilly, would a child regulator not see the direction and the danger in which this was tending? This ... this was ... we haven't time to give the figures again, but if we had the figures during the three or four years of your tenure, and the three ... two or three years after, the ... the lending, as a witness here, Bill Black, said, was growing like crazy.

Mr. Liam O'Reilly:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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How could it not be-----

Mr. Liam O'Reilly:

I would just say to you, Deputy, that there were no child regulators in the regulatory office. We had people who were working very hard at their job. Now, it may have been misdirected, but they were working very hard. And that's ... that's the position. It wasn't caught.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And, Mr. O'Reilly, you did ... in page 3 of your written statement to us you mentioned the principle-based regime, and financial institutions committing fully to a culture of integrity, and that the main method of asserting influence over the banks was moral suasion. And Senator O'Keeffe raised and pressed you on this already. But, in view of the shocking banking scandals, whereas ... where, in the public domain, it is known that and proved that some ... some banks were found blatantly cheating taxpayers, why did you have some confidence that they now were going to be paragons of integrity? All of them.

Mr. Liam O'Reilly:

Well, I ... I just will quote Eugene Sheehy on this one: "By and large I found the people in banking institutions to be people who are serious about their job, serious about their customers, serious in long-term profits", not short-term profits. I think that there were certain weaknesses in the system. For instance, I had spoken about ... in many speeches I made I spoke about ... bonus systems should not be based on profits, they should not be based on share prices.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. O'Reilly, their profits were increasing hand over fist during the time you were there and after.

Mr. Liam O'Reilly:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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They were after maximisation of profits. So that ... what-----

Mr. Liam O'Reilly:

And the IMF was saying that the banking system had enough buffers to deal with any downturn in prices. And there were demographic reasons why we had increases in ... in lending. We had population increases. I can quote the OECD who list a number of things which would ... you would call structural issues-----

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

Mr. Liam O'Reilly:

-----and beyond that there was an ... there was an excess of prices in-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And, Mr. O'Reilly, as an experienced banker, you saw, as well, the Nordic collapse in the '80s and '90s, for example, and many other banking collapses, as a result of excessive property lending. Was the problem that you were gentleman regulators, really, depending on the banks to observe the ... the Marquis of Queensberry rules, but you weren't dealing with gentleman bankers, you were dealing with street brawlers who were out for maximised profits?

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

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Would that be a fair analogy, perhaps?

Mr. Liam O'Reilly:

I couldn't characterise people I knew as bankers as street brawlers.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Would the light-touch regulation be explained by another theory that has been raised, and I'll put it to you, Mr. O'Reilly, that following the massive deregulation of the international financial industry, starting with the Thatcher-Reagan period in the 80s, and then, according to a witness here, Bill Black, massively intensified by the Clinton regime, that the scale of the financial industry internationally and the scale of profits and interest that was involved, had led governments to wanting a share of this, and didn't want to curb the excessive profits that was going on, in order to gain from it?

Mr. Liam O'Reilly:

At last, I can agree with you, Deputy. And, I would say that the Basel accord was a characterisation of that where you had the banks coming in and saying: "We have big technology systems, we can mind ourselves. If we mind ourselves more, maybe you will charge us less capital". That was wrong.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, and can I further develop this point a little bit, Mr. O'Reilly? In his book, called Ship of Fools, the ... I think he is now deputy editor of The Irish Times, Fintan O'Toole, quoted the Industrial Development Authority, the IDA, referring to a flexible and business focused tax and regulatory system in Ireland, and then quotes directly the IDA as follows:

In 1998, the Regulator advised the banking licence regulations, its banking regulations, and it may now accept under certain circumstances applications from corporate entities to be licensed as banks. In the case of most group treasury and asset financing operations, the Regulator has disapplied its powers of supervision.

I'll repeat, "...the Regulator has disapplied its powers of supervision." Can you throw any light on what that means?

Mr. Liam O'Reilly:

Well, I think that generally, there was a movement towards principles-based regulation which has been characterised as light touch, I don't like using that word, but certainly-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. O'Reilly this is the premier agency bringing big business, finance etc. into the State. They say that as a matter of policy you had disapplied the regulatory system.

Mr. Liam O'Reilly:

Well I will go further and say it was a huge mistake to put into the 2003 Act that we should be involved in the promotion of this.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Move faster, please.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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You were conflicted by that were you?

Mr. Liam O'Reilly:

I would say it was a confliction and it's gone, thank goodness.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. O'Reilly, when I was ... in relation to that and the follow on and the consequence of that, when I was researching for your appearance today, I wanted to find out that ship of fools referred to and Wikipediatells me that it's an allegory originating with Plato. It depicts a vessel without a pilot, populated by human inhabitants who are, among other things, oblivious and seemingly ignorant of their course. In hindsight, would it be very unfair to say that that was the Central Bank in relation to its control of what was happening in the banks or the regulator?

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

Mr. Liam O'Reilly:

I couldn't characterise it that way but I can say that we made a mistake in applying principles-based regulation and we made a mistake in not recognising the full extent of the risks at the time. To say that we were rudderless, I cannot as a person who has worked that length of time in my life, call myself a member of a ship of fools.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Right and last point, briefly, Mr. O'Reilly-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Quickly now Deputy please, we will do the reviews later.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Six members of your board were also on the Central Bank board, isn't that correct?

Mr. Liam O'Reilly:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And they had a majority in fact.

Mr. Liam O'Reilly:

No they didn't.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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They didn't have a majority in the board.

Mr. Liam O'Reilly:

No they didn't because the Chairman of the board was the Governor.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay but it was a substantial component.

Mr. Liam O'Reilly:

It was six-six.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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So can I just ask you a new-----

Mr. Liam O'Reilly:

And usually the chairman has casting vote.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. Can I just ask you in your time there, was there any one or two or three board members who were expressing, say, a serious opposition to the general light-touch regulation that would have made a mark on you?

Mr. Liam O'Reilly:

No, I think the actual system of regulation was never questioned. I suppose if I remember and I don't want to single out one person because then, you know, you are saying one person. But I can say that there was a concern among a minority of members that the property development that was occurring could end in disaster.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. I am going to move towards the wrap-up here Mr. O'Reilly. I just want to deal with one item before I invite the leads to come back with their own wrap-ups and that is as CEO of the Financial Regulator, can you outline your role in micro-prudential supervision of individual institutions, the banking sector and for financial stability generally?

Mr. Liam O'Reilly:

I was the supervisor of the prudential area and the consumer area, and the prudential area had four departments I think, and the consumer area had two departments and as well as that, there was a legal department and an administration department. So I had the prudential regulator reporting to me and he was in charge of banking supervision, securities etc. So that was my line role in relation to that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So who were you responsible and accountable to?

Mr. Liam O'Reilly:

I was accountable to the chairman of the board.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Chairperson of the board, thank you very much. I am going to reference some documents and they are actually up in front of you in a moment. This is from Vol. 3 and it is page 40. What we have here is an aggregate summary, it's in relation to the financial stability report of 2004 and it's the very end of the page there Mr. O'Reilly, where it says "A number of risks to financial stability were highlighted in the report ... Irish banks growth rate 4 times that of the European average ... Irish banks accessing substantial funding from non-Irish sources ... continued increase in house prices [and] tax policy in favour of home ownership." Just moving on further, there is a summary of the actual final stability report of 2004 and that moves to page 45 of the same document. I just want to bring your attention to the end of col. 1, which is the heading, "Household Sector". Bear in mind this is for 2004, again during your tenure. The "Private-sector indebtedness, measured as the value of debt to gross domestic product ... has increased substantially since the mid-1990s and it is now at historically high levels". Moving down then to what would bethe third paragraph on the second column it says:

First-time house buyers are now more heavily indebted by comparison with their peers in the early and mid-1990s. Consequently, the repayment burdens of first-time buyers have not fallen with the decline [of] variable mortgage interest rates, which are now at historically low levels, as households are opting [I maybe question the word "opting" here] for higher mortgage debt ... income ratios, higher loan-to-value ratios and/or longer maturity loans.

In layperson's language, this meant that the traditional way of buying a house over 20 years with three to four times one's income was now being pushed out in every conceivable way, 100% mortgages, loan-to-value ratios, the maturity levels over 35 years. This is all happening under your watch and it is happening in 2004. Can you give us an explanation as to how the standard, whatever about the standard banking model that was being referred to, I think by Deputy Higgins, and yourself earlier, where banks existed for 100 years, in a very short period of time, peoples' ability to buy a home had been completely refigured into a new model, all at additional cost? Even though interest rates now were historically low, it was still costing more to buy a house. Can you explain to us why that happened during your tenure?

Mr. Liam O'Reilly:

I would say that my statement in the middle of 2005, which actually expressed those concerns and was saying that we were reaching the stage where institutions must make sure that people can afford this. And that was a worry that was being expressed there, that people wouldn't be able to afford houses. The situation had developed, there's no doubt about it, and it's a question of how it developed. I think that maybe we should not forget the incentive systems that were being provided for to buying the houses, as well as the easy availability of credit. But I would also say that there was a competition going on between financial institutions, this is in hindsight, which was totally inappropriate for the time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In that regard so, because Ms O'Dea in questioning on a similar line of questioning yesterday, said that what was coming out of the Financial Regulator's office was a lot of advice about these products and to be mindful, "put on your seat belt" was the kind of analogy that we discussed with her. But really there was a product here being put out, that was a series of products, that if you were giving warnings to the consumer there did not seem to be any particular action and I'll maybe get further clarity on you. At an institutional level, what were you doing to the institutions to go in to deal with exactly the type of problems you are talking about now?

Mr. Liam O'Reilly:

Well, for instance, the loan to value mortgage issue was addressed in May 2004 with the increase of higher capital requirements for people who lent money at 100% mortgages. The risk weight was increased, which was a disincentive.

But, you know, in all honesty, moral suasion was the major instrument and it was ineffective and I can't say any more than that. In hindsight, I'm saying it was a mistake.

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

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Chairman. The same document that the Chairman has been discussing with you, Mr. O'Reilly, on page 9, please; that's the Vol. 3 one, yes.

Mr. Liam O'Reilly:

Vol. 3, page 9?

Photo of Sean BarrettSean Barrett (Independent)
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Yes, page 9, yes. Now, in the-----

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

Photo of Sean BarrettSean Barrett (Independent)
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The second-last sentence, it says, "Two of what the [Financial Regulator] regarded as key elements of the governance architecture of principles-based regulation - Directors' Compliance Statements and the Corporate Governance Code were not ... in place." That's from Honohan. Was that because of the pressures we mentioned earlier from the Department of Finance?

Mr. Liam O'Reilly:

I would say that ... and I've said it earlier, I think we were ... and I don't know whether it was ... well, it was part of the political philosophy, I suppose, but we were bogged down all the time in consultation. It was a partnership approach between the banks and the regulator and that doesn't work and that was the problem.

Photo of Sean BarrettSean Barrett (Independent)
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Did you act in a deferential manner towards the Department of Finance?

Mr. Liam O'Reilly:

No, never.

Photo of Sean BarrettSean Barrett (Independent)
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The exceptions to credit policy when the banks were in ... that ... could you discuss those with us? There seemed to be quite substantial increases outside normal guidelines in lending. I think in some cases the exceptions were nearly as large as what was within guidelines. Did you have discussions with them about those?

Mr. Liam O'Reilly:

Yes. With the banks?

Mr. Liam O'Reilly:

Yes. Yes, we wrote to the banks. I remember one set of letters which went directly to the chairman of the board of each lending institution warning them about general issues within the industry and, where their high loan-to-value ratios were in place, we warned them, "Is this ...how are you dealing with the risks attached to that in your lending policies?"

Photo of Sean BarrettSean Barrett (Independent)
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Did they take your concerns on board?

Mr. Liam O'Reilly:

Well, we were getting board minutes back from the banks plus assurances that they had changed their policy in that regard and they were making sure that they were well looked after.

Photo of Sean BarrettSean Barrett (Independent)
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The final one, in your opening statement, you referred to the role of the non-executive directors on principles-based regulation. Was that, with respect, not naive? They turn up, say, one day a month for meetings. The executive directors were there. We rescued six banks; if they'd five non-executive directors, about 30 people. You had 318 full-time staff. Should you not have taken that task on board rather than leave it to the non-executive directors?

Mr. Liam O'Reilly:

Well, as I say, we were operating a principles-based approach which had then attached to it a certain staff complement and we felt that that leverage, which wasn't alone the non-executive directors, remember, it was that the non-executive directors, who were ... the chairman of the audit committee, for instance, had to, at every meeting of that meeting, meet the internal auditor without any other management being there and we were using these resources in our system. Is it enough? Not any more.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator D'Arcy and then we'll close.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. O'Reilly, just one point. The principle-based regulation within our jurisdiction was the same as the principle-based regulation in other jurisdictions; is that correct?

Mr. Liam O'Reilly:

I would say that the ... maybe we were behind the line on getting administrative sanctions in place.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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We weren't as ... as-----

Mr. Liam O'Reilly:

We weren't as advanced.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. Well, can you explain why, in our jurisdiction, the debt ratio between what the banking collapse cost this State, in comparison to our GDP, was a multiple times other countries'?

Mr. Liam O'Reilly:

Sorry, is the question was it or-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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No, why? Why was it?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Why it came to pass.

Mr. Liam O'Reilly:

Why ... why was it?

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Yes, when you had the same-----

Mr. Liam O'Reilly:

I think-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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-----principle-based approach.

Mr. Liam O'Reilly:

I think that the big thing that might be missed a little bit is the fact that the Lehman's crisis was only the first wave of what happened. After that, there was a world depression. After that, there was a plummeting in prices so that, by a year and a half later, prices were at an exceptionally low level. They're actually recovering now, but I would say that that made a fair contribution to the amount of money that had to be paid out to recapitalise banks.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Just to finish off that line of questioning, Mr. O'Reilly, was it not the standard of the loan book was the real issue for the Irish banking sector?

Mr. Liam O'Reilly:

I would say-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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The assets on-----

Mr. Liam O'Reilly:

I would say another element in that was, particularly in the case of commercial loans to a small number of individuals, was the other big issue that cost money.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Senator. So, with that said, is there anything else you'd like to add, Mr. O'Reilly, before I bring matters to a conclusion?

Mr. Liam O'Reilly:

No, just thank you very much for listening to me and best of luck with the rest of your inquiry.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. O'Reilly. So, with that said, I'd like to thank you for your participation here today and for your engagement with the inquiry. The witness is now excused and I just ... before we suspend the meeting, there's just one matter we have to deal with in private session there with lead investigator Pat McLoughlin in a few moments. So, with that said, I'll excuse the witness and then very ... suspend for a few moments to go into private session.

Sitting suspended at 1.16 p.m., resumed in private session at 1.18 p.m., suspended at 1.21 p.m. and resumed in public session at 2.41 p.m.

Central Bank-Financial Regulator - Mr. Brian Patterson

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I now propose that the Inquiry into the Banking Crisis resume in public session. Is that agreed? Agreed.

And can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. Today we continue our hearings with the Central Bank of Ireland and Financial Regulator. At our session this afternoon, we will hear from Mr. Brian Patterson, former chairman, the Irish Financial Services Regulatory Authority. Mr. Brian Patterson was interim chairperson ... or, chairman of the IFSRA from November 2002 to April 2003. He became chairman of the Financial Regulator in May 2003, a position he held until April 2008. He was also a member of the board of the CBFSAI from May 2003 to April 2008. Mr. Patterson, you're very welcome before the committee this afternoon.

And before hearing from you, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry, which overlap with the subject matter of the inquiry. The utmost caution should be taken not to prejudice those proceedings. In particular, there are ... or, sorry, in addition, there are particular obligations of professional secrecy on officers of the Central Bank in respect of confidential information that 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 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 the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screen to your left and right. And members of the public and journalists are reminded that these documents are confidential and that 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 Mr. Patterson, please.

The following witness was sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Once again, Mr. Patterson, welcome in before the committee this afternoon, and if I can invite you to make your opening remarks to the committee, please.

Mr. Brian Patterson:

Okay. Thank you, Chairman.

In April 2002, I was asked to become the non-executive chairman of the interim Irish Financial Services Regulatory Authority, which we know as IFSRA, by the Minister for Finance, and with involvement also of the Minister for Enterprise, Trade and Employment. The authority was formally constituted in 2003 and I remained chairman until my term expired in April 2008. Because it may come up later, Chairman, I should mention that as from October 2007, I was dealing with a serious illness. As chairman of IFSRA, I was also, ex officio, a non-executive member of the board of the Central Bank.

In 2004, instead of the more cumbersome title Irish Financial Services Regulatory Authority, it was decided to adopt in everyday usage the simpler term, "Financial Regulator", to mean the whole organisation, and that is the meaning I shall use here. In this statement, I'll also use the term "authority" to mean the board of the Financial Regulator and "executive" to mean the CEO and his staff. I'll also refer to the board of the Central Bank.

My job was to manage the authority, that is, the board, and to ensure that its non-executive group of independent, senior people worked well together and worked effectively with the executive in developing and approving policies, strategies, plans and initiatives. The executive’s job was to manage the organisation and to report to the authority on the ongoing work of regulation.

The first line of defence against a bank’s failure and the responsibility for protecting its safety and soundness lies squarely with the bank itself - its board, its management, its risk committee, its compliance officer; the second line of defence is the bank’s auditors; the third line of defence, at that time, was the Financial Regulator, responsible for the prudential regulation of individual banks; and the fourth line of defence was the Central Bank, which retained responsibility for systemic financial stability. In the banking crisis which befell us here in Ireland, all of these defences failed for complex and interrelated reasons.

As well as setting up a completely new organisation, the Financial Regulator achieved much in developing its consumer protection mandate, in implementing very complex EU directives, as well as regulating insurance, credit unions and the many other areas under its supervision. However, it clearly failed in its duty to uphold the safety and soundness of Irish banks. As chairman of the authority, I accept responsibility for my part in that failure. It's something I regret deeply. Had I known then what I know now, things could have been very different.The authority and the executive of the Financial Regulator took their responsibilities very seriously. They were diligent, hard working and, at all times, acted in good faith. Contrarian opinions were encouraged. So why did things go so wrong? That is the question on which I'll try to shed some light, and to do so without in any way seeking to evade my responsibility. I'll outline a number of reasons that, in my view, led to the ultimate failure of banking regulation. I'll describe these briefly under two main headings - structure and practice.

Let me first deal with structure. The interim regulatory authority was set up in 2002 following a long debate which followed the McDowell report about how it might best be structured. The main issues were: one, which financial services should be brought into its remit; two, whether a new structure would be independent of, or be part of, the Central Bank; and, three, whether it should focus on consumer protection alone or be combined with prudential regulation. The impetus for an integrated and separate regulator to cover the whole of the financial services industry came from a number of sources. One, following the radical deregulation of financial services under Presidents Reagan and Bush in the US during the 1980s followed by the "Big Bang" deregulation of 1986 in the UK, financial services had become more deregulated, more complex and were converging across traditional sector boundaries, which, in Ireland, and for historical reasons, had been regulated by separate entities reporting to different Government Departments. No. 2, it was believed that banks and other financial services were mis-selling to their customers and that stronger emphasis need now to be placed on consumer protection. Three, the DIRT inquiry and a number of other matters in the 1990s had raised persistent questions as to how effective the Central Bank was in supervising the banks. So it was believed that a more independent structure with a substantial focus on consumer protection was required. However, there were strongly competing views as to how this should be done. Following a lengthy debate, the structure that resulted was a complicated compromise.

The Irish Financial Services Regulatory Authoritywould have responsibility for both consumer protection and the supervision of individual financial services providers, including over 50 banking entities plus 30 EU banks operating on a "passport" basis into Ireland, two building societies, 180 insurance companies, 3,400 funds, 4,000 intermediaries, as well as re-insurance companies, stockbrokers and the Stock Exchange, bureaux de change, licensed moneylenders and 430 credit unions who were vocally opposed to the new regulatory arrangements. The organisation, with supervisory responsibility for over 8,000 different entities, had a lot on its plate. Of its approximately 350 staff, around 45 were initially allocated to banking supervision.

The authority reported to the Oireachtas through the Minister for Finance. It had a degree of independence, but, at the same time, operated within the overall framework of the Central Bank in what was to be known as the Central Bank and Financial Services Authority of Ireland, CBFSAI. The Central Bank and its Governor retained responsibility for financial stability and had powers to direct the authority in that regard; it remained the “competent authority” under EU directives; it was the sole point of contact with the ECB.

The web of accountabilities was, to say the least, complicated. Some observers described the new structures as unwieldy and unworkable. However, early on, the Governor and I decided to try our best to make them work. I should say at this point that the Governor and I had a good, professional relationship all the time through my tenure as chairman. In the initial stages, the challenge was to begin implementing the legislation, which at that point was still a Bill, and to build an entirely new organisation with staff who were then working in a number of different organisations and Government Departments. The regulator inherited most of its staff from the Central Bank and so also inherited, and was effectively constrained by, the Central Bank’s HR policies, systems, and culture, a culture which, in my view, was generally hierarchical, deferential, cautious, and secretive. Accommodation and the critically important services of HR and IT systems were provided by the Central Bank. The bank was not a strong performer in either of these areas and this did slow down our banking regulators in coping with change, of which there was a lot in the period, and in developing their crucial data analytics capacity.

The Financial Regulator was given formal legal status in 2003, although its sanctioning regime was not in place until nearly two years later, and its ... the new legislative framework for banking supervision, under Basel II, was not in place until 2006. The authority had its own board of ten members, six of whom also sat on the board of the Central Bank, including myself as chairman and the CEO. None of the authority - the board - had any experience in regulating banks. There was some initial training for authority members in prudential regulation and financial stability. In hindsight, there was not enough.

At the time, those outside the regulator often saw prudential regulation as being in opposition to consumer protection. There was little or no acceptance that prudential regulation was, and is, in fact, the ultimate in consumer protection for depositors, for shareholders and, as we now know, for taxpayers. Some consumer groups even criticised the amount of resources the authority was then committing to prudential regulation, in so far as it used resources which, in their view, could have been better deployed to consumer protection. Through all of this time, looking back, there’s a theme of taking prudential regulation for granted.

As an example of this mindset, the legislation laid down that the consumer director was to be a statutory, ex officiomember of the authority; surprisingly, the prudential director was not. Early on we recognised this deficiency and we wrote to the Minister to put it on record that even though not written into law, we would treat the prudential director as if he were a full member of the authority, in the sense that he attended and participated in all meetings and received all board papers. The Minister agreed.

The priority given to consumer protection was exacerbated in those early years by a number of high profile consumer issues, for example, foreign exchange overcharging, which absorbed much time and energy of both the executive and the new authority. Many of the interactions with senior bankers on these issues were extremely robust. During one heated discussion in my presence, the CEO of a large bank threw a bunch of keys across the table to our CEO and asked him if he wanted to run the expletive bank.

Part of the CBFSAI mandate was to develop the financial services sector, although not at the expense of safety, soundness and stability – a responsibility more recently removed in the 2010 Act. While the regulator legally had no similar responsibility, it was widely believed that its remit included supporting the development of the industry. Hence there was an effort to ensure that rules and regulatory practice did not have a disproportionate impact on the operation and development of the financial services sector, particularly in relation to the IFSC. Following a fact finding visit to the US in early 2007, the CEO and I came to the view that the authority did not have sufficient visibility of what was happening in international financial markets and, in particular, in the US. On return, I suggested appointing an international adviser to the authority. This idea, unfortunately, did not find enough support in the board of the Central Bank or of the authority and, in April 2007, I was forced to drop it. Again with hindsight, an international adviser might have alerted us to the risks in the US financial markets at that time and how these would come in time to impact the Irish banking system.

Let me turn to the powers of the regulator. There is some misunderstanding about the limits of the Financial Regulator’s powers in relation to the banks. One, first, it had no powers, per se, of approval or disapproval over the banks’ products like 100% mortgages. The regulatory framework was not designed around prohibiting products, but around imposing additional capital charges on more risky products. Second, while it did regulate full subsidiaries of foreign banks in Ireland, it had no powers of prudential regulation over EU banks "passporting" as branches into Ireland, and which were regulated by their home supervisor. The authority was very conscious that if, for example, the capital requirements on Irish banks were pushed too high, foreign banks which were already, or could move beyond our supervisory reach by switching from subsidiary to branch could have gained advantage over their Irish competitors. This was particularly the case with some aggressive UK banks, attracted to the Irish market by increased margins. Trying to regulate these foreign banks through their home supervisor was futile; the role of the ECB in supervision was, at the time, very weak, as was transnational co-operation between banking regulators.

The McDowell report had recommended that the regulator be given powers of administrative sanction so that it could challenge the banks more effectively, although most countries in Europe did not use sanctions as a core part of their prudential banking supervision. However, the power to impose sanctions on the industry took a long time to materialise. The legislation was not enacted until August 2004, and by the time statutory instruments and staff training were complete, sanctions were not available to the authority until late 2005, more than two years after vesting. This lag in giving the regulator powers of sanction may have weakened the new organisation in the eyes of powerful, and dare I say, in the case of a few increasingly arrogant banks. When eventually enacted, the legislation gave the authority powers to sanction without having to access the courts. Internally, there were real concerns about legal and possible constitutional challenge. If, in the early stages, the authority’s sanctioning powers were to be struck down by the courts, it would have far-reaching consequences, and these concerns fed into a Central Bank culture which had already had in-built cautiousness and hesitancy.

Resourcing levels in banking supervision, as you've heard, were derived from the principles-based approach. It's worth noting that in the new, post-crash regulatory regime, a more intrusive, inspection-based approach required a 170% increase in staff resources. As you have heard, resources at the time were under considerable pressure. As well as carrying out ongoing supervision, they had, at the same time, to implement a raft of complex EU directives, particularly Basel II. Management in banking supervision did seek some increase in resources but there was a perceived need to keep a lid on costs and the procedure for getting approval for additional staff was extremely complicated. Even when approval was obtained, the filling of posts was constrained by, first, the inability to attract enough external candidates at the right level and, second, by the capability of the Central Bank’s recruitment function.

In relation to the first of these points, the regulator was constrained by the pay scales and HR policies of the Central Bank and its long-standing conformity to terms and conditions of the Civil Service. And there were three consequences of this: number one, it was virtually impossible to offer competitive market conditions and to bring in, particularly at a senior level, expertise from outside, especially from the highly paid financial services industry. For example, on the basis of figures which are in the public domain, the authority would never have been in a position at that time to recruit a Matthew Elderfield. Number two, performance management systems and practices were very weak and number three, the organisation culture was formal and slow. The authority was obliged to take its IT and systems development from the Central Bank. Because of problems in this unit, it was a constant source of frustration and inefficiency to the whole organisation and to banking supervision in particular.

In summarising this part about structure, it's clear with hindsight that the Financial Regulator, as it was constituted, was not entirely fit for purpose. A modern Financial Regulator needs a board with regulatory experience and skills. It needs an enabling legal framework with strength to counter the naturally powerful influence of the banking sector. It needs to be well resourced, to have a fast-moving capacity to develop its IT capability and to recruit expert staff. It needs freedom of action and clarity in its legislative mandate that it's single-mindedly to prioritise the stability of the banking sector over other competing public policy goals.

Let me turn to regulation and practice. As you've heard ad nauseam, principle-based prudential regulation was at the time perceived internationally as best practice. It was the bedrock of EU banking supervision as enshrined in the Basel accords – to which the Irish Government was a signatory. It had therefore to be embraced by the Central Bank and was inherited and continued by the new Financial Regulator.

In an era of deregulation and belief in free-market policies, principles-based regulation was based on the belief that one, the market should be allowed to operate freely; the regulator should not interfere in product design or pricing and had no powers to do so. Two, responsible financial services providers were best placed to make decisions about their businesses and were required by government ... required to be governed by experienced managements and boards, backed up by risk committees, compliance officers and auditors. Boards were required to comprise of persons who were "fit and proper" and who operated in a transparent and ethical way. This would take, number four, place under regulatory oversight, with reporting, monitoring and risk-based inspections, backed up by strong enforcement.

As part of the EU push to develop the single internal market with a common regulatory framework, the Government had signed up to implement EU-wide, complex, data-rich, risk-based system of prudential regulation named Basel II, which was to complement the principles-based core principles of effective banking supervision. The regulator was required to adopt this system and to bring the Irish banks under its disciplines. Implementation of Basel II, completed in 2006, fell to the Financial Regulator. This work was extremely challenging, complex and detailed; it put a lot of strain on the Central Bank’s systems development capacity. Critically, it temporarily diverted a large number of banking supervisory staff from day-to-day supervision at a time when, as we now know, the seeds of the banking crisis were already germinating. Ironically, the new Basel II framework did not prevent an EU-wide banking crisis and it was superseded in 2011 by a new accord, Basel III.

To strengthen its principles-based approach, in 2005 the authority set out to introduce a new fitness and probity regime for the directors of financial institutions. There was, inevitably, strong challenge from the industry. The authority sought legal advice, which was that constitutionally, no directors who were already appointed, could be reassessed and by implication potentially disqualified. In other words, they were effectively grandfathered or grandmothered. After the crash, the 2010 Act brought in extensive powers for the Central Bank to examine existing appointees – powers not available to the regulator before that time.

In a second move taken by the authority to strengthen its supervisory approach, in November 2004 the authority set out to use its discretionary powers under the Central Bank Acts to require compliance statements of directors in financial institutions. The consequential consultation process ran into a barrage of resistance from the industry. They deployed a range of arguments, including that this was inconsistent with the company law review group’s report. Following extensive lobbying and discussion, the Department of Finance wrote to the authority in November 2006 asking it not to proceed with the necessary consultation process, “without first consulting the Department” – a clear signal to us that this did not have Government support. In retrospect, I believe we were mistaken not to have pressed ahead with this measure despite the extreme resistance that we faced.

Banking supervision collected data from the banks and carried out on-site inspections. The principles-based approach focused on checking banks’ internal control systems and board minutes to assure the supervisors that their internal controls were operating. Instead of, for example, random sampling of loan files to challenge bank managements' assertions, the inspection methodology left actual judgements of what was prudent to the banks' managements. The dramatic rise in credit called for new information to be collected from the banks. However, the Central Bank just did not have the IT change management capacity to specify that data need or to implement it quickly, while also implementing Basel II and doing everything else it was doing for the Central Bank and for the ECB.

Within an often crowded agenda, the CEO and the prudential director reported on their supervision responsibilities at the monthly authority meeting. The prudential pack, which contained detailed data on an institution-by-institution basis, was a quarterly standing item on the authority’s agenda and was discussed at length. Solvency ratios of the banks under supervision were examined and were continually seen to be within the defined limits. The pack included some details of major exposures of Irish banks including those to property developers. These exposures were examined by the executive and were the subject of detailed discussion with the institutions themselves. The executive assured the authority that all these loans had strong asset backing. With the benefit of hindsight, the valuations on which this was based depended on some kind of soft landing.

Chairman, I've omitted the next sentence which was in my written statement as I realised after I had submitted it that it was not fully correct.

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

Mr. Brian Patterson:

The regulator had no powers to investigate the affairs of bank customers. After the crash, it emerged, as we know, that some large developers had never been asked by their bank to provide a statement of affairs nor had the bank properly assessed their net worth. In hindsight, the executive should examine ... should have examined this more closely and, if necessary, forced the banks to improve the standards of inquiry on which they based their lending decisions. The prudential pack did not include micro-trend statistics which could've become the focus of discussion had they been present. This reflected the view that the regulator was a micro-prudential supervisor only, with a mandate to ensure every individual bank had strong capital ratios, rather than to analyse if risk was building in the system as a whole.

Much has been said on the subject of sector limits. It is my understanding that the Central Bank had effectively relaxed these limits in the 1990s, prior to the setting up of the Financial Regulator, in order to encourage the development of the IFSC and in particular to facilitate the arrival of one large foreign bank which had a major sector exposure. It was then felt that foreign and domestic banks had to be treated the same, a level playing field, in order to avoid giving substance to any impression that Ireland was host to an offshore centre that was being treated more lightly than its domestic banks. Furthermore, sector limits are notoriously difficult to define and so were used more as guidelines than rules. And as banking supervision got closer to the full implementation of Basel II, it became less and less tenable to give any weight to sector limits, which were to be superseded by the Basel II approach. Nevertheless, and again in hindsight, while sector exposure was monitored by the executive, we paid insufficient attention to this indicator.

The regulator paid close attention to the Central Bank’s stress tests, which were largely carried out in the banks themselves under supervision of the Central Bank. As presented to the authority, they indicated that even under their most pessimistic scenarios, for example, slowdown in economic growth, rise in unemployment, the banks were well capitalised and capable of withstanding any external threats.

However, in hindsight they did not factor in, number one: the degree of reliance on international wholesale funding which, as events were to prove, was highly volatile - the banks were borrowing short to lend long; two, the risk of a calamitous collapse in property prices and the consequent impact on the banks’ balance sheets; and, three, severe economic recession, which impaired the ability of borrowers to repay loans. The authority took great comfort from the results of these stress tests. Had they shown a risk to any bank’s solvency, let alone to the banking system as a whole, the alarm bells would have been ringing loudly and action would surely have followed.

The annual financial stability report, as you have heard, was issued by the Central Bank in each of the years 2004 to 2007, inclusive. The report was prepared by a joint Central Bank-Financial Regulator committee under the chairmanship of the then director general of the Central Bank. The report was based on the Central Bank’s economic analysis and most recent stress tests, plus input from staff in banking supervision. Even though the magnitude of the risk was not properly understood, there was often disagreement in this committee about how strong the report should be in identifying risks to the banking system. The report was finalised by the Governor and the board of the Central Bank. As the clouds gathered, there were concerns that a strongly worded financial stability report could have resulted in the unintended consequence of causing the very collapse the Financial Regulator and the Central Bank were seeking to avoid. However, the Governor had regular one-to-one meetings with the Minister and it was believed that he could be more direct in private than he could be in public.

The authority was also given a false sense of security by a series of external reports: number one, audit reports on the regulated banks, which did not raise any concerns about liquidity or solvency; number two, the 2006 IMF financial sector assessment programme report, which gave the banks and the Financial Regulator a glowing report; number three, the PwC 2007 report, which again concluded that the banks were in good health and able to weather any storm; and, number four, the IMF report of September 2007, which found that the banking system is "well capitalised, profitable and liquid, and non-performing loans are low". Again, the authority took great comfort from these reports. They seemed to confirm what the internal processes and reports were saying, that is, that the banks were well capitalised, and could withstand any downturn or external shocks.

To summarise this section on practice, the regulator was operating a system of principles-based regulation, which was internationally accepted as best practice at the time. It was also embedded in the Basel II accord, a regulatory system to which the Irish Government was committed and which called for dramatic increases in data gathering from the banks. Implementing Basel II challenged the Central Bank’s IT capability and diverted banking supervision staff from normal duties. None of the many internal processes or external reports that I have described raised serious red flags about the banks’ viability or pointed to any of the cataclysmic events that were to follow. Had any of them shown a risk to the banks' solvency, let alone to the banking system as a whole, the alarm bells would have been ringing loudly and the authority would have been impelled to investigate and to take action.

In conclusion, Chairman, the Financial Regulator had an overly complex structure with an extremely broad mandate, which emphasised consumer protection as the main priority, with constrained powers and limited resources devoted to banking supervision. The complex entanglements with the Central Bank also limited the regulator’s effectiveness in a number of ways. However, shortcomings in the structure do not alone explain why the system failed. The regulator’s processes and reports and the findings of external scrutineers, any of which should have raised red flags or sent warning signals, all failed to do so. As a result, the authority simply did not see the enormity of the risks being taken by the banks themselves and the calamity that was to overwhelm them through the speed and severity of the crash. Had we known then what we know now, we would, of course, have acted more strongly and used whatever powers were at our disposal with the forcefulness required to rein in the banks’ lending. But we did not know then what we know now. And so, as a key part of the defence against banking failure, the Financial Regulator failed in its responsibility to uphold the safety and soundness of the Irish banks. As a former chairman of the authority, that is something I will forever regret.

Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Mr. Patterson, for your opening statement. And if I can invite Deputy Kieran O'Donnell to lead off. Deputy, you've 25 minutes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thank you, Chairman. Welcome, Mr. Patterson. The memorandum of understanding between the Central Bank and the Financial Regulator dealt with the responses of both the Central Bank and the regulator. Was there clarity in what should have been dealt with by the financial regulatory board or by the Central Bank board? And that's coming from document Vol. 1, page 7. It's memorandum of understanding.

Mr. Brian Patterson:

I don't need to refer to the document, Chairman, I understand the question.

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

Mr. Brian Patterson:

In my mind, the responsibilities were very clear. The Financial Regulator was responsible for the supervision and regulation of the individual banks. The Central Bank was responsible for overall systemic financial stability; quite clear, okay? Because the two organisations had this very complex dividing line, I think, looking back on it, that what happened was some of the accountabilities fell between two stools. Easier to see in hindsight, but at the time I guess we didn't realise this. And the financial stability report, which was where all this was supposed to come together, didn't actually do the business. And I think it was for this reason: were there concerns within the boards of the regulator and the Central Bank about the degree of bank lending and the risks they were taking? Yes, there were. There were concerns, and they were often voiced.

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

Mr. Brian Patterson:

By various members of the authority, and by various members of the Central Bank board.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you voice them yourself?

Mr. Brian Patterson:

Yes, I did.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And where ... and how did ... how ... what was the outcome of that?

Mr. Brian Patterson:

Well, this is what happens. Did the financial stability report accurately reflect those concerns? No, it didn't. Did the financial stability report contain recommendations for action? No, it didn't. Why? Because it couldn't. The financial stability report is not a suitable vehicle for flagging concerns about the banking system because it's a public document. And if the financial stability report had said XYZ bank or the banking system as a whole is looking very shaky and the Financial Regulator should take the following actions, there probably would have been queues outside the bank in the street the next day. So it wasn't capable, in my view, of doing that function. Now-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you're saying the financial construct under which the new bank regulatory system was set up in '03 was flawed from day one?

Mr. Brian Patterson:

I think there were flaws in it. But I was going to go on to say, if you'll excuse me, that we all lived in the same building - the Financial Regulator and the Central Bank, and all the executives and all the boards. We lived in the same building, we shared the same services, we had regular informal interaction with each other-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Had you an office on the seventh floor?

Mr. Brian Patterson:

I did, a small one, yes.

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

Mr. Brian Patterson:

And we have-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But you made it ... you made it to the seventh floor?

Mr. Brian Patterson:

I did make it to the seventh floor. We had regular interaction with each other and there were ample opportunities for executives and, indeed, board members to communicate to each other, to sit down and say "Look, I'm really concerned about this." And that's what didn't happen. Because out of the ongoing interaction between the regulator and all its people and the Central Bank, no proposals or recommendations for actions which were stronger or more urgent emerged, other than the ones that were in any case taken.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why not?

Mr. Brian Patterson:

Because, and it goes back to the fundamental issue here ... because, collectively, the two organisations just didn't see the size of the risk that the banks were taking or the calamity which was going to overwhelm them in due course.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And was that your ... your ... in your statement you make reference to the fact that the board was relying on the executive in terms of banking expertise. Should the regulator, in terms of the ... executive, have looked more closely at how loans were being granted by the banks?

Mr. Brian Patterson:

Yes, absolutely.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And at the time did you make that known to the CEO of the financial regulatory authority?

Mr. Brian Patterson:

No, because at the time we didn't see what a disaster that would ultimately turn out to be. You can see these things very easily with hindsight, but at the time, no, in all honesty, neither I nor, I think, the members of the authority made that point to the chief executive.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You have made reference in your statement ... that there was no one on the board of the Financial Regulator with any banking expertise. Now, you were ... you were appointed as interim chair back in April 2002.

Mr. Brian Patterson:

Correct.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So how did you allow a situation to develop where you had no one on the board of the financial regulatory authority, the section of the new ... which was set up specifically to regulate the banks, with ... it would be basically like having a restaurant with no chef?

Mr. Brian Patterson:

First of all, what I said was that there was nobody on the board of the authority with banking regulation experience.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Correct. But, sure, that's what the Financial Regulator ... was a key component of it.

Mr. Brian Patterson:

No, I agree. I agree, absolutely.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you were there from the start.

Mr. Brian Patterson:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So why did you not insist on people being on the board with, with bank regulation experience?

Mr. Brian Patterson:

I was appointed chairman before the board was appointed-----

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

Mr. Brian Patterson:

-----and I did try in conversations with the Minister and his staff.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who was the Minister at the time?

Mr. Brian Patterson:

Mr. McCreevy.

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

Mr. Brian Patterson:

And his staff. I tried to make the point that the board needed to have regulatory experience. There were people with banking experience on it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What was the outcome of those discussions? What-----

Mr. Brian Patterson:

It didn't happen.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What did Mr. McCreevy say to you?

Mr. Brian Patterson:

I didn't hear anything until the members of the, of the authority were announced in the media.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, you were ignored?

Mr. Brian Patterson:

Yes, I guess.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And why, if you were ignored, if you felt so strongly about it, why did you proceed to take up position as chair?

Mr. Brian Patterson:

That's a fair question. I believed at the time that we had good people on the board; they were good people.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But, sure, they'd no banking experience.

Mr. Brian Patterson:

They had bank ... some had banking experience, but not-----

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

Mr. Brian Patterson:

-----not banking ... No, no.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We can't-----

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

Mr. Brian Patterson:

We did have people with banking experience on the board, but not regulation experience. That's the difference, all right?

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

Mr. Brian Patterson:

And there were other people from the financial services industry who had long experience. Also, I was told, and I believed that the executive had within it in-depth experience of banking supervision, banking regulation, that the whole system was well oiled and that it would work ... it would work well and it would serve the authority well. And on the basis of those two things, I decided to serve. With the benefit of hindsight, maybe I shouldn't.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But in looking at it and taking that executive experience you're talking about, you were ... you announced the appointment of both CEOs, which were both Mr. O'Reilly, Liam O'Reilly, and Patrick Neary. So, what was the process by the ... the appointing panel, the persons for the executive team in the Financial Regulator who actually appointed the CEO? What was the process you went through? Who was on the board that interviewed these people? What was the process? How did you follow up with, with scrutiny in terms of their performance?

Mr. Brian Patterson:

Okay. This, Chairman, will probably be a long answer because I need to-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, I'll give you time for it, that's fine.

Mr. Brian Patterson:

-----do justice to this. As you say, Deputy, in my time we appointed two chief executives, Liam O'Reilly and Pat Neary. And if I deal with the Pat Nearly appointment, because I think the Liam O'Reilly one was similar.

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

Mr. Brian Patterson:

The first thing that we did was to develop a detailed job specification and a person specification and that would have included experience of prudential regulation, consumer protection, organisation, leadership capabilities, administrative experience and so on - very detailed document - and that was signed off by the authority. We recruited - not we recruited, we appointed an external executive search company to assist us with finding candidates with managing the process------

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who were they, Mr. Patterson?

Mr. Brian Patterson:

I believe it was Amrop at the time. And to advise us generally on the selection process, and they then produced a list of candidates, which to my memory was around about 15 or 20, or something like that, that was whittled down to a final four or five. We then, we had in the meantime engaged a Finnish expert from Finland who had been the former head of financial regulation in Finland; I can't remember his name offhand, and he became part of our selection process as an independent assessor.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I can give you his name, he was Kaarlo Jännäri.

Mr. Brian Patterson:

He was indeed, thank you. And five members of the authority, plus him, making six in all, became a sub-committee of the authority to make the recommendation to the authority. We interviewed ... I chaired that process. We interviewed the four or five candidates on the short list; we split the group of six into two. They both independently interviewed the candidates, we then came together to discuss what we had seen. There was a lot of discussion, as inevitably there should be, and eventually a consensus emerged that in the case of Pat Neary, that he was the best person available to do the job. That recommendation was made to the authority, which approved it unanimously and it was then given to the Minister for formal approval.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Do you believe in the circumstances where you had over 80% of the people interviewing, five of the six people were from the board with no bank regulation experience in both cases, interviewing for a position, do you believe that you recruited the correct person in the circumstances? Was it the appropriate process? You were setting up a completely new regulatory authority, why didn’t you bring in someone from the outside? Both were insiders, both were promoted from within the system. Why did ye not ... why did we end ... do you believe ye appointed the correct people in terms of what Ireland needed at that time?

Mr. Brian Patterson:

Can I deal with the first part of your question first? The fact that there wasn't in-depth banking regulation experience on the board was why we brought the Finnish expert in to the process to give that voice, and I think he did that very effectively, that's the first thing. Why did we appoint two insiders in the case of both Liam and Pat? The reality is that we were constrained by the policies and salary-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What was the salary on offer at the time?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Hold on a second and just allow ... continue please, Mr. Patterson.

Mr. Brian Patterson:

We were constrained by the policies and the salary grades of the Central Bank, which in turn were linked to the Civil Service, and bearing in mind that externally we would have been fishing in the financial services pool, known for its very high salaries and bonuses and all those kind of things, it was ... it was very difficult, if impossible, to attract people to apply for this job who were at the right level of experience and seniority; and yes, we did get some external candidates but they weren't at the right level. So therefore, the process from the word go, was heavily slanted towards internal candidates.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What was the salary on offer at the time?

Mr. Brian Patterson:

I would have to check that. My feeling was that it was €140,000 or something like that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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That's a considerable salary, Mr. Patterson.

Mr. Brian Patterson:

It is, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you're telling me that the only person you could recruit on both situations were people from inside the system on that level of salary?

Mr. Brian Patterson:

That's the way it turned out. They were the best people available from the candidates that we had in front of us.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And two things, do you not believe you should have had further banking regulation expertise where you had five of the six people with no bank regulation experience? Surely it should have been balanced in having people on the interview board with bank regulation experience? And what type of performance measures did you have in respect of the CEOs thereafter?

Mr. Brian Patterson:

To the first question, no, I think we had enough in the Finnish expert, who was very vocal in these processes and who brought to the table in-depth knowledge and independent knowledge of financial supervision and financial regulation. In relation to performance assessment, the way this worked was that every year I had one-to-one meetings with members of the authority and I asked them what did they think of the performance of the executive and in particular the chief executive. So I collected their views, added my own, obviously, and then I had a discussion with the chief executive of the day about his performance.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So these were members of the board-----

Mr. Brian Patterson:

They were.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----who had no bank regulation experience?

Mr. Brian Patterson:

Who had bank ... no bank regulation experience, correct. Sorry?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So did you not think of getting an independent review of the CEOs in terms of people that would have bank regulation experience?

Mr. Brian Patterson:

Not at that time, no, we didn't.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I deal on a number of things. What is your view on, we'll say ... do you believe that the bank, the Financial Regulator, had sufficient powers to take direct action against banks during your tenure?

Mr. Brian Patterson:

I used to think, Chairman, that we didn't, but now that I examine this with the benefit of hindsight, I have changed my mind. I've come to the conclusion that yes, we did. I've talked in my statement about the sanctioning regime, and it was late, and etc., etc. But the reality is that in banking supervision, we had other powers that we could have used. We could have-----

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

Mr. Brian Patterson:

We could have, well there's the famous old moral suasion, although I think in the climate of the day-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It's kind of become a bit of an echo-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I think we need to allow a bit of time. Only comment upon the questions, please Deputy? Okay.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay, but it has become a bit of an echo.

Mr. Brian Patterson:

I know. I realise that. I mean, I... if you'll forgive me for a moment, I remember when I was studying my economics, I think at the feet of Garret FitzGerald in UCD, and he told us about moral suasion, he said that refers to the eyebrows of the Governor. So in other words, if, if the ... if you were having a conversation with the Governor and he raised his eyebrows-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I suggest you should have listened.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I suggest you get on there with questioning there, Deputy, and pull back on making remarks.

Mr. Brian Patterson:

You asked me what, what powers we actually had. Moral suasion was one of them, but I honestly don't think that was working; the banks weren't listening. We could have attached conditions to licences; we could have done more in requiring capital requirements; we could have done more and done it sooner. What else could we have done? I suppose in extremis, we could have gone and asked for emergency legislation.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why didn't you do it?

Mr. Brian Patterson:

Because, and I'm sorry, Chairman, I'll be saying this again and again. We simply did not see the calamity that was coming down the track.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And what was your view on contrarian views like Morgan Kelly at the time? What was your view-----

Mr. Brian Patterson:

External ones?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes. That were saying there was major problems at the time as early as 2006.

Mr. Brian Patterson:

I think those external contrarians, they were a small minority and their voice, I think, looking back, got drowned out by the what Peter Nyberg calls the "groupthink".

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You're on record as saying that you had issues with what Morgan Kelly was saying.

Mr. Brian Patterson:

I don't recall that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Do you not in terms of ... at a Kilkenny Chamber of Commerce do?

Mr. Brian Patterson:

I remember the chamber of Kilkenny ... the Chamber of Commerce in Kilkenny do. I do, indeed, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you not make reference to Mr. Kelly's comments?

Mr. Brian Patterson:

I don't recall it but if you tell me I did, then I did.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I ... two quick things. You retired in April 2008 from the Financial Regulator as chair and a function was held a number of months later on 26 November 2008 in a hostelry close to Stephen's Green-----

Mr. Brian Patterson:

Yes-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----hosted by the Irish Banking Federation

Mr. Brian Patterson:

Correct.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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, which was literally just over two months ... less than two months after the bank guarantee, that the Irish taxpayer put €64 billion ... ended up at €64 billion. Was it appropriate for you to take up that offer to effectively attend a function, which in Shane Ross's book, The Bankers, virtually all the big bankers who had been there on the night of the guarantee, were present?

Mr. Brian Patterson:

I'm glad you've asked me this because I'll welcome the opportunity to get the facts on this straight. This small function, it was a small private dinner. It was a very sober affair, believe me. I was going through chemotherapy at the time and I didn’t eat or drink very much at all.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I appreciate that.

Mr. Brian Patterson:

It took place in November of that year.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Glad to see you recovered well.

Mr. Brian Patterson:

Thank you. I ... it took place in November of the year. It was long after I had retired. It was a one-off event. I had never during my time, in ... as chairman, accepted private hospitality like that. I had been at industry functions all right. I’d never accepted private hospitality from any of the financial services providers and nor would I have, even during my tenure, or around the time of my retirement. This was seven months later and, therefore, for that reason, for myself, I was comfortable that that was okay to do, all right? When I realised that the executives had also been invited, and they were still in office, I was less comfortable, although it did go ahead. It had been ... incidentally, it had been organised some months before the guarantee, so it was in the diary for a long time. Looking back on it, I ... it wasn’t appropriate for the executives to be there and I think they’ve said that in this committee and I regret that that happened.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was it appropriate for the Irish Banking Federation to be hosting a retirement do for the chair of the board that was regulating them?

Mr. Brian Patterson:

On the basis that it was long after my retirement, I didn’t see a problem with that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you didn’t see an issue with it?

Mr. Brian Patterson:

No.

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

Mr. Brian Patterson:

For me, personally; for the executive, a different matter.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I just ... on a small note. The issue of golf balls being provided, hosted by the Irish financial regulatory authority, were you aware of that?

Mr. Brian Patterson:

I became aware of it when I listened to Pat Neary’s evidence, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You weren’t aware of it prior to that?

Mr. Brian Patterson:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It didn’t come up at the board level?

Mr. Brian Patterson:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I just go back to your statement ... do you think it was appropriate?

Mr. Brian Patterson:

It wasn’t, no. I would mention, however ... I mean ... it wasn’t appropriate ... so, let me get that straight. It actually arose out of the consumer side of the Financial Regulator and in the climate of the day, the consumer side wanted the public to be more aware of its functions and what it offered, right and this was part of some promotion pack that they commissioned.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It was about driving golf balls----

Mr. Brian Patterson:

I’m not going to try and defend it, Chairman. It’s not appropriate, I just wanted to----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I just ask you to move on actually, please, Mr. Patterson.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I go to page 3 of your statement-----

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

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----and you said ... that’s what I’m trying to do, Chairman ...

Many of the interactions with senior bankers on these issues were extremely robust. During [our] heated discussions in my presence, the CEO of a large bank threw a bunch of keys across the table to our CEO and asked him if he wanted to run the expletive bank.

When did that happen? Who was CEO at the time?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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No, he won’t, that’ll be sectioned.

Mr. Brian Patterson:

And if I say, when it happened, Chairman, I’ll probably give the game away as well.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why did you put it into your statement?

Mr. Brian Patterson:

Because it’s true.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So ... and what was the actual circumstances around it?

Mr. Brian Patterson:

It was a consumer protection issue. It wasn’t a prudential issue and it was a very high profile one at the time and there was great heat in the system between the Financial Regulator and this bank. And there was a meeting between myself and the chief executive, Liam O’Reilly, at the time – that’ll give you a timeframe - and the chairman and chief executive of this bank and it was at this meeting that this incident happened.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I ask you two final things? Looking back now in hindsight - and you made reference there, there was measures available to the bank - did you have much interaction as chair – you reported it to the Minister for Finance - did you have much interaction with the Ministers of the time, Charlie McCreevy and Brian Cowen, in your time?

Mr. Brian Patterson:

I met ... with the chief executive I met the Minister probably around twice a year, largely, I think, almost totally at our request and the purpose of that was, less to kind of report to the Minister, in some sort of supervisory capacity; it was more to keep the Minister informed with, for example, EU developments, directives and so on. And also, a recurring theme at the time was to ask the Government to strengthen the legislation in relation to credit unions which we were worried about at the time, something, incidentally, the Government was reluctant to do.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you have discussions with the Minister of the time in 2006, where you spoke about the compliance statements and you got a letter back in November 2006 that not to proceed? Did you go to the Minister and impress upon him the need for this to happen? And also there was obviously worries at the board level in terms of the state of the loans in the banks. Did you, as chair, meet with the Minister?

Mr. Brian Patterson:

In all of my interaction with the Ministers, other than the credit union issue, which I mentioned, I don’t recall us discussing in any depth any prudential issues.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why not?

Mr. Brian Patterson:

Because again and I’ll be very boring on this, at the time we didn’t see what was coming down the track. It’s as simple as that. We didn’t see it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, looking back now, what would you have done differently. You were there for five years, okay-----

Mr. Brian Patterson:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----and during that time, the balance sheets of the banks and property loans were growing at about 30% per annum, consistently across all the major banks, and clearly ... and you had the ECB saying at the time that loans should have gone up by, maybe, up to 4% per annum. So, looking back now, are you ... do you believe that the financial, we’ll say, regularity authority failed in its role? And what would you have done differently?

Mr. Brian Patterson:

Well, I’ve said, Chairman, very plainly in my statement that they did fail and I’ve accepted my responsibility for my part in that. What would I have done differently? In the first few years of the new Financial Regulator, there was a huge priority put on consumer protection. If you examine the agendas and the minutes of the authority, consumer protection loomed large.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And yet, Mr. Patterson, there was no consumer interest on the board of IFSRA, when it was established?

Mr. Brian Patterson:

Well, I think we all spoke for the consumer. It was a public interest board. There weren’t any specific consumer representatives, you’re right.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But you had a situation where you had no one with banking regulation experience and you had no one representing interests of consumers specifically.

Mr. Brian Patterson:

Well, we had the consumer director. That was her job.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But that was within the bank.

Mr. Brian Patterson:

Yes, but it was her sole job to represent the consumers

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So continue, we'll say, in terms of what you would have done------

Mr. Brian Patterson:

Would have done differently? I would, looking back, have devoted more time in authority meetings to prudential matters, first point. I would have set up a subcommittee of the authority to work more closely with the executive in examining and digging into prudential returns, prudential matters. I would have led the authority to question the executive more closely on prudential matters.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And do you believe that the credit sector concentrations and prudent underwriting standards were important to financial stability? And do you believe that there were adequate discussions of breaches of lending policy and sector risk concentration limits at board meetings of both the Central Bank and IFSRA? And when you’re answering that, if there had been members of the board that had financial regulatory experience, would we have ended up in the situation where the Irish taxpayer ended up grossing €64 billion into the Irish banks?

Mr. Brian Patterson:

I’ll answer the second question first. If there had been more experience or skill in banking regulation as opposed to banking and banking regulation on the board of both the authority and the Central Bank, I think there’s a good chance that we could have avoided at least the worst of what happened and I would include----

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

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Give him time to respond, now, Deputy.

Mr. Brian Patterson:

I would include in that having one or two people with international experience, particularly the United States, and we didn’t have those.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you not consider looking for it at the time?

Mr. Brian Patterson:

Not at the time, no.

Well, I mean, I told you that in 2006 I suggested that but I wasn't getting anywhere with it. The ... can ... can I take the first question?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The credit concentration limits and the-----

Mr. Brian Patterson:

Yes, sector limits. Of course, they're important in banking supervision. And with the benefit of hindsight, again we can see just how important they ... they were. I said in my statement that my belief is that sector concentration limits were, in effect, relaxed in the 1990s in order to facilitate the development of the IFSC. And I think that, sort of, became the conventional wisdom that sector limits were there all right and yes, they would be looked at and so on but they wouldn't be strongly policed. And with the benefit of hindsight that ... that was wrong. They should have been, and strong enforcement action should have been taken with the banks to bring that back into line.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Fine, thank you, Deputy. I ... just before I bring in Deputy Doherty there, I just want to get some clarity on a couple of matters there with you, Mr. O'Reilly, or sorry, Mr. Patterson. One is just to come back to Deputy O'Donnell's earlier question there in regard to the appointment of staff and so forth. The question I have for you is: was performance monitored and assessed and by whom?

Mr. Brian Patterson:

Was the CEO's performance?

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

Mr. Brian Patterson:

As I said in response to the Deputy, we did have a process for monitoring the performance of the chief executive and, indeed, his key lieutenants. And that was ... that involved the authority as a whole.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What ... what were the benchmarks of the targets or specific key performance indicators that would be looked at?

Mr. Brian Patterson:

We had developed a very detailed strategy which, I think, is in the core documents, and the chief executive's objectives fell out of that. They ... they were intrinsically linked to the strategy and he was required to report quarterly to the authority on the implementation of the strategic plan and that formed the core of his performance assessment.

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

Mr. Brian Patterson:

That included, incidentally, sorry, Chairman ... it included the safety and soundness of the banks.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Up to 2006 or that period, was there ever a senior Central Bank or regulatory position appointed that came from outside the public service?

Mr. Brian Patterson:

At a senior level, I think not.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. So ... and that would be ... would you be fairly clear on that or that would be your assumption?

Mr. Brian Patterson:

I'm just running through my memory, Chairman, and I can't think of an example or at a senior level, which is what we're talking about-----

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

Mr. Brian Patterson:

-----that there was an external appointment, no.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. For the Financial Regulator's position, the CEO's position, can you recall how many people applied for that post and how many came from the public service?

Mr. Brian Patterson:

As I said in response to the earlier question I ... my memory it was about 15 or 20 in the long list.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And were they all private or public?

Mr. Brian Patterson:

No, they were mostly public.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mostly public-----

Mr. Brian Patterson:

Public sector, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right. And given what you said earlier, it was inevitable that the appointment was going to come from the public sector most likely.

Mr. Brian Patterson:

It wasn't inevitable, Chairman, but it was heavily slanted in that direction, yes-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But the ... okay but the .... traditionally that would have been the appointment-----

Mr. Brian Patterson:

Yes-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----so it would be consistent with that. Thank you. Deputy Doherty.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat, a Chathaoirligh. Fáilte roimh an tUasal Patterson. I'm glad to see you're in good health before us today. Can I ask you just in terms of some of the dates? You retired from the board in April of 2008, is that correct? And you mentioned to us that you were in a ... you were ill for a period and I don't want to intrude in relation to that. But can you ... were you fulfilling the duties of chairperson up until April 2008 or were ... did your illness happen prior to that and impede in that ... in that position?

Mr. Brian Patterson:

Sure, and I don't mind talking about this because it's all on the public record anyway.

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

Mr. Brian Patterson:

I was diagnosed with cancer in October 2007. I had a major operation. I was expected to return to normal service in January but I developed secondaries and I had a year of chemotherapy, which included the dinner which was referred to. At the time, I put in place ... there was no legal ... legal deputy chair position. But I ensured when I was in hospital that my ... the man who eventually was my successor, Jim Farrell, that he chaired the authority meetings and was available to the executive at all time. And then when I had the second round of it, I put in place that system again. I went to the Minister in February of 2008 and said that I was not ... I didn't want to seek reappointment and he wasn't maybe going to reappointment me anyway, but I certainly didn't want to seek reappointment. So I put him on notice that as of April, he had to have a new chairman. Did I fulfil my duties? Not 100%. Absolutely, I was ... I was ... I wasn't firing on all cylinders. But I believe that I put in place arrangements to make sure that the authority was in good hands.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay ... okay. In relation to your own experience and skills, did you have the necessary experience and skills to become the chairperson of the board from 2003 onwards?

Mr. Brian Patterson:

I think there are ... there are two parts to this answer, Deputy, if I may. The first is that in relation to governance, organisation development, leadership, human resources, consumer stuff, yes, I had a lot of experience in those kind of areas. In relation to banking regulation and banking supervision, I had no experience. And when I was being asked to become the chairman, I pointed that out to the Minister. I was reassured at the time that consumer protection was going to be the majority of this job, and that prudential regulation was already in good hands through the executive and the Central Bank and that, therefore, I shouldn't worry too much about that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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That's ... I appreciate that. And that's what happened at the time. You gave your reflections to the committee in relation to how a board should be constituted in terms of experience and skills based on hindsight, based on where you are today. Based on where you are today, looking at your own position, did you have the necessary experience and skills to fulfil the role that you were challenged and tasked with?

Mr. Brian Patterson:

If I look back, it would have been far better that the chairman of the authority from its inception would have had either banking experience, or better still, banking regulatory experience. And I didn't so, therefore, the answer to your question is "No".

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. You've mentioned, and, indeed, Deputy O'Donnell has mentioned it, but you've mentioned it in response to myself in terms of that ... that dinner they ... what's been dubbed as the "bankers' last supper". Can you just explain to me how that came about? Who made the phone call? Did somebody phone you and say, "We have an idea of bringing all the chief executives together to have dinner with you or-----

Mr. Brian Patterson:

I had ... I had a phone call from the chief executive of the IBF and he said, "We're thinking about having a little dinner for you to mark your retirement." This was ... this was, as I say, months after I had retired. And that was how it started.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So months after you retired but ... which is April, but before the guarantee which is September.

Mr. Brian Patterson:

Correct, correct. It was around about, I don't know, probably around June or something like that, July.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did he ... did he mention that he was planning to invite the likes of David Drumm and Eugene Sheehy and Richie Boucher? Did he tell you that these-----

Mr. Brian Patterson:

I don't think they were all there, incidentally but------

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, I think some of them didn't turn up-----

Mr. Brian Patterson:

Well, some of them maybe, but some of those names I don't think I've ever met some of those people.

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

Mr. Brian Patterson:

He didn't, no, he didn't.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, did he suggest ...did you ask who would be there or?

Mr. Brian Patterson:

No, I didn't, no, I didn't think at the time-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, just turn up on the night-----

Mr. Brian Patterson:

It was to be ... it was to be a small dinner and that was it, you know, I didn't see it was a big deal-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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See who was there, okay. It's reported that you defended your ... you defended your role as chairperson of ... of the authority at that dinner.

Mr. Brian Patterson:

No, I think we talked about fishing.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, so there was no speeches and-----

Mr. Brian Patterson:

No.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Listen, we'll move on from that. I don't think it's the burning issue here. One of the statutory objectives of the Central Bank is the promotion of the financial services industry in Ireland. In your view, was there a conflict between the objectives of the Financial Regulator and the responsibility for prudential supervision?

Mr. Brian Patterson:

I think, in hindsight, there is ... there is some conflict, yes. And I think where that comes home to roost would be in, for example, when we were considering the additional capital requirements that you heard about from Con Horan ... when we were considering that, one of the things that ... that would have weighed heavily with the authority and, I guess, with the executive and also with the Central Bank, because they had to sign off on those would have been that by placing additional capital requirements on the Irish banks, we were setting them at a competitive disadvantage with the foreign banks which were operating in Ireland on a passport basis, yes? And in that sense, the responsibility to develop and to nurture the Irish financial services industry would have ... would have come into ... into people's consideration.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So was the light-touch regulation, or not, adopted as a result of not wanting to distort the promotion of the Irish Financial Services Centre?

Mr. Brian Patterson:

I don't think that was the reason, Deputy. I think ... I think that principles-based regulation was around a long time before that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Well, maybe I'm not ... I'm not talking about principles-based, which obviously can be dubbed as right-touch ... light-touch regulation. I'm talking about super light. I'm talking about the fact that administrative sanctions, additional capital, which all happened within a principles-based regulation model. But those didn't happen, as you outlined the reasons why some of them didn't happen. Did that type of, kind of, super light regulation take place as a result of the impact that could take place as a result of the ... contrary to that could have an impact on the financial services centre?

Mr. Brian Patterson:

I don't see it like that. I think they were, kind of, separate events. Now, undoubtedly, a principles-based regulatory approach suited the foreign banks coming into the IFSC; I won't deny that. But I don't think that was the genesis of principles-based regulation. It was around for a long time before that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Do you have a view in relation to whether there was a two-tier or a two-track type of regulation? This was suggested earlier on by the previous witness, that in relation to, for example, I think, its administrative sanctions that there was ... or sorry it wasn't administrative sanctions, it was concentration levels, that there was a two-tier type of regulation, that the firms in the financial services centre weren't getting the letters in terms of breaching concentration levels?

Mr. Brian Patterson:

That's not my understanding; in fact, on the contrary. I think both the executive and the authority set out to have a level playing pitch and that the guys in the IFSC and the Irish banks would be treated the same. Whether it actually transpired like that, I can't say.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. So we have seen, as committee members, evidence, for example, of letters to and fro, to and from banks, from the Financial Regulator, that talks about the concentration levels.

Mr. Brian Patterson:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, and we know the rules, 200% for one product, 250% for both. So are you telling us that that approach was also adopted with financial firms in the Irish Financial Services Centre, that banks who breached those limits were also being written to by the regulator?

Mr. Brian Patterson:

I'm searching my memory, Chairman, to see can I come up with any evidence of that, and I can't. So, therefore, I have ... in truth I have to answer your question "I don't know".

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, that's fair enough. In your view, did the Financial Regulator have sufficient staff to carry out its tasks in relation to consumer protection and the introduction of the IFRS capital directive and its other statutory roles?

Mr. Brian Patterson:

I'll probably have to take those one by one. Did the consumer protection division have enough staff? I think, yes, it did. I'm sure Mary O'Dea would probably disagree with that but I think, from my vantage point, yes, they did have enough staff. What was the second one?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I've asked in relation to consumer protection and in relation to the introduction of the IFRS capital derivative and its other statutory roles also.

Mr. Brian Patterson:

Well, if I can, sort of, bundle that under prudential regulation?

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

Mr. Brian Patterson:

The prudential regulation division, on banking supervision, in particular, did not have enough staff.

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

Mr. Brian Patterson:

I think that's quite clear. They didn't have enough staff even for principles-based regulation.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Can you explain why additional staff weren't hired?

Mr. Brian Patterson:

I know you've been in to this with some of the previous witnesses. There was a perceived need to keep a lid on costs, first of all, and there are reasons for that which I can go into if you wish ... perceived need to keep a lid on costs. The process for getting approval for additional staff was quite convoluted and lengthy. It had to go through a whole lot of filters so that by the time it came to the authority, it probably had been watered down quite a lot, and the authority's budget and remuneration committee would have interrogated the executive quite strongly on the need, as they should have done, on the need for additional staff. The fact that we levied 50% of our costs on the industry was also a factor and industry watchdogs were forever waiting to pounce on us for increases in resources which would impact the size of the levy. And then, to crown it all, even when approval had been given for extra staff, we were unable to recruit them and so the ... the members of the authority and the budget and remuneration committee were probably entitled to say, "Why are you looking for extra staff when you haven't even filled the posts that we gave you six months ago or a year ago?"

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I'm interested to hear you saying about the fact that the industry has to bear 50% of the cost of regulation. You're suggesting that the ... a factor in relation to not hiring additional staff would be the fact that these institutions would be on your backs in relation to it in terms of that their levy would have increased?

Mr. Brian Patterson:

It was one of many factors, I'm not suggesting that that was a show-stopper.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But it was a factor?

Mr. Brian Patterson:

Yes, it was a factor, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I'm surprised at that obviously-----

Mr. Brian Patterson:

I mean ... and one of the things that was ... one of the things that-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I'm just surprised at the information. I'm not saying it's right or wrong or whatever, I'm just surprised it's-----

Mr. Brian Patterson:

I want to be clear, Chairman. I'm not saying it was a show-stopper-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, it's just it was a fact that was there for discussion.

Mr. Brian Patterson:

It was there somewhere.

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

Mr. Brian Patterson:

And I'll go one step further on that. The funds industry in the IFSC is highly sensitive to the costs of fund approval.

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

Mr. Brian Patterson:

And that was a ... an internationally competitive market for funds setting up in Ireland and we were often very conscious of the cost that would be levied on funds and how that compared with the costs that would be charged, say, by Luxembourg or somewhere like that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Can I go on to ask you was there severe punitive action ever proposed or discussed at the IFSRA-Central Bank board level for breach of lending policies within banks or for breaches of the sectoral risk limits?

Mr. Brian Patterson:

Were there severe penalties ever discussed? The answer is "No".

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No. Regarding financial stability round-table discussions between the Governor of the Central Bank, the regulator and the banks themselves, were these meetings used to raise the financial stability concerns of the Central Bank and of IFSRA in relation to what could be described as the two most important emerging factors, that is, the change to the funding composition of the banks and the aggregate lending exposure of banks to the construction sector?

Mr. Brian Patterson:

I wasn't present at those round-table meetings so I can't really comment on what was raised or not.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Mr. Patterson, during your time with the Financial Regulator's office, were you aware or not of the links between wholesale funding and commercial and residential property development in the Irish domestic banking system?

Mr. Brian Patterson:

The link between wholesale ... the borrowing short to lend long thing, yes?

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

Mr. Brian Patterson:

At the time, no, I wasn't sufficiently aware of it.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did the board ever discuss any of that ... these issues?

Mr. Brian Patterson:

In that ... in those terms? No. But to be fair there were concerns often voiced within the authority about credit risk transfer, about sectoral limits, about the risks that certain banks were undertaking ... yes they were discussed.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes but in terms of the wholesale lending-----

Mr. Brian Patterson:

That particular bit of it-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Borrow short to lend long-----

Mr. Brian Patterson:

I don't recall that coming up, no.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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We've had Mr. Dan McLaughlin, economist with one of the financial institutions before the committee and he said in his evidence, and I'm just quoting it for you, he said:

The other thing I would point out is the major losses for the Irish banks were not in residential property, they were in commercial property ... in commercial property. Not many people, if I recall, wrote anything about commercial property, and that was what caused the damage for Irish banks' profitability and caused them to require significant capital inflow ... injection from the State, not residential property.

Do you concur with the view that it was commercial property not residential property that, ultimately, caused the banks to fail?

Mr. Brian Patterson:

I think it was both.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You think it was both?

Mr. Brian Patterson:

I don't think it was one or the other.

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

Mr. Brian Patterson:

But I would bow to his economic expertise, but my impression, or my judgment, is that it was both.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did the board have discussions in relation to these exposures of commercial property and ... both on commercial property and on residential property?

Mr. Brian Patterson:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And how ... what type of discussions did you have in relation to them?

Mr. Brian Patterson:

There were ongoing concerns voiced about, as I said, about sector concentration, about the size of the banks' loan books and how they were growing. Not everybody shared that view. I mean, my recollection is that probably two, maybe three, members of the authority expressed those concerns on a fairly regular basis but they didn't convince the rest of the authority and they didn't convince the executive.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did the board ever think or discuss, did they ever, kind of, say, "I think there's a property bubble here"?

Mr. Brian Patterson:

The board of the authority I don't think did.

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

Mr. Brian Patterson:

The board of the Central Bank did.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Right. I was on ... you're on the seventh floor I was on the seventh floor on one occasion when I met with Governor Honohan and while I was waiting for him to come in one of the things that I actually ... it impressed on me is you are up so high and you see the entire skyline of Dublin. And I was just sitting there while I was waiting for the meeting thinking about how many cranes would have been in the sky during the period that we're discussing and how difficult it would be not to just look out this window and see what was going on below you. Is that something that impressed on you in relation to your period there as chairperson, just that you couldn't look out any window from that seventh floor without seeing Dublin littered by cranes in a construction frenzy?

Mr. Brian Patterson:

Absolutely, yes. I used frequently to go into the room where you see the cranes and on one or two occasions, I actually counted them. And, yes, of course, you couldn't escape it.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But you didn't think there was a bubble?

Mr. Brian Patterson:

I thought that there was a bubble but I didn't believe that the bubble was as severe as it later turned out to be and nor did I realise how quickly and severely the crash would come, when it came.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. I'm going to refer to your core booklet, it's Vol. 2, page 3, and I ... I'll quote the section anyway, but it's Vol. 2, page 3. This is a summary of draft minutes from the financial stability co-ordination committee in April 2004, and the summary reads:

... the CBFSAI had not convinced market participants that there may be "systemic risk" building up in the banking sector. Indeed, he indicated that there may be a "degree of euphoria building up in the property lending markets, and that the boards and managements of banks are being myopic about the potential risks.".

That's in April 2004. Is that a fair report of the discussions to your knowledge of the time?

Mr. Brian Patterson:

I remember reading that but I can't find it in the reference that you gave me. Page 3 of Vol. 3?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Page ... Vol. 2.

Mr. Brian Patterson:

Oh, Vol. 2, I beg your pardon.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It's on the screen. It's on the screen.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's on the screen in front of you.

Mr. Brian Patterson:

Okay, I have it here, yes. That's a ... that's a minute of the financial stability co-ordinating committee, yes?

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

Mr. Brian Patterson:

Yes, of which I was not a part, so I don't ... I don't remember that discussion.

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

Mr. Brian Patterson:

So, can ... sorry, can you ask the question again, please?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I'm asking ... that's a minute of the ... is the ... is that a fair report of the discussions that may have been happening at board level at the time? Was there discussions of this nature being ... was this reported in to the board? Were you made aware of the fact that the ... the CBFSAI had not convinced market participants of the systemic risks building up in the banking sector?

Mr. Brian Patterson:

I don't ... I don't remember that being reported specifically in that language. What I ... what I was aware of, and that was in 2004 ... what I was aware of was that there were some robust discussions going on within the financial stability co-ordinating committee and that there were some disagreements about what the financial stability report could or could not say in relation to the build-up of systemic risk. So, I don't ... I don't know if that answers your question, Deputy, I-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, so ... okay. Were there ... were you aware of the fact that - in 2004 - that there was suggestion, from the CBFSAI, that there was systemic risks in the banking sector?

Mr. Brian Patterson:

Yes, I was aware, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, what were the systemic risks that you were aware of?

Mr. Brian Patterson:

The systemic ... by the time 2004 came, I think there was a growing realisation in the whole of the building - I mean, you can ... you can say the authority, the ... the Central Bank board, and their ... and their executives - that the pressure was building in the economy, the pressure was building in the housing market and the commercial property market and that ... that these were clouds on the horizon. Yes, that there was a realisation of that. But ... but, I suppose, what's behind your question is that why didn't we act.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, the ... the question I ... I wanted to, first of all, find out what you thought was the problem at the time. What did you think was not just a risk but a systemic risk.

Mr. Brian Patterson:

Okay. Okay.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In my view, big difference ... in my view, so it's ... it's just ... so in your view the systemic risk was ... was what?

Mr. Brian Patterson:

I ... I don't think it was as specific as that. I ... I think at that time my sense of it was that the economy was overheating and that this could have consequences. I ... I do recall, at one of the joint board meetings, when the financial stability report was being discussed - and it may have been later than 2004, just to be clear - I remember saying something like that we didn't really understand why the economy ... all the variables that were at work in why the economy was growing as strongly as it was and why the housing market was growing as ... as strongly as it was and that, therefore, some confluence of events, I remember using these words, some confluence of events, which we could not foresee, might actually turn the whole thing on its head.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. I'm gonna ... pressed for time so want to just move to this ... this area here. Mr. Patterson, in 2006, Fitch placed the Irish banks on a lower rated category for macro-potential risks. We know, from the evidence that was presented to Liam O'Reilly, that this was brought before the financial stability co-ordination committee in 2006. The reference - for the secretariat - is in core book, LOR - Vol. 3, 42, but I'm not ... not going to go into quoting from it. The report itself was covered in The Irish Timeson 8 September 2006 and the newspaper reported that, according to Fitch, and I'm quoting from The Irish Timesat the time, it says:

Ireland has a high-quality banking system, but also runs an above average risk of a systemic failure.

[...]

Fitch note[d] that private sector credit as a percentage of [...] GDP will reach 190% in 2006. When this is taken together with the rapid growth in private credit, 21.7% according to the survey, Ireland falls into the "MP[1]3" category, which is Fitch's highest measure of the risk to economic stability.

Was the response of the Financial Regulator, and the Central Bank ... what was the response of the Financial Regulator and the Central Bank to this downgrade by Fitch?

Mr. Brian Patterson:

I ... I don't recall the specific downgrade or, indeed, that ... that report, but I ... I guess it's part of the ... the overall level of concern that, as I've said earlier, was building inside ... inside the two organisations, about risks and about systemic risk in particular. The ... the problem in all of this is that there ... there wasn't sufficient alarm in either of the two organisations to impel better action.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I'll ... I'll try and sum up in this ... in this questions here. See, you were the chairperson, so you were the ... one of the main people, one of the most important persons within the entire organisation. You ... you say in your statement that if you know ... if you knew then what you knew now, you would have acted differently. My question is: what do you know now that you didn't know then, given what I've suggested to you - for example, Fitch pointing out concentration of lending, other reports that would be available in terms of concentration of lending, sector limits being breached, and so on? What do you know now that you didn't know then?

Mr. Brian Patterson:

First of all, I need to point out that the authority - other than the executive posts - were all non-executive, and I was non-executive, and, therefore, I relied, and so did the other members of the authority, very heavily, on what the executive would bring to the table in terms of their analysis, their proposals for action, their concerns, etc., etc. And what I know now, to answer your question, that I didn't know then, was how the ... the extent of the risk, both in individual banks - and we know who they are - and systemically, I did not understand the extent of it, and nor did I appreciate-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But what do you mean by "the extent of it"? Sorry, just, what do you mean, in specific terms ... what do you mean by "extent"?

Mr. Brian Patterson:

By how close to the wind the banks were sailing.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Sorry, again, what do you mean by "how close to the wind the banks were sailing"?

Mr. Brian Patterson:

The risks they were taking.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The risks in what? Like-----

Mr. Brian Patterson:

In ... in both the wholesale funding, which ... which you ... you've referred to and also in the size and the ... the nature of their ... their loan book.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But, would the size and nature of their loan book not be reported to you, as a board, for any of the years that you were chairperson of that board?

Mr. Brian Patterson:

Yes, the prudential pack that I ... I've mentioned had data in that but it came accompanied with very reassuring noises.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, but you knew the size and scale of the----

Mr. Brian Patterson:

Yes. Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. So, you ... you knew now what you knew then in relation to the size and scale. I'm really trying to go down to the point of, you know, this statement that you make, if you knew then what you knew now things would be different. I ... I'm struggling to find out what you didn't know then that you now know now.

Mr. Brian Patterson:

What ... what I-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'll bring you back in at the end but I'd like you to answer that as best you can, Mr. Patterson.

Mr. Brian Patterson:

Sure. Sure. Fundamentally what I know now that I didn't know then is what actually happened, in terms of what happened in terms of the freeze on liquidity, how that impacted the banks and led very quickly to solvency issues and how those led, in turn, to the need for the bank guarantee and the bailout and all of that whole sorry tale of events. I did not know then that those were going to happen. That's really what I meant.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, can I maybe reframe that question before I move on to Deputy Phelan. The proposition being put forward by Deputy Doherty, and this committee, is that the information was available then. You're stating, Mr. Patterson, that you may not have been intimately informed of it but are you disputing the proposition that the information was in the ether at the time? It's not something that laterally came onto the table.

Mr. Brian Patterson:

No, no, I'm not disputing that, Chairman.

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

Mr. Brian Patterson:

The ... the information was there, I mean, I read the paper just as-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Who had it?

Mr. Brian Patterson:

In one sense, we all had it-----

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

Mr. Brian Patterson:

-----and I'm not trying to be glib about it. But, a ... a non-executive board does rely on its executive to really distil it, to point it, and ... and to back it up with proposals as to what we're going to do.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Okay, but earlier in your testimony this afternoon, Mr. Patterson, you made reference to the Central Bank board having discussions on ... with regard to the property growth and so forth but that this did not come up on the IFSRA ... the ... the ... your own board.

But there were so many common directors as we know, sure you were all meeting in one manifestation or another on the seventh floor. So are you saying because it didn't happen here, it was not going to happen over here in terms of discussion?

Mr. Brian Patterson:

If I recall Chairman, I think the point I was trying to make was that the Central Bank board rightly had a focus on the systemic stability issue, whereas the authority board rightly had a focus on the individual institutions.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, but is it not like kind of two hands of the one being, that to lift something it requires both. I will bring in Deputy Phelan after this-----

Mr. Brian Patterson:

Absolutely.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----because in your earlier statement today, you talk about the powers and you speak about 100% mortgages and not having the powers to approve or disapprove a product. Now, the purpose of the entity that was created in 2003 for better or for worse was to cover a whole load of areas and put structures in place where they would interface with one another. So if you were not empowered at one end to deal with what you saw as a problem, you could talk to the other hand and say "do you have actions that you can take?" and we know from our engagement with Mr. Hurley that there was a series of measures that the Central Bank could have used. The reasoning for maybe choosing not to use them is a different debate. But even in the interest, the situation of 100% mortgages, okay you're telling us that you didn't have the powers at the time but did you turn round to anybody who did have the powers and say do something about this?

Mr. Brian Patterson:

The answer to your question, Chairman, is no, and let me explain. What I referred to in my statement is that the authority didn't have legal powers to approve or disapprove products per se, but that doesn't mean it didn't have other powers. And as I think I've said, the regulator had powers to try and curb and could have curbed the issue of 100% mortgages. Now why did it not do so? It didn't do so because number one ... I think there are a couple of reasons, number one, because the approach at the time was not to... what's the word I'm looking for... to become involved in products but the two things that the authority could do would be to police through consumer protection how they were sold. Were they being sold inappropriately to the wrong people? Because for some people, 100% mortgages would be okay. Not a majority but for some people they would be okay. To police how they were sold and also if the authority felt that the loan book was becoming risky, more so than it should be, then to impose additional capital requirements, which ultimately was done. So that was the approach and that seemed to be again in line with the famous principles-based regulation.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy Phelan and then we'll break.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you Chairman. Good afternoon Mr. Patterson. Can I ask you firstly your views on the efficacy, it is bound to have been touched on by some of the previous questioners, but the efficacy of principles-based regulation and did those views change from the time that you were appointed chairman and through your time as chairman and subsequently?

Mr. Brian Patterson:

At the time, principles-based regulation seemed to be the right thing to do. That was heavily influenced by the fact that everybody was doing it, bar I think the US and maybe Germany and rules-based regulation did not work too well for them either. So it was the generally accepted international best practice, all right, and as such I suppose it was accepted without enough question by everybody. I became part of that groupthink, if you want to call it that. Did my view change over the years? No it didn't. Did it change subsequently? Yes it did, because we can now see clearly that number one, it wasn't up to the job. The whole of Europe sees that now and has changed the way they regulate and also particularly I think in the case of Ireland, it wasn't backed by sufficient intrusion because you can have rules and you can have principles and you can have different levels of intrusion with both. We had principles-based regulation with not a lot of intrusion and that wasn't correct.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask you following on from the first question, I think, from Deputy O'Donnell, in relation to your appointment, why do you believe yourself that you were chosen or did you have a discussion with the then Minister for Finance or the Minister for Enterprise I think you referenced in your opening statement? I am not sure who that Minister-----

Mr. Brian Patterson:

My discussion was with the sec gen of that Department at the time, and later with the Minister. Why do I think I was chosen? I'm not trying to be smart but I guess you should ask them that. I had experience in the private sector of boards and governance, I knew a good bit about consumer issues because the companies that I worked for had consumer markets. I knew about organisation development and it was put to me that this is an organisation-building task. We have to build a new organisation from scratch and you seem to know a thing or two about that so...

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Effectively from your opening statement you have given examples that while it was a new organisation, really from a staffing point of view people were coming across from the Central Bank so a new structure may have been created but the same operatives, to use that maybe awful term, were in the places they might have always occupied, is that correct?

Mr. Brian Patterson:

Not completely because there were quite a number of staff transferred from Enterprise, Trade and Employment. Credit unions and people like that were over in a different part of the world, the Registrar of Friendly Societies regulated the credit unions so... but the majority of the staff did come from the Central Bank, yes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You had extensive experience in management in a number of leading national and international businesses, is that fair to say? I want not to dwell on what has been asked previously but you highlighted in your opening comments about the absence of experiencing bank regulation from the membership of the board and you said that you suggested to the Minister that should be rectified and that that call wasn't implemented or was ignored. You did however highlight the fact that, you said training was provided for the board members. In hindsight this was not enough. Who was responsible for that and what did training consist of?

Mr. Brian Patterson:

My recollection, because we are going back a long way here, my recollection is that we had something like two afternoons of training, which was laid on by the Central Bank people themselves, in various aspects of prudential regulation. As the months and years went by, we often had special briefings by specialists within either the regulator or the Cental Bank on specific issues, like EU directives and things like that as well, outside the formal board meetings but with the benefit of hindsight it just wasn't enough.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It was too ... okay, it was too limited. Can I then also follow on, on to page 4 of your opening statement where you stated under the heading of "Resourcing", the final two bullet points there, where you said that performance management systems and practices were very weak and organisation culture was formal and slow. Can I ask what did you do as chairperson to try and change those two particular difficulties, which seem to be more of, on the face of it at least, a managerial difficulty rather than resourcing per se?

Mr. Brian Patterson:

I tried very hard to introduce a more hard-edged performance management culture in the organisation. I can't say I was wholly successful with that. I tried in everything I did within the regulator to instill a culture which was more fast-moving, less formal, more action-oriented. I can't say I was wholly successful in that either.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I am going to present a position and I am trying not to be leading because I know the Chairman will be on to me but somebody who comes with such a distinguished CV in terms of management to the position that you were appointed to, to come in here and give your presentation - and I have no reason to doubt your integrity in giving it - but to lay out criticisms which are of a managerial nature and then say that you were not successful in dealing with them, there's a bit of a glaring contradiction or difficulty there from the point of view of the general public, in trying to reconcile those two situations. Can you try to?

Mr. Brian Patterson:

I'll try. First of all, I was a non-executive chairman. That means I was in the building one or two days a week maybe. I think to bring about deep-rooted culture change in an organisation which was fairly resistant to culture change is ... it takes a long time. You can't do it overnight. It would take ongoing and energetic leadership by a chief executive and a team of executives to makes that happen and I wasn't in that position.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But you were the chairman or acting chairman for five and a half years?

Mr. Brian Patterson:

Correct.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Which is a long time in corporate terms.

Mr. Brian Patterson:

It is a long time. I would not say that I had no impact. If I gave that impression that would be wrong. I would have set fairly stretching goals for myself in what kind of change that I could bring about and against those standards I was not wholly satisfied with the amount of change I was able to bring about.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I then want to turn to another quote from your opening statement and I think ... seem to have lost what page it was on, but I'll read it to you. You said that "The authority was very conscious that if [...] the capital requirements of Irish banks were pushed too high, foreign banks which could move beyond our supervisory reach could [...] have gained advantage over their Irish competitors." Did you see your role, and the role of the regulator, therefore, as more protecting the interests of Irish banks, rather than regulating their operation?

Mr. Brian Patterson:

There was a conflict there between what might have been done in terms of simply attending to the safety and soundness of Irish banks, as if they were the only banks on the playing pitch and, at the same time, not putting them at a competitive disadvantage vis-à-visthe foreign banks who were operating in Ireland and you may recall that, in particular, two of the UK banks were behaving very aggressively at the time. And, yes, that was an issue and it often came up in discussion - both in the board and outside the board - as to how you reconcile those two things. And, as I mentioned, I think in response to Deputy Doherty, that when it came to the capital requirements that were imposed in 2006, that was an issue, as to how far we could push it without seriously disadvantaging the Irish banks.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Are you suggesting that, fundamentally, the way the organisation was structured, in that sense, was a deep flaw, effectively, from the beginning; that it hampered what many people would perceive as the primary function of the regulator, which would be to regulate?

Mr. Brian Patterson:

I think, if we had our time over and had the powers, because this was in the legislation and it was subsequently taken out in the 2010 Act ... that ... that requirement to support and develop the industry shouldn't have been present.

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