Mr. Cormac Butler:

I thank the committee for inviting us to speak about the banking sector, its impact on Ireland's housing crisis and the role of vulture funds. For 20 years, I have advised on financial institution risk in London and globally. I wrote books on risk measurement and financial instruments and trained more than 100 bank regulators globally. I gave evidence to two UK House of Commons inquiries.

I am joined by Mr. Tim Bush, a former member of the Urgent Issues Task Force, UITF, of the then UK and Ireland Accounting Standards Board. The UITF examined whether proposed accounting standards complied with company law. In 2010, Mr. Bush warned that the impairment accounting rule used by British and Irish banks was not in line with company law. This year, after nine years, the accounting profession and the Financial Reporting Council confirmed that the standards did not fit with the law. The law is concerned with accounts underpinning what is known as capital maintenance, which includes capital solvency.

At the 2015 Oireachtas bank inquiry, Irish bankers incorrectly claimed that, by law, they had to conceal losses and claimed that a new accounting standard would resolve this.

It will not do so. Rather, it could lead to bigger problems. Among the problems created are subsidies to vulture funds. Some banks claim they profited from loan sales to vulture funds, but this is extremely unlikely. Thanks to flawed accounting standards, banks can bury loan write downs into reserves and thus record an artificial accounting profit. These transactions are potentially illegal if the true subsidy is concealed. The matter was addressed in an article headlined, "Questions raised over AIB €1.1 bn problem loans sale" published on 4 November last year by the Financial Times.

A further problem is insurance against past losses. Irish banks were not solvent on the night of the September 2008 guarantee. Unlike the Government, the ECB was aware of this, yet it insisted that the Government should pay for these hidden losses. Under EU law, the Government is not liable. Indeed, the cancellation of the promissory notes may be illegal.

Liquidity difficulties are another potential problem. If banks conceal their losses, it becomes impossible to borrow money. Today, banks continue to conceal losses which make borrowing difficult and expensive, a cost borne by current Irish mortgagors.

Asset stripping is another problem. One UK bank with operations in Ireland may have pushed small but healthy businesses into liquidation by calling in loans unnecessarily, a matter on which evidence was given to the committee by a group of small business owners. The actions of the bank were partly motivated by flawed bank bonuses and incentive schemes. Anthony Stansfeld, police commissioner for Thames Valley in the UK, expressed concern at similar practices in the UK and claimed that the problem is widespread, advising those affected to read the Project Turnbull report which was produced by a bank whistleblower.

A new accounting standard could also lead to abuses of company law. Some years ago, a well-known company was able to split its assets into two separate companies. Investors could recognise substantial profits from the property of the company while staff and creditors were shunted into another company and were unpaid, contrary to the spirit of company law.

On pension and reputation, the recent collapses of London Capital & Finance, Patisserie Valerie and Carillion caused havoc for those in private sector pensions in the UK. Kevin Hollinrake, MP, called for an inquiry into compensating investors.

On rights issue problems, it is difficult to see how banks can approach shareholders and investors for additional funds if they are not disclosing all of their losses. Company law prevents innocent shareholders from being burdened with losses that were concealed when they made the investment.

On subsidised loans, the accounting profession may have exploited accounting standards to conceal subsidies given to developers, a matter which Deputy Catherine Murphy attempted to investigate. There is a risk that IBRC exploited the accounting standards when measuring these subsidies.

As regards a solution, a House of Commons report published in April, entitled "The Future of Audit", concluded that banks concealing losses are potentially breaking the law and that advice by the various accounting bodies, including a legal opinion they commissioned, is incorrect. Under the capital maintenance rules, banks are not allowed to pay dividends out of capital, as confirmed by the AssetCo v. Grant Thornton LLP 2019 case law. Mr. Bush presented this at a House of Lords inquiry in 2010 and, on behalf of the UK Local Authority Pension Fund Forum, obtained a legal opinion from George Bompas QC which set out the law in a way which indicates that some witness statements given to the Irish banking inquiry were incorrect. The aforementioned AssetCo High Court case confirmed this interpretation of the law.

We strongly suggest that bankers who appear before the committee should be asked to restate their published accounts to comply with the law. If they do so, banks will have to reveal that they were insolvent at the time of the guarantee and, as a result, the ECB loans will have to be reclassified as capital. This would automatically resolve the legality surrounding the repayment of promissory notes and, more important, reveal the huge subsidies given to various vulture funds. It would also reveal the extent of asset stripping that forced many Irish businesses into failure. If the banks fail to do so, they will have to provide a legal opinion stating that the report of the House of Commons report is wrong and so is the recent admission by the Institute of Chartered Accountants in England and Wales, ICAEW, that it gave flawed advice on the concealment of losses. Under Irish company law, it remains a criminal offence to misreport the financial position.