Mr. Cormac Butler:

The background is that between 2005 and 2008, many banks were not compliant with company law. They were hiding huge amounts of losses and people were unwilling to lend money to them. The Chair may recall that there was a radio programme where the presenter was told to calm down on his comments because people were queuing up and taking money out of deposit accounts with the bank. If banks are insolvent, they will face difficulty in retaining deposits.

The litmus test in 2008 was that if a bank had sufficient deposits then everything was okay, and if it did not it was in trouble. Therefore, banks used what I can only describe as window-dressing opportunities to make sure that their deposit figure was going up and not going down. The way they achieved that, put simply, was that they lent money to themselves. They lent money to a customer but that customer loan came back in as a deposit so they were able to say that their deposits were increasing and therefore they were very helpful and there is no need to be concerned and no need to have a run on the bank. In order to do that they had to involve third parties. This is known as a circular transaction where you lend money and then take it back in again through your deposit account.

These circular transactions often involved third parties. Sometimes these third parties were compliant and in some cases they were unwitting victims. The case I came across was where an individual had land and was in a bit of difficulty. He was approached by somebody who said they had connections in a bank and that they may be able to resolve his difficulties. The result was that the bank lent out the money, the money was not given to the customer but the associates. The bank told the customer that it would lend him money as long as he involved an associate. The bank lent the money to the associate and rather than the associate passing it on to the customer, the associate took complete control and we have evidence that the money went back into a deposit account. The consequence of that was that the customer was on the loan agreement as a borrower but they never received the money. One can see what is going to happen next: the customer got into severe financial difficulty and he was left in the lurch by the bank. It was quite a cash flow shortfall but if the bank had behaved properly, that customer could have had a viable business whereas as a result, the customer was forced to sell assets at very distressed prices and suffered losses well in excess of the money that was lent. There was contagion damage as a result of this misdemeanour. My understanding is that this practice was quite popular at the time. As I said, back in 2008, banks were in severe difficulty.