Michael Noonan (Limerick City, Fine Gael)

Yesterday was a sobering day for anyone interested in how a successful economy can, in parallel, develop the seeds of self-destruction, and how these seeds can take root, grow and develop and eventually create enormous havoc. This is the third year of the banking crisis and I come to the Dáil Chamber today in a sombre mood.

How it all came to pass is the subject of the report we have before us today, Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, Report of the Commission of Investigation into the Banking Sector in Ireland, prepared by Peter Nyberg. As I said yesterday, this report represents a thoughtful and multifaceted analysis into the causes of the banking crisis in Ireland and bears careful and measured consideration by all in the House. It requires careful consideration because we have to learn the lessons from these events, about how we got there, how we managed during the period and how we dealt with the crisis as it was developing.

Mr. Nyberg's report is a story about bank management which no longer understood what lending was about and had forgotten the very nature of credit. Providing credit, Mr Nyberg says, is not a sale of bank services; it is the acquisition of a risky asset. The appropriate prudential focus of such a transaction is, therefore, limiting and mitigating risk - or, at the very least, understanding the real risk and pricing it accordingly - rather than expanding sales, which seemed to be the objective of the banking industry in Ireland. This apparent inability, some might say unwillingness, of Irish banks to remember this basic principle of banking was a major cause of the banking crisis in Ireland.

It is a story about banks, whose boards did not fully understand their role in oversight and control and that, in certain cases, lacked appropriate expertise to hold bank management to account.

It is the story of national authorities which failed to read the macroeconomic warning signals that could have indicated a pattern of unsound lending behaviour by banks in a timely fashion, which seriously underestimated the nature and extent of the risks in the Irish financial system, and which had not gathered the necessary information. If more relevant information on and analysis of the underlying position of some of the banks had been available, discussions and policy recommendations may have been different. It is also the story of a seriously inept Government which fuelled rather than restrained the activities of banks when the crisis began to emerge. That is why this report is important. That is why this House has a responsibility to reflect on it and to see what lessons we must learn from this appalling crisis in order to get back to rebuilding the country, rebuilding its institutions, rebuilding our communities and getting people back to work.

In January 2010 the previous Government set out a framework to the Oireachtas for investigation into the banking sector. This investigation consisted of two distinct stages. The preliminary report published in June 2010 by the Governor of the Central Bank, Professor Patrick Honohan, entitled The Irish Banking Crisis - Regulatory and Financial Stability Policy 2003-2008, and the report by Messrs Regling and Watson, entitled Preliminary Report on the Sources of Ireland's Banking Crisis, formed the first stage of this investigation.

The second stage consisted of a statutory commission of investigation. The establishment of this commission was approved by Dáil Éireann and Seanad Éireann on 8 July 2010, and an order formally establishing the commission was made by the previous Government on 21 September 2010. The commission's terms of reference, which covered the period 2003 to 5 January 2009, were to examine the following: the main causes of the serious failures within each of the covered institutions; the main reasons Anglo Irish Bank Corporation and Irish Nationwide Building Society adopted and implemented business models, strategies and lending practices which resulted in those institutions experiencing severe financial distress; whether external auditors of the covered institutions commented in their audit reports or other communications to the institutions concerned on the failures that were arising; and the main causes for the failures in the performance of the statutory roles and responsibilities of the Central Bank and Financial Services Authority of Ireland and the relevance in that regard of any advices or directions given by the Department of Finance.

The previous Minister for Finance formally appointed Mr. Peter Nyberg as sole member of the commission of investigation on 22 September 2010. The commission submitted its report to me on 22 March 2011, in keeping with its remit to complete its investigation within six months. I thank Mr. Nyberg for completing his work so quickly and thoroughly and for offering an analysis that gives us plenty of food for thought.

In accordance with the terms of reference of the commission, the report makes several findings. Mr. Nyberg found that the main reason for the crisis was the unhindered expansion of the property bubble financed by banks using wholesale market funding. Attendant risks went undetected or seriously misjudged by the authorities whose actions and warnings were modest and insufficient. The speed and severity of the crisis was made worse by worldwide economic events but, notwithstanding these external factors, the problems which led to the crisis and the scale of that crisis were the result of domestic Irish decisions and actions.

The report states that many of the problems and failings in Irish banks and public institutions were similar to those in other countries. Banks set aggressive targets for profit growth which implied a partial change in business model and strategy without the necessary corresponding strengthening of governance, procedures and practices. Boards and relevant observers appear to have had little appreciation of how the banks were run at grassroot level, or at least they did not seem unduly concerned about the practices taking place. The inadequate attention banks generally paid to credit risk management is, in the end, evidenced by the extent and nature of their subsequent problem loans. Management and boards in general appear not to have fully appreciated the two key risks to which their banks were exposed, namely, increased exposures to funding-dependent development projects with future refinance risks, and volatile wholesale funding. Bank management and boards seem to have been totally unprepared for both of their key risks, property loan impairment and funding problems, occurring simultaneously.

The report also concludes that for several years before the banking crisis, the authorities operated under the assumption that financial markets generally were efficient and self-regulating. A banking system requires oversight, the report states, and, when necessary, the intervention of alert, aware and empowered authorities. This is because of the economic and social importance of banking, as well as its high leverage, public depositor support and a tendency to exhibit occasional problems. The core policy challenge for the authorities was to recognise early warning signs, within banks and the economy, so as to be in a position to take timely pre-emptive action and mitigate any potential threats to financial stability.

In respect of auditors, the report states that their commentary regularly focuses only on issues they consider relevant to the accuracy of historic accounts. In practice, this means auditors look primarily backward and at technical issues that may influence the accuracy of accounts. The auditors clearly fulfilled this narrow function according to existing rules and regulations. There appears to have been no challenging dialogue with the covered banks on their business models and growing property and funding exposures. The commission finds it unfortunate that sufficient, timely and challenging auditor dialogue was not used to influence the banks' business models and lending practices.

The findings and recommendations set out in the report in regard to auditors are a matter for the Minister for Enterprise, Trade and Innovation to consider, and I have written to him seeking his views. However, it is my view that auditors may be able to take on a more enhanced role in co-operation with supervisory authorities, while recognising their specific statutory functions. The Central Bank and Financial Services Authority of Ireland is already engaging with the audit profession to explore how it can assist the bank in exercising its supervisory functions. I am keen to see progress and developments in that area.

I will outline some of the actions the Government plans to take to meet the recommendations set out in the report.The commission makes recommendations in regard to the structure of the banking sector, stating that it may be necessary to limit the size and growth of banks and the banking system relative to the economy. The State's November 2010 agreement with the external authorities envisages a programme of deleveraging and restructuring to take place within the banking sector in the next two years. I have already announced the details of what will be done in that area.

The commission's report is highly critical of the role played by board members and senior management of banks in failing to oversee their institutions effectively. As a result of these board-level failures, I am setting out three measures designed to strengthen bank boards and management. First, the chairman of each institution will have to provide me and the NTMA with a board renewal plan This plan will have regard to company law and regulatory requirements and will set out, for each institution, the steps to be taken to ensure the skills and competence levels of board members are fully adequate to the demands of the current situation and the planned future of the Irish banking system.

Second, the board of each institution will be asked to provide a management renewal plan This plan will set out, for the relevant institution, the steps to be taken to ensure the skills and competence levels of senior managers are fully adequate to the demands of the current situation and the planned future of the Irish banking system and that each senior manager will be capable of meeting the Central Bank's new fitness and probity standards.

Third, it is essential that boards of banks continue to have an appropriate number of independent non-executive directors. Having regard to the size of its shareholding in each institution and the necessity of ensuring the State's interest is properly represented on each board, I will actively nominate members of the boards of each bank from among qualified individuals with appropriate skills and experience.

The Central Bank also is undertaking a wide-ranging programme of reform of the way it regulates the corporate governance and board-level membership of the financial institutions. It also is important to continue to strengthen the Central Bank. Members will be aware that a number of measures have been put in place since the onset of the crisis. These include legislative changes to merge the Central Bank and Financial Regulator and to enhance the powers of the unified organisation. Further enhancements to the Central Bank's powers will be introduced to the Oireachtas shortly in the forthcoming Central Bank (supervision and enforcement) Bill and these will be outlined at that stage.

The report contains important messages and conclusions for the Department of Finance. While this report relates principally to banking matters, some of these messages may also be of importance to the Department of public expenditure and reform and to Departments generally. Critical assessment and review of past actions can sometimes be difficult and this is a challenge to which everyone must face up. This is particularly important for Departments of State. I will take the report from Mr. Peter Nyberg, as well as a broader review of the Department that was chaired by Mr. Rob Wright, and determine how to reform and build the capacity in the Department to service the demands of the economy in these uncertain times. In addition, there must be ongoing adaptation and better definition of the roles and functions of the Department and the NTMA and its associated bodies to ensure the structures in place take full account of the developing situation. A stand-alone unit accountable to the Minister through the Department of Finance and with a clear set of objectives to manage the Government's holdings in the financial sector will be created to fulfil the oversight role.

The restructuring of the banks announced already by the Government must be implemented. This will require a hands-on approach by the banking unit in the Department of Finance, which will drive the reform. This unit will be strengthened as necessary and will draw on the resources of the NTMA to carry out its work. In the first instance, the unit will operate within the Department of Finance but in due course, it will become more independent of the Department while still reporting to the Minister for Finance. A detailed implementation plan will be developed in consultation with all relevant organisations.

Before concluding, I will address one further point. The publication of the commission's report yesterday and the statements on the report in the Dáil today provide an opportunity for public debate and consideration of the report. It is important that the Oireachtas have adequate opportunity to consider and discuss the report. Having consulted with the Attorney General, I can confirm that while the publication of the report will not prejudice any criminal proceedings that are pending or in progress, I also was advised that the Abbeylara judgement makes it very difficult for Oireachtas committees to effectively fulfil their important oversight roles. Therefore, as I stated yesterday, the Government proposes to hold a referendum on a proposed constitutional amendment by the end of this year to address the consequences of the Abbeylara judgement.

The Nyberg report has identified the main causes of the banking crisis and, together with the two preliminary reports, sets out all the interlinked elements that each in its own way contributed to the financial crisis in which we have found ourselves since 2007. We must now learn the lesson from this crisis and put in place the building blocks for moving the economy on to growth. The Government is bringing about a radical restructuring of the banks to support economic growth and job creation. Unfortunately, as has been seen in the report of the commission and other issues today, legacy issues remain in the banks that the Government must address and it is determined to so do. I commend this report to the House.

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