Brian Lenihan Jnr (Dublin West, Fianna Fail)

I also commend the report to the House and thank the Minister for his introduction to the report and the constructive tone of that introduction. The report is damning in respect of both the Financial Regulator and the Central Bank. It concludes that the Financial Regulator and the Central Bank were aware of the problems in Anglo Irish Bank and in Irish Nationwide Building Society in particular. The dependence on foreign funding and the concentration of lending in the property sector was clear from their balance sheets and the governance issues at Irish Nationwide Building Society appear to have been well known by the relevant authorities. If it had believed it necessary, sufficient information was available to the Financial Regulator to have taken decisive action in the case of both of these institutions. However, there does not appear to have been an appreciation at the Financial Regulator of the funding and lending risks that were building up in the banking system. As the Minister has pointed out, it appeared to rely on the boards of management of the banks to make the correct decisions in the best interests of their institutions. Lending practices were not scrutinised and there was a general unwillingness to engage in any detail in what possibly was perceived to be intrusive verification to establish whether the banks were behaving in a prudent manner.

This is very serious because those of us in public life believed there was a failure on the part of the political system to ensure there were greater restrictions on credit and fewer incentives to property speculation and property incentivisation. Similarly, I refer to a lack of requirement to pay deposits in the case of the acquisition of speculative land or land for future speculative purposes, a failure to insist on a requirement for deposits by lenders in such circumstances, as well as a failure to insist on the need for more restrictive mortgage conditions. These all are matters which never even entered the realm of consideration during the relevant period because the preliminary assessment that the actual position was drifting into a crisis, which would have been essential, was never made in the first place. This is highly serious. The interaction with the banks in the case of the Financial Regulator and the Central Bank was confined to bank governance and internal processes. Even where deficiencies or weaknesses were discovered, there was an unwillingness to take firm action. This undermined the authority of the regulator from the outset and the report does not accept that lack of resources or powers was the reason for the failure of the Financial Regulator to intervene.

An understandable criticism that often is made of the Government and the political system concerns a failure to provide adequate resources or legal powers. However, the report finds there was no failure to provide adequate powers or resources to the relevant authorities. The report states that had the will been there, a number of possible approaches were available that could have reduced considerably the scale of what eventually emerged. It appears that the Central Bank seriously underestimated the extent and nature of the risks that had been building up in the financial system. It expressed nuanced and somewhat indirect concerns on possible risks. There was no exploration of worst-case scenarios and therefore, no full preparation for a crisis and no crisis contingency planning. Consequently, what one would expect to happen within the Department of Defence all the time did not happen at the Central Bank or the Financial Regulator as there was no contingency planning for disaster scenarios. The Central Bank believed it was the responsibility of the regulator to evaluate possible problems in financial institutions. While it was responsible for overall financial stability, it believed it should not question the regulator's supervision of individual institutions. This is part of the institutional architecture prescribed and discussed in this House at length in the earlier part of the last decade. As the regulator did not raise any concerns in this regard, the Central Bank could not have been expected to detect existing or emerging problems. However, the report finds this to have been an unacceptably narrow interpretation of its responsibilities by the Central Bank. It states that financial stability should have been the overriding objective and the Central Bank, as well as other responsible authorities, should have done whatever was necessary to achieve this.

Moreover, the report finds that an active and suspicious Central Bank would have had concerns about emerging macroeconomic data from mid to late 2005. While it notes the existence of financial stability reports that show an awareness of the emerging economic risks, the view was that such risks would not materialise. The financial stability reports referred to concerns about risks to stability but the overall conclusion was that the most likely option was a soft landing. "Monsieur Trichet, nous cherchons le soft landing", appears to have been the dominant maxim within Irish finance at the time. The financial stability reports refer to concerns about risks to stability but, as I stated, the conclusion was that the most likely outcome would be a soft landing. Members now know of course that such a soft landing did not happen. The evidence in favour of this view was far from analytically compelling according to the report but had wide currency in banking circles and among the authorities. The report attributes this to herding and to group-think behaviour. This is a rather modest characterisation of what really amounted to a Gadarene swine-like phenomenon.

The report also criticises the failure of the Central Bank to foster critical debate internally on stability issues. It accepts the view that it would not have been in the best interest of stability to publish alarmist views but goes on to state there was nothing to prevent the Central Bank from voicing concerns confidentially to the Government. Crucially, the report finds there was no evidence that this was done.

The report finds that the Department of Finance was concerned about the need to rein in Government expenditure and tax reliefs, but suggests the Department's warnings were not vigorously articulated. It points out that, in the briefing given to Mr. Brian Cowen when he became Minister in 2004, there was no mention of concerns about credit growth. It also states that the ability of the Department and the Minister to convince the Government of the need for restraint was blunted by the fact that, from 2003 to 2007, tax revenues were consistently higher than forecast, leading to larger budget surpluses than planned. Political pressure to allow high rates of spending on social and other priorities was considerable. While the Department identified various risks to the economy, no single comprehensive analysis integrating these risks and assessing their implications for the economy was conducted.

Regarding the construction sector, senior management at the Department was updated regularly on housing development and credit growth, including some warnings that the latter was unsustainable. Nevertheless, a briefing note to the Minister on the 2005 financial stability report stated: "all the evidence is that systemic risk ... to the financial system from a downturn in the property market is relatively limited". The report finds no evidence that the Department was particularly concerned with prudential matters or financial stability concerns. There was no critical analysis of the reports coming from the Central Bank.

Regarding the decision to guarantee the deposits and liabilities of the banking sector in September 2008, the report states that the lack of a paper trail makes it difficult to make judgments, but it finds that the lack of suspicion and the absence of correct information on the banks' balance sheets impacted on what alternatives were considered reasonable on the night of the guarantee. Decisions were made in the belief that the banks were and would remain solvent and that the issue that needed to be addressed was one of short-term liquidity. Only on this basis does the commission understand and accept the need to give a broad guarantee.

The report acknowledges the pressures under which the decision was made. However, it criticises the lack of options considered in the run up to the decision, which it puts down to the lack of preparatory work in the run up to the financial crisis by the relevant authorities. It points out that the contingency plans that had been made were based on the belief held by the regulator and the Central Bank that there was no solvency issue facing any of the banks. This position was maintained subsequent to the guarantee. The possibility of a systemic crisis was not considered. An internal Department of Finance presentation in February 2008 ruled out an open-ended legally binding guarantee on the grounds of the risk to which it would expose the Exchequer, but a later presentation in April 2008 noted: "there are circumstances where such guarantees may be unavoidable to maintain confidence in the overall financial system."

Mr. Nyberg should be thanked for his work. I understand that he has examined a great number and range of documents and interviewed a large number of personalities, including me, who were involved at various stages of these matters. I had an opportunity to examine a limited selection of the report prior to publication in so far as the report had anything to say about periods in respect of which I was in office. The bulk of the report deals with the serious developments in the banking system.

The Minister is right and he has produced a number of practical proposals on foot of the report. The outgoing Government moved swiftly to merge the Financial Regulator and the Central Bank into one entity. This decision was questioned by some at the time. In light of the report, though, it was the correct decision. We should never again be in a position in which the two are separate, as issues of financial stability and bank regulation should be inseparable.

The report is curiously silent on the issue of the role and responsibilities of the European Central Bank, ECB, in respect of the national authorities, specifically the Irish Central Bank and the regulatory system. This is a germane issue for the Minister and the State in the negotiations he must undertake in Europe, yet it is not really touched upon in the report. A further look at the issue might be worthwhile. Although I hesitate to suggest a further commission or anything of that character, it deserves further study and preparation of material.

Having summarised the findings, the Minister made the point that the question of the role of auditors is a matter for the Department of Enterprise, Trade and Innovation, which it is, but it seems that one of the core problems with the banking sector is the fact that, to acquire business, auditors depend on the goodwill of the institutions they are auditing. This inherent conflict of interest has clearly caused a great deal of difficulty in terms of accurate financial information on the banks.

The Minister referred to the changes in the structures of the banking system and, crucially, addressed the question of the capacities of banks' boards and managements. This must be at the heart of any response to the report. A great deal of change has already occurred at board and management level in the banking sector. While change comes with a price, it must be done. The Minister has formalised the approach of the former and current Governments in terms of a board renewal plan and a management renewal plan. These plans involve the phasing out of some residual elements of board presence that have been there from a time not long before the guarantee. It is appropriate that the Minister should put in a formal way the Government's proposals in this regard.

When public interest directors were appointed under the guarantee, I consulted the Opposition parties about their appointment. This practice should be continued. Notwithstanding that, it is the case that the selection of these individuals is a matter of considerable concern. From my experience, I might suggest to the Minister that, while he can gather a large number of curricula vitae and examine many personalities, the actual skill and judgment required are the skill and judgment to form a view independent of the institution and not to be captured by the institution.

See this speech in context