Michael McGrath (Cork South Central, Fianna Fail)

I very much welcome the opportunity to contribute to the debate on the report of the Commission of Investigation into the Banking Sector in Ireland, known as the Nyberg report. The report builds on the work done in the preliminary reports by Professor Patrick Honohan and Max Watson and Klaus Regling and provides further insight into the causes of the Irish banking crisis. Mr. Peter Nyberg is to be thanked for producing a comprehensive report which addresses in a very straightforward way the origins of the crisis.

The Irish banking crisis is a truly sorry chapter in the country's history. The direct cost to citizens is now estimated to be in the order of €70 billion - excluding the work of NAMA which we hope will pay for itself over its lifetime - with incalculable damage inflicted on our reputation. In addition, the cost of not having a banking system that properly meets the basic needs of the economy and has not done so since 2008 is unknown. There can be little doubt but that the frail and limp state of the banking system since the onset of the crisis has impeded our economic recovery. The inability of the banking system to meet the needs of the economy has cost thousands of jobs and made life miserable for so many. Some reports estimate that up to 5,000 people working in the banking sector will lose their jobs as a result of the downsizing and de-leveraging in the banking system. In addition, it should be remembered that thousands of shareholders in the Irish banks lost all of their money, including many who invested their life savings.

I welcome the work of the new Government in seeking to draw a firm line under the crisis, building on the banking policy of the previous Government and the agreement reached last November between the State, the European Union and the IMF. I sincerely hope the strategy outlined by the Minister for Finance at the end of March, underpinned by the comprehensive bank stress tests, will work and that we are well on the road to fixing the problems in the banking system. While we all wish there were easy answers to our banking problems, the truth is there are not.

I welcome Deputy Peter Mathews' contribution. He made many predictions in recent years in regard to the banking crisis, many of which turned out to be true. One thing that concerns me, coming from an expert such as him, is his prediction that there is a further €20 billion of losses on the books of the Irish banks above and beyond what was identified in the stress tests. The fact that somebody of his expertise would make that assertion is a concern because all of us hope we have identified the bottom of the black hole in the banks. I hope his analysis is carefully examined and a conclusion reached in regard to it.

It is clear from reading the report and the two earlier reports that the primary responsibility for the near collapse of the banks rests with the banks. To varying degrees, the different banks departed from the traditional deposit-based business model, abandoned any semblance of proper risk management and engaged in a sustained and aggressive level of lending that threatened not just their own future but the economic future of the country. The report sets out the failures that occurred at a series of levels. The basic ingredients of the crisis have been known for some time: banks engaging in a frenzy of reckless lending to one particular sector, without any regard to risk management, aided and abetted by a hapless regulatory system; free flowing funding from wholesale lending markets; an insatiable domestic appetite for property consumption, and an inappropriate monetary policy at European level. All of this, it must be said, was actively encouraged and supported by public policy for many years.

I am glad Mr. Nyberg highlighted the issue of the reward culture in the banks which played a not insignificant role in the crisis. In paragraph 2.6.3 he notes:

... rapid loan asset growth was extensively and significantly rewarded at executive and other senior levels in most banks ... Targets that were intended to be demanding through the pursuit of sound policies and prudent spread of risk were easily achieved through volume lending to the property sector.

Mr. Nyberg cogently remarks on the herd mentality between different institutions but within the banks executives were rewarded on the basis that the more they lent, the bigger the bonuses they received.

In so many respects, the behaviour of the banks has been reprehensible since the beginning of the crisis. They have sought at every turn to conceal the full extent of their loan losses and misled the Government and the authorities about their true financial position. They resisted change that was blatantly necessary. They have sought to have it their own way on each occasion. Senior bankers have rewarded themselves handsomely, seemingly oblivious to the opinion of the people who have come to their rescue.

Second only to the banks in the hierarchy of blame are the Financial Regulator and the Central Bank, with the report being especially damning of their role. In essence, they utterly failed in their duties and the State is paying a high price for their incompetence. Some of Mr. Nyberg's observations in this regard are worth noting:

The CB [Central Bank] was not powerless; it had the right to direct the activities of the FR [Financial Regulator] and it could advise the Government. There are, however, no records of such direction or advice or even efforts at such... The problems in Anglo and INBS in particular, were not hidden but were in plain sight of the FR and the CB... The DoF [Department of Finance] and the Minister for Finance were regularly provided with a Financial Stability Report, officially jointly written by the CB and the FR... The report occasionally made reference to the frothiness of the Irish property market but did not explicitly infer serious risks to the banks from this emerging bubble.

In other words, some warnings were given, but they were not forcefully expressed and not sustained. As far as the Central Bank and Financial Regulator were concerned, everything in the garden was rosy. The regulator came before the Oireachtas Joint Committee on Finance and the Public Service on several occasions and was clearly delusional about the risks before his very eyes. The Irish authorities, however, were not alone in being remiss in their duties. Mr. Nyberg notes: "Generally, international organisations (IMF, EU, and OECD) were, at most, modestly critical and often complimentary regarding Irish developments and institutions".

The appointments of Professor Patrick Honohan and Mr. Matthew Elderfield and the reform of the Central Bank-Financial Regulator structure by the previous Government were important steps forward. I welcome the new Government's indication that it is determined to build on these reforms to ensure we have a Central Bank and financial regulatory function that is fit for purpose.

Mr. Nyberg gives a balanced appraisal of the extensive bank guarantee introduced at the end of September 2008. In paragraph 5.3.11 he states: "The discussions for alternative measures before and on Sept 29, 2008, were conducted on the basis of very deficient information". That the Government of the day had to make a decision of this importance in the absence of full information from the relevant authorities is an absolute indictment of those authorities. Their lack of preparedness for the looming crisis was inexplicable. Paragraph 5.3.13 states: "Given the information provided, the Commission understands the Government's decision to provide a broad guarantee for the banks; if no major solvency problems were expected the Guarantee would not have to be called upon". It is clear from the report that the guarantee decision was made with inadequate information on the policy options. If the true picture was known about the banks, a different decision might well have been made involving perhaps a limited guarantee to secure short-term liquidity for the banks pending the adoption of a resolution regime. However, Mr. Nyberg acknowledges that even that approach was not without serious risk and difficulty. The banks were not honest with the Government about the extent of their problems and those responsible for advising the Government failed miserably in their role. As the report observes:

Crisis management in Ireland, therefore, was rendered less than fully effective by longstanding insufficient appreciation of bank exposures on the part of all the authorities. Decision makers and their various advisors, in autumn 2008, still mainly shared the common view that the banks were, and would remain, solvent.

It is clear that the economy was allowed to become grossly over-reliant on the property and construction sector. The Government of the day has to accept full responsibility for this and should have moved much earlier to reduce this reliance. Instead, for too long, petrol was thrown on the fire and the apparent boom. It all seemed fine for as long as property prices kept rising. In general, public spending was not adequately controlled, especially in the early years covered by the Nyberg report and pro-cyclical policies fuelled the boom.

Many private citizens contributed in no small way to the madness. I recall the scramble when new phases of residential developments were being released. Those in the right circle, with access to lending, were putting their names down for six or eight houses in the days leading up to the official release of a development phase. By the time the next phase was released, such investors could be up €20,000 or €30,000 per unit. It all seemed so easy. The young couples who queued to pay exorbitant prices were easy fodder and are the ones ultimately paying for the frenzy.

Part of the terms of reference for the investigation was to examine the role of external auditors. As someone who worked in audit and qualified as a chartered accountant with a big four firm, it saddens me that my profession failed to highlight adequately the serious risks building up in the banks. While auditors fulfilled their narrow function according to rules and regulations, Mr. Nyberg confirms they did not generally report excesses over prudential sector spending limits to the Financial Regulator. Even if they had, he notes, it appears unlikely that anything would have been done about it.

The only issue over which we now have control is that of ensuring lessons have been learned and that corrective steps are taken. In that regard I welcome the Minister, Deputy Noonan's, statement today. I look forward, together with my colleagues in Fianna Fáil, to working in a positive and constructive way with the new Government to address the issues raised in the report.

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