A report on the banking crisis by Central Bank Governor Patrick Honohan has found that there was a 'comprehensive failure' by the directors of Irish banks to maintain safe and sound banking practices.
But the report also finds that the Central Bank and the Financial Regulator - the main guardians of the financial system - also failed in their role.
It describes the approach taken by the Central Bank and the regulator to the banks as 'timid', 'excessively deferential' and 'accommodating'.
The report also says Government economic and budgetary policies contributed significantly to the overheating of the economy.
Professor Honohan says the Government was relying to a 'clearly unsustainable extent' on revenue from the construction boom, while also encouraging it through tax incentives.
The Governor says the international financial crisis and the collapse of Lehman Brothers were not to blame for the problems in Irish banks.
He also says the Government's bank guarantee scheme was necessary, and the costs of allowing a bank to collapse could have been much higher, though he says the guarantee should have been discussed with fellow EU members.
His report says the banks borrowed too much abroad to support a credit-fuelled property market and a construction 'frenzy'.
Professor Honohan says regulators did not move decisively and quickly enough against banks with governance issues, while any action taken was 'delayed and timid'.
He says too much emphasis was put on fears of upsetting the competitive position of the Irish banks, and encouraging the development of the financial services industry.
The report says not enough resources were devoted to the supervision of banks, and that the regulators relied on the banks to run themselves properly and manage their risks.
It says the Central Bank and the Financial Regulator were unwilling to face the real risk of a looming problem and act to head it off.
But Professor Honohan adds that 'rocking the boat' would have meant the regulators' having to face possibly strong adverse public reaction.
He says the Government's reliance on the building boom helped to create a climate of public opinion which was led to believe that the party would continue forever.
The report does not discuss directors' loans, the Quinn-Anglo Irish Bank or back-to-back deposits among banks.
Its aim was to look at why regulators did not identify problems in the financial system earlier and take action to prevent damage.
It also asks whether the best policies were followed after the crisis started.
Governor Honohan conducted 120 hours of interviews during the investigation.
Those interviewed included former Financial Regulators Patrick Neary and Liam O'Reilly, John Corrigan and Michael Somers of the NTMA, the former chief executive of Bank of Ireland Brian Goggin and the former AIB chief Eugene Sheehy.
Former chairman of Irish Nationwide Michael Walsh was also interviewed.
Only one of the interviewees brought a lawyer, but Governor Honohan declined to say which one.
'International factors not the cause'
The report says the weaknesses in the Irish banking system were not caused by the international credit crunch.
Professor Honohan points out that Irish house prices had been falling for 18 months before US bank Lehman Brothers collapse.
'Heavy loan losses were inevitable for Irish banks regardless of international factors,' the report says, adding that Anglo Irish Bank and Irish Nationwide were already too far down the road of insolvency.
He says the banks tolerated a gradual lowering of lending standards, and allowed 'numerous exceptions' to their own stated lending polices.
The report says the banks did not challenge the security behind big land development loans, and as a result they did not realise how vulnerable they were to property price falls.
Regulator 'unwilling to rock the boat'
The report finds that financial regulation was 'unduly deferential' to the banks, and the regulator appeared unwilling to rock the boat.
It finds that demands from some of the regulator's staff were set aside after the banks made direct representations to senior regulators.
The report says attempts to formalise principles for running the banks failed after lobbying from the financial industry.
It adds that there was 'no appetite' on the part of the regulator for legal cases, and no penalties were imposed for breaches of prudential regulations before 2008.
Central Bank reports come under fire
Professor Honohan says the language of the annual financial stability reports produced by the Central Bank was too reassuring, though he says similar reports from the International Monetary Fund and OECD were no different.
The Governor was particularly critical of the 2007 financial stability report, which predicted a soft landing for the property sector.
'Despite internal evidence to the contrary, the central conclusion of a soft landing was not based on any quantifiable calculation or analysis. It was a triumph of hope over reason,' the report says.
The report says the 2004 financial stability report said the financial system was fine, but an attached article by a Central bank economist said the property market was overvalued by 55 to 63%.
It says stress tests - which looked at how Irish banks would cope with potential shocks - were too weak and comforting. The report says banks had no reliable models tested on Irish data to predict reliably, and were prone to over-optimism - and then denial.
Bank guarantees
Professor Honohan's report says the bank guarantees introduced by the Government in September 2008 were necessary, and the costs of a financial collapse would have been 'tens of billions more' than the cost of the guarantee.
But he says the inclusion of subordinated debt - money lent to banks by investors at a greater risk in return for a higher interest rate - increased the State's potential share of losses.
He adds, however, that these account for only a small amount of the total guarantee.
The Governor also says there should have been discussions with other EU members before the guarantee was introduced.
The report says the Government had begun drafting legislation on nationalising a bank or building society after the run on Northern Rock in Britain in September 2007.
But Professor Honohan says the wisdom of leaving the management of Anglo and Irish Nationwide in place when they were clearly on the road to insolvency was not considered.
Case studies of individual banks
Bank A
The report refers to an inspection of one bank, referred to as Bank A, in May and June of 2007. This found that 28% of its loans were not within the bank's own lending policies.
Bank B
An inspection of another bank, Bank B, found that some loans which were given outside its lending guidelines were not notified to senior management. The bank's own computer system could not produce a summary of how many interest-only mortgages the bank had agreed. The report says the bank disputed these findings at the concluding meeting with the regulator.
Bank C
The report looked at an inspection of one bank carried out in 2005 following concerns raised the previous year. It found four 'high priority' findings: the bank lacked a defined credit policy; it had a 'large and imprecise' appetite for risk; it relied on implicit guarantees from public sector bodies and utilities; and there was insufficient board oversight.
13 other 'medium priority' findings included problems with its credit committee. The inspection found that approvals for loans were given out between meetings of the committee, while the chairman attended only five of 26 scheduled meetings that year.
Five banks
In December 2007, five banks were asked to assess their five biggest property borrowers. The banks said there were no concerns about their top five property borrowers.
The report says that in all cases the banks were wrong. The report found that updates on property valuations were based on estimates by management.
Banks also had statements of the assets of big borrowers which were not verified. 'The institution was unable to get a net worth statement from Mr X, as he is unwilling to disclose such details in writing. Statements provided by Mr Y and Mr Z were unverified by a third party,' the report says.
One bank, Bank E, said a Mr X's net worth included €100m of working capital provided by the bank itself.
The report says that, despite a 'catalogue of deficiencies', the implication that loan appraisal was wholly inadequate and personal guarantees could not be relied on was not taken on board by the regulatory system.
'The Financial Regulator did not seem to understand that the solvency of all banks could be at risk given the declining value of collateral,' the report says. It adds that the best indication of the banks' attitude to the regulator's inspectors was that the final meetings, when these concerns were raised with senior management at the banks, lasted only 20 to 30 minutes.
Anglo
The report finds that inspections of Anglo Irish Bank did result in concerns about the way the bank was run, and that there concerns about the heavy reliance on personal guarantees.
But the report says the lack of a credible threat of action by the regulator reduced the urgency of dealing with the issues.
