'Property mania' at heart of bank crisisWednesday 20 April 2011 08.03
The Nyberg report into the handling of the banking crisis has found that the crisis was the result of domestic Irish decisions and actions, and not international developments.
The report, written by Finnish banking expert Peter Nyberg, said the main cause was the 'unhindered expansion of the property bubble', which was fuelled by banks using money borrowed from international markets.
It said the risks linked to the bubble were undetected or seriously misjudged by the authorities. It said any warnings from the authorities were 'modest and insufficient'.
The report said nobody abroad forced Irish households, investors, banks and authorities to take what it called 'unsustainable' financial risks.
The report referred to the development of a 'national speculative mania' in Ireland during the property boom. It said neither banks or borrowers really understood the risks they were taking.,
It said Anglo Irish Bank, because of its strong growth, came to be seen as a role model for other Irish banks, leading to a general lowering of credit standards.
The report refers to a 'pervasive pressure' for consensus during the period leading up to the crisis, saying banks appeared to have behaved in a 'herding' fashion, while there was a widespread lack of critical discussion within many banks and authorities.
The report says the way Anglo Irish Bank and Irish Nationwide were run fell short of best practice. Mr Nyberg says that while procedures and process existed on paper at Anglo, they were not followed in practice. At Irish Nationwide, he says, some essential, independent functions either did not effectively exist of were under-resourced.
It found that there were 'numerous' instances were banks did not comply with banking regulations, but went unsanctioned by the Financial Regulator. In the cases of Anglo and Irish Nationwide, where the regulator did raise concerns, they led to little real change.
The report describes it as 'remarkable' that the regulator accepted the severe problems in Irish Nationwide and allowed it to continue without major reform or sanctions. It adds that the regulator's problem was not lack of powers but lack of scepticism.
On the other banks, the report says some board members interviewed indicated that there was a 'strong preference for consensus'. The report says it appears to have been difficult for individual board members to express views which went against the majority. Mr Nyberg also says the documentation of board discussions over the period was 'insufficient'.
Central Bank 'may have been in denial'
The report says the Central Bank and Financial Regulator took note of risky bank behaviour, but did not seem to think it worrying enough to take major policy measures to restrain the banks.
It says a 'very limited' number of individuals argued for stronger measures but failed to convince their superiors.
The report says the Government actively supported the property market over a long period against the 'apparently weak but clear' opposition of the Department of Finance.
The report says the Central Bank may have been in a state of denial, and did little to alert banks or other authorities to potential financial risks. Any warnings that were made public were toned down. The report says staff at the Central Bank and Financial Regulator did not co-operate in a meaningful way until the crisis.
It adds, however, that international organisations such as the IMF, EU and OECD, were at most modestly critical and often complimentary about Ireland. 'This gave the authorities and the banks additional reason to assume that all really was well,' it says.
It also says that the banks' external auditors fulfilled their narrow function according to existing rules, but did not appear to have questioned the banks about their growing exposure to property. The report says such dialogue could have highlighted the risks to the banks' business models.
Guararntee talks 'based on wrong assumption'
On the bank guarantee of September 2008, the report says that if accurate information on the state of the banks had been available at the time, it is 'quite likely' that a more limited guarantee, combined with a State takeover of at least one bank might have been considered more seriously.
The Nyberg report says decisions at the time were made on the wrong assumption that all the banks were and would remain solvent.
It says the guarantee represented a considerable risk to the country, and it could have been useful to consider other ways of keeping the banks going for a few days. But the report adds that, given the mood of financial markets at the time, the risk fo destabilising the situation would have been 'substantial'.
Noonan says Government will reflect on report
Finance Minister Michael Noonan has welcomed the publication of the report.
He said the Government intends to reflect on its contents after making a formal statement to the Dáil tomorrow when the House is due to hear statements on its findings.
Today's report is the final of three reports into the banking crisis. That collapse has so far cost the taxpayer €70 billion.
Last summer Central Bank Governor Patrick Honohan's report focussed on regulation of the banks. A second report by experts Klaus Regling and Max Watson examined the economic background which led to the crisis.
The Cabinet discussed the report earlier today before its publication.