Banking inquiry: Final report breakdown

Wednesday 27 January 2016 23.24
The final report of the banking inquiry was published today
The final report of the banking inquiry was published today

The banking inquiry's final report says the European Central Bank threatened to cut off funding for Irish banks if the country did not apply for a bailout. 

Final Report Volume 1 | Volume 2

The report focuses on a letter from ECB President Jean Claude Trichet in November 2010 which was sent to then-finance minister Brian Lenihan.  

In the letter, Mr Trichet demanded Ireland apply for external assistance, undertake economic reforms and restructure its banking system. Ireland did request a bailout in November 2010.

The report found if Ireland did not apply for the EU/IMF bailout then emergency liquidity assistance, which was funding Irish banks, would be cut off by the ECB.

The report also found that the Irish authorities were in discussions from September 2010 with individual Troika partners before an agreement to enter formal bailout discussions. 

The document says that by October 2010 Ireland's entry into the bailout programme was inevitable. 

It adds that the entry of Ireland into the bailout was determined by "factors outside of the Government's control".

It said the possibility that Ireland might need a bailout was first considered in September 2008 by the then-Second Secretary of the Department of Finance Kevin Cardiff.  

The joint committee also attacked the ECB for not cooperating with it, saying this undermined" their ability to investigate matters fully" and accused it of having a serious "democratic deficit".

They note the opportunity to put questions to Jean Claude Trichet at an event at the RHK in April 2015.

But they go on to claim in the report that "there is a serious democratic deficit when it comes to the ECB's accountability to the inquiry in terms of significant decisions taken by the Government that it was directly involved in over the period under investigation".

Warnings about the economy discounted or ignored

The Banking Inquiry also found that most of the warnings given about the economy in the years leading up to the crisis were discounted or ignored by regulatory and governmental authorities. 

It found that multiple warning signals - provided by domestic and foreign experts and economic institutions - were ignored until it was too late to avert the crisis.

Concerns had been raised in relation to a number of issues.

These included: property overvaluation; growth of credit in the banks; level of household debt; loss of international competitiveness through productivity issues and wage inflation; a growing dependence on the construction sector; and an over-reliance on property-related taxes.

The report revealed the Central Bank and Financial Regulator had been aware, as early as 2003, that banks were placing increasing reliance on property lending and that different lending practices were being adopted. 

Neither intervened decisively at the time or in the years prior to the crisis.

The Financial Regulator failed to identify the systemic risk building up in the banking sector and the emerging risk to the stability of the overall system. 

The report found that banks were allowed breach sectoral lending limits on property, without fear of any consequence. 

The inquiry said the Department of Finance was too reliant on external agencies such as the IMF and did not do sufficient analysis to form an independent review on some of the key risks facing the economy.

Inquiry report details 'failure to identify risks'

Information on banks on night of guarantee 'inadequate'

The banking inquiry has found that the information available to the key decision makers on the night of the bank guarantee - Monday 29 September - about the underlying health of the banks was "inadequate".

It said that the Government had been advised by the Central Bank and the Financial Regulator that all six Irish banks were solvent on the night of the guarantee.

In a chapter focusing on the guarantee, the inquiry also ascertained that the Department of the Taoiseach did not keep minutes on the night of the guarantee and was not able to provide any drafts of the proposed guarantee as it developed.

The inquiry said that the option of guaranteeing the banks did not actually arise for the first time on 29 September but the option had first been introduced in January 2008, again in February and again in June 2008.

It also said that a draft press release announcing a six-month guarantee has been prepared by the Central Bank before 9.10pm on the night of 29 September. This only covered deposits and interbank lending, however.

Today's report says that bank bosses from AIB and Bank of Ireland, when leaving Government Buildings on the night of 29 September, had different views on whether the Government was going to proceed to guarantee four of six of the Irish banks.

It also reported "conflicting" evidence as to whether representatives from Bank of Ireland and AIB did provide their own written guarantee proposals to the meetings on the night of the guarantee. 

The word "solvent" was also removed from the final official Government statement announcing the guarantee, the inquiry found.

The Oireachtas committee also found that one consequence of the crisis and the bank restructuring efforts that followed was the "almost total cessation of new lending for businesses" between 2009 and 2013.  

It found there were a number of reasons why the PwC's Project Atlas Report published in 2008 did not reveal the true extent of the capital requirements of the banks. 

They said the wider assumptions for the economy, taken from official forecasts and on which the
work was based, did not materialise. 

It said there was insufficient time for loan reviews given the fragility of the banking system and the analysis was based on the management accounts of the relevant banks and not an independent verification of the loan books.

Report recommends commercial property register

In the section on the property market, the report said a detailed and comprehensive commercial property price register should be introduced and that at the height of the boom many "drive-by" valuations were carried out even on some of the largest developments.

Members also spoke of revenue from the property market being a significant source of funding for certain media outlets.

The report said in the lead up to the crisis, many developers had become "heavily reliant on bank debt" to fund their developments.

"In many cases, developers adopted a business model in which a bank would bear all of the risk of a transaction, either through 100% financing or using so-called 'paper equity' to fund any element of developer's equity".

The report also said “property or land valuations were not carried out in all cases", adding this took place even in the case of some large developments.

"As the property boom took hold, reliance on informal 'desktop' and 'drive-by' valuations, which did not involve any physical inspection of a property, became more prevalent," the report said.

However, a number of developers gave evidence that they continued to rely upon professional valuations.

The committee found "relationship banking" taking place, where some developers built strong relationships with particular banks and this was a part of the Irish banking system.

In some cases, both parties became business partners in a joint venture.

The report also said revenue from the property sector was a significant source of income for some media outlets, accounting for as much as 14% or 17% of all revenue for some newspapers.

Editors denied that editorial independence was affected by their advertising relationship with the property sector.

External Auditing

The Banking Inquiry found that in the nine years leading up to the bailout a small number of firms dominated external auditing in the banking sector.

They were KPMG, EY and PwC who the report says "not only dominated the audits of Ireland's financial institutions, but they audited particular banks for extended, unbroken periods. During the same period, Deloitte audited the accounts of Ulster Bank".

It says certain regulations delayed the recognition of "loan-loss provisions" and that in the period running up to the crisis banks were able to make "voluntary" disclosures of provision for loan losses.

It notes the European Commission's recommendations on audit changes for banking, which include mandatory audit rotation of audit firms and compulsory tendering for audit services, prohibition on audit firms providing non-audit services and European supervision of the audit sector should be implemented.

The report calls for the capacity for direct reporting of critical business risk to the regulatory authority by an external auditor of banks should be strengthened.

Going on to say financial institutions should be obliged to obtain an independent audit of their regulatory returns. The external audit function would be strengthened significantly by such an independent audit, bringing it into line with practice in insurance companies.

The committee says any audit should highlight any inconsistencies between the annual audited Financial Statements and the regulatory returns submitted during the year.

Keywords: banking inquiry