Former minister Mary Harney has told the banking inquiry that previous governments she was involved with made mistakes, which she certainly regretted.

Ms Harney appeared before the inquiry today along with former Green Party leader John Gormley.

She said they did not foresee the enormous explosion of cheap credit from the early part of the last decade.

Ms Harney also said there should have been more proactive monitoring mechanisms giving regular assessment of financial stability, which could have helped to raise awareness of risks.

She said that as a government they had undue confidence in the new financial regulatory regime and stood too much at arm's length when there were serious signals to be read in the economy.

That was clearly wrong, she said. Ms Harney also said they allowed public spending to grow too quickly on the back of unprecedented tax growth.

She said they also underestimated the multiplier effect of excessive and unsustainable construction activity and property transactions on the economy as a whole, and the public finances in particular.

Ms Harney said she was proud of the economic and social achievements over that period on reducing unemployment and emigration and national infrastructure.

The Exchequer ran a budget surplus in every year bar one from 1998 to 2007, thereby shrinking the national debt.

She added the tax burden on individuals was also sharply reduced, while spending on public services grew rapidly, although perhaps too rapidly.

Ms Harney said the broad thrust of macro, and indeed general, economic policy of the time was correct but it needed the imposition of a heavier hand of restraint from the early 2000s onwards.

Ms Harney defended the reorganisation of regulation, which resulted in the splitting of the Financial Regulator from the Central Bank in 2003.

She said the investigations into Guinness Mahon, Irish Intercontinental Bank and the National Irish Bank all provided evidence that regulation was not effective.

She was of the view that a new, more effective form of regulation was required.

Ms Harney said the decision was recommended to government by her as minister for enterprise, trade and employment.

The culture did not change, perhaps in a small country there was too much deference to the banks, she said.

Bank guarantee 'least worst option' - Gormley

Mr Gormley told the banking inquiry the guarantee was probably the "least worst option" given that the then government did not know there was an insolvency problem.

He said some of the worst days experienced by the Green Party were when it was in government. He added nobody could have foreseen the collapse, and the party was forced to make the most unpalatable of decisions.

He said he thought they were the right decisions. 

On guarantee night, the first indication he had was when he got a phone call from then finance minister Brian Lenihan at about 2am on 30 September. Mr Lenihan explained the urgency of the situation.

He said that this was an incorporeal cabinet meeting, but that Mr Gormley was welcome to come into Government Buildings, if he wished.

Mr Gormley said he was satisfied to give his consent to a government decision to publish legislation to give effect to the guarantee on the basis of previous discussions.

He said his party made some of the most difficult political decisions that any small party has ever had to make.

TDs and Senators voted for cutbacks and tax increases, convinced that this was the correct course of action, while also knowing they would lead inevitably to electoral annihilation.

Mr Gormley said that it is hard to exaggerate the way things accelerated.

He said: “We were left dealing with that crisis as quickly as possible and when it came to making those decisions minister Ryan and minister Lenihan presented us with the options.”

He said he did not know there was legislation being prepared to nationalise institutions.

Mr Gormley added he did not know Mr Lenihan was engaging with the Central Bank on this issue.

He said he became aware Anglo was insolvent when Eamon Ryan, who was dealing with the issue, told him about it. 

On entering government, the Green Party resolved to introduce a more evidence-based and sustainable planning system.

As minister Mr Gormley enacted new planning legislation and intervened at local level in a number of cases of poor planning practice.

He said he was convinced that had they been in place earlier, the property bubble would not have inflated to such an extent and the severity of the economic crisis would have been much reduced.

He said he had the impression that the Department of Finance was working on a plan, but he had no idea that it had been working on it for an extensive period of time, as indicated in the evidence of Kevin Cardiff.

Mr Gormley said it would not have changed anything if he had been present in Government Buildings when the decision to issue a bank guarantee was made.

Under questioning from Fine Gael's John Paul Phelan, Mr Gormley said he was across the issue. He said that both himself and Mr Lenihan were on the same page.

Mr Gormley said they were told it was a liquidity problem and not a solvency one and they were misled by the banks.

He said that some individuals in banks must have known but he did not have evidence for that.   

Mr Gormley told the inquiry it became clear that Anglo's debts were massive.

He said the only option was to nationalise Anglo.

It was the option that nobody favoured, it was the last option, but it was the only option, he said.

Ms Harney also said that nationalisation was the only option.

She said she became aware that Anglo was insolvent in the run-in to the nationalisation of the bank.

At the time of the guarantee, she said, the issue was liquidity because of reckless lending.

Mr Gormley denied the government guarantee was a bluff.

He said that the government acted on the best possible information, saying it was assured it was a liquidity crisis.

Ms Harney said that the guarantee was absolutely not a bluff.

She said it was her belief there was no alternative and that if some banks were excluded it would have led to enormous controversy.

Ms Harney said the information on which the decision was made was very limited.

She said it did not indicate there was a solvency issue, which emerged subsequently.

In her experience in government, she said, her colleagues always acted in the national interest, notwithstanding the consequences political, or otherwise. 

Ms Harney said Mr Lenihan called into her office and told her about Anglo, very close to when the legislation was introduced.

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Inquiry hears EBS developed unsustainable model during boom

The former chief risk officer at EBS has told the banking inquiry the building society developed an unsustainable model by relying on cheap wholesale funding to pay for its lending growth.

Fidelma Clarke said that in 1999, the loan book was funded solely by deposits.

Between 1999 and 2007, the loan book grew by 300% while deposits grew by 170%. The gap was funded by the wholesale markets.

A new regulatory regime had been put in place to prevent a re-occurrence.

Ms Clarke was CRO from 2009 to 2012 and remains a non-executive director of EBS Ltd.

She said tracker mortgages produced a very low return with a high-risk premium.

Ms Clarke said she believed that excessive competition and the availability of credit led to the financial institution acting more like a commercial lender than a building society.

She said that competition from foreign banks had put pressure on domestic lenders.

Ms Clarke said she believed the board of EBS felt that if all the banks in the market were moving in one particular direction, the building society would stop being relevant if it did not follow suit.

Earlier, the inquiry heard that EBS rejected an offer to merge with AIB in 2007. The building society was later taken over by the bank four years later.

Alan Merriman, who was EBS finance director from 2005 to 2009, said he advocated that the offer should be accepted but the board did not consider it seriously.

He said it was clear the building society’s longer term sustainability was in question; it was under pressure with a razor thin margin and its ability to generate capital was very tight. 

The former chief risk officer at EBS has told the inquiry that the building society developed an unsustainable model by relying on cheap wholesale funding to pay for its lending growth.

Fidelma Clarke said that in 1999, the loan book was funded solely by deposits. 

Between 1999 and 2007, the loan book grew by 300% while deposits grew by 170%. 

The gap was funded by the wholesale markets.  A new regulatory regime had been put in place to prevent a recurrence.

Ms Clarke was CRO from 2009 to 2012 and remains a non-executive director of EBS ltd.

She said tracker mortgages produced a very low return with a high-risk premium.