Here are some quotes from the report of the Commission of Investigation into the Banking Sector in Ireland.
- International developments … did not in themselves cause the crisis though they helped precipitate it.
- The willingness of banks to accept higher risks by providing more and shockingly larger loans primarily for commercial property deals was an important reason for the gradual increase in financial fragility in Ireland.
- By mid-decade, Anglo Irish Bank (Anglo) and Irish Nationwide Building Society (INBS) were growing strongly on the basis of relationship banking, providing loans to a limited number of entrepreneurs operating in the riskier parts of the property market.
- Bank loans seem to have expanded so rapidly because neither banks nor borrowers apparently really understood the risks they were taking. Many banks were increasingly led and managed by people with less practical experience of credit and risk management than before
- Banks, citing the long sequence of good years, generally saw little problem in expanding their lending by allowing credit quality and risk management to gradually erode. Likewise, households and investors had seen their incomes and wealth increase markedly for a number of years; easy access to credit further encouraged belief in a never-ending boom. In essence, both sides of the market assumed that the other side knew what it was doing.
- A self-reinforcing spiral developed: higher prices and values caused increased speculative buying of housing and land; evaluators based their estimates on these higher prices; this increased the demand and collateral for bank lending, which in turn raised prices as more funding was provided
- A minority of people indicated that contrarian views were both difficult to maintain during the long boom and unhealthy to present to boards or superiors.
- The Commission considers that this pervasive pressure for consensus may explain why so many different parties in Ireland simultaneously were willing to adopt specific policies and accepted practices that later proved unsound.
- A number of banks essentially appear to have followed the example of peer banks in a “herding” fashion; there is little evidence of original critical analysis of the advantages and risks of the policies. Widespread lack of critical discussion within many banks and authorities indicates a tendency to “groupthink”; serious consideration of alternatives appears to be modest or absent.
Flawed lending: Anglo and INBS
- Contrary to public perception at the time, lending at Anglo and INBS had proceeded with insufficient checks and balances during the Period. Relationship lending, high-growth strategies and rapid credit decisions meant that their balance sheets increased as the projects of preferred customers grew
- Governance at these banks also fell short of best practice. While procedures and processes in Anglo existed on paper, in certain cases they were not properly implemented or followed in practice. It appears that, at least in the latter years, only a handful of management was aware of all activities of the bank. At INBS, a number of essential, independent functions either did not effectively exist or were seriously under-resourced.
- The Financial Regulator(FR) was clearly aware of many of these problems in the two banks. Prior to the commencement of the Period, and consistently throughout, it raised significant concerns regarding governance at INBS. It also submitted a comprehensive list of procedural and portfolio problems to Anglo. It furthermore raised minimum capital ratios for both banks. However, such remedies did not prove effective to ensure sufficiently greater prudence and accountability in either of the banks.
The Herd: Other Banks
- Bank management and boards in some of the other covered banks feared that, if they did not yield to the pressure to be as profitable as Anglo, in particular, they would face loss of long-standing customers, declining bank value, potential takeover and a loss of professional respect. The few that admitted to feeling any degree of concern at the change of strategy often added that consistent opposition would probably have meant formal or informal sanctioning.
- It appears to have been difficult for individual members, especially those without banking experience, to express and maintain a view contrary to the majority view on the board.
- Over time, managers known for strict credit and risk management were replaced;
The Silent Observers: External Auditors
- … banks had to be rescued from closure by the Government Guarantee in some instances not more than six months after being given clean audit opinions.
- The problems in the Irish banks were building for several years before the crisis. These were problems of credit quality, sustainable lending practices and adequacy of internal procedures; they were not generally operational problems related to the IT systems or the mechanics of loan documentation. Auditors, therefore, did not feel that commenting on the implications of such business model problems fell within their proper remit. In fact, it may be questioned whether they even saw them as problems since very few others appear to have seen them either. On these issues, they appear generally to have stayed silent.
- The Central Bank (CB) and the FR noted macroeconomic risks and risky bank behaviour but appear to have judged them insufficiently alarming to take major restraining policy measures. Among all the authorities a very limited number of individuals, either in boards or among staff, saw the risks as significant and actively argued for stronger measures; in all cases they failed to convince their colleagues or superiors.
- There may have been a state of denial in the CB; warnings of stability risks appear to have been sidestepped internally or, when made public especially in the Financial Stability Reports, toned down in the policy conclusions. Trust in a soft landing was consistent and, though not very well founded, continued up until and including the crisis management phase of the Period.
- The CB was not powerless; it had the right to direct the activities of the FR and it could advise the Government. There are, however, no records of such direction or advice or even efforts at such. These institutions worked separately and their respective independence was repeatedly stressed; however, this was counteracted by their partly common board members. Until the crisis, many of the staff of the CB and the FR apparently did not cooperate in a sufficiently meaningful way in assessing financial stability. This, together with the determined optimism and caution of senior management, may help explain why so few staff were seriously concerned about stability issues at the time. It appears that each of the authorities ultimately assumed that the other conscientiously fulfilled its prudential tasks. Thus, less was done than either of them assumed.
- The problems in Anglo and INBS in particular, were not hidden but were in plain sight of the FR and the CB. The funding strategy of Anglo was obvious from its balance sheet and the concentration to the more speculative part of the market was generally known. Similarly, INBS’s expansion into development lending was also clearly documented and the governance problems in the bank were widely known by the authorities.
- Generally, international organisations (IMF, EU, and OECD) were, at most, modestly critical and often complimentary regarding Irish developments and institutions. This gave the authorities and the banks additional reason to assume that all really was well. Domestic doubters were few, late and usually lowkey, possibly because it was thought that expressing contrarian views risked sanction; in addition, a long period of good times had reduced the numbers of those willing to continue to go against the prevailing and apparently proven consensus.
Policy with Insufficient Information: the Guarantee
- Proper information is a precondition for any crisis management based on reality. As it turned out, decisions were made on the erroneous assumption that all banks were and would remain solvent. Only on that assumption could the decision to simply provide a broad guarantee be understood.
- If accurate information on banks’ exposures had been available at the time it seems quite likely to the Commission that a more limited guarantee combined with a state take-over of at least one bank might have been more seriously contemplated. Indeed, on the basis that such information had been available, banks could have been directed to raise substantially more private capital well before end-September 2008. As it turned out, however, the Government was advised that banks’ insolvency risks were small relative to liquidity risks and it was eventually decided not to consider nationalisation.