AIB's retail division – not specialist corporate lending – handled its large property loans, writes SIMON CARSWELL

IN FEBRUARY 2007, the Financial Regulator wrote to the board of Allied Irish Banks (AIB) asking the bank to examine its exposure to property and construction and to confirm whether it was happy with the size of this exposure.

The letter prompted a discussion of about an hour in the boardroom and turned into something of a technical debate around what constituted a property loan.

While a loan may have been for a property, it was argued that the security for the loan was based around the cash flow and assets of a business.

This raised the question during the boardroom discussion: was this a property loan?

Following the letter, AIB decided to put limits on the lending for building on land with no planning, or where there was planning but no construction had taken place.

In the end, the fact there was no exact science around the classification of loans at AIB didn’t matter – the Irish property market and economy tanked, affecting the value of properties and cash flows in businesses, wiping out large parts of the bank’s security.

AIB has been left with losses of €20 billion, requiring roughly the same amount from the State to prop up the now almost fully nationalised bank.

This makes the State’s bill on AIB, which had a whopping €23.7 billion in development loans, second only to Anglo Irish Bank’s €29.3 billion tab.

Even after transferring €20 billion in loans to the National Asset Management Agency, AIB will still be left with land and development loans totalling €7.4 billion on its books. This is made up of the sub-€20 million loans that were due to have been moved to Nama.

The size of this part of AIB’s loan book reflects the kind of hubris that ex-International Monetary Fund banking expert Peter Nyberg wrote about in his report on the banking crisis, which was published on Tuesday.

Ireland had been gripped with “a national speculative mania” centred on property, Nyberg said.

The type of boardroom discussion at AIB in 2007 and the comfort its directors drew from business cash flow on property loans was captured more generally in Nyberg’s findings on the crisis.

“It appears now, with hindsight, to be almost unbelievable that intelligent professionals in the banking sector appear not to have been aware of the size of the risks they were taking,” said Nyberg.

He found that, in 2006, AIB increased management’s powers to approve exceptions to the bank’s large exposure policy from €250 million to €750 million.

“Exceptions were to be reported to the first board meeting following each such management approval,” said the Nyberg report.

He identified AIB as being the first to pursue the profits that Anglo made from property during the 2003/08 bubble period.

Nyberg found that AIB’s large property loans were handled not by specialist corporate lending divisions but by its retail division.

The divisional structure of AIB made credit and management difficult due partly to inadequacies in the bank’s IT systems, and large loans were “not receiving the close attention and supervision necessary due to the volume of business growth”, said the report.

Responding to the call from Minister for Finance Michael Noonan for a board renewal plan, AIB announced after the publication of the Nyberg report that the three pre-crisis directors still on its board would be standing down.

Nyberg avoided blaming anybody by name, preferring to say that many people across various institutions and wider Irish society had to share responsibility.