GOVERNMENT REGULATION:IN ITS assessment of the role of government departments and agencies in bubble-era bank supervision and crisis management up to January 2009, yesterday's Nyberg report was wide-ranging in its criticisms.

Among other things: the authorities failed to foresee risks; were subject to “groupthink” and “a conformist style” of decision making; were slow to draw up adequate contingency plans once problems arose in 2007; and remained behind the curve until the end of the period examined.

The report considers individually the performance of the Department of Finance, the Financial Regulator and the Central Bank in the 2003-2007 period.

It then examines their collective crisis management from mid-2007 to September 2008, the decision to guarantee the banks’ liabilities and, finally, the period from October 2008 to the nationalisation of Anglo Irish Bank in January 2009.

On the single most controversial decision – the September 29th, 2008, guarantee – the report states: “If accurate information on banks’ exposure had been available at the time, it seems quite likely that a more limited guarantee combined with a State takeover of at least one bank might have been more seriously contemplated.”

However, the report does not criticise the guarantee, saying it “understands the government’s decision to provide a broad guarantee for the banks”.

Although the guarantee was a success “initially”, according to the report, its effectiveness was quickly eroded.

This owed to “a series of announcements by the authorities outlining alternative plans which in the end had to be abandoned”, and the effect the “broad” nature of the guarantee had on sovereign creditworthiness.

On the nationalisation of Anglo Irish Bank the report does not make any judgments. It does, however, say that allowing a bank to fail was not an option, not least because Mr Nyberg “understands” that the European Central Bank advised against it.

In the bubble period, the report excoriates the Financial Regulator, finding failures in every function. Apart from a 2006 decision to increase banks’ capital requirements, it finds no evidence of any action to rein in excessive lending.

The report is equally scathing in its criticism of the Central Bank in the period up to 2007, and rejects the defence that to involve itself in the regulator’s role would have been an intrusion.

It notes that the bank had responsibility for overall financial stability.

It also criticises the lack of contingency planning for “worst case scenarios” and finds “difficulty in understanding the apparent lack of interest in fostering critical debate within the confidential confines” of the bank.

It notes that an internal study prepared in 2007, which found property prices overvalued by 39 per cent, was suppressed.

“An active and suspicious Central Bank would have had concerns over the macroeconomic data emerging in mid-2005,” the report states.

The report contains considerable amounts of such data. It shows that bank lending relative to size of the economy began to grow in 2003. From approximately 130 per cent in 1999-2003, the value of outstanding loans crossed the 200 per cent of gross domestic product (GDP) threshold by 2005.

It continued to soar thereafter, reaching 300 per cent of GDP in 2008. The report compares this with lending in the euro zone and the United Kingdom, finding that, relative to GDP, it peaked in Ireland at considerably higher levels than either comparator economy, and grew far more rapidly to reach that point.

In the case of the euro zone, the increase of lending to GDP was very gradual from 1999 until 2005. It then accelerated slightly up to 2008. It peaked at 200 per cent.

In the case of the UK, lending grew moderately in the four years from 1999. From 2003 it accelerated, although it never approached Irish growth rates. It peaked at 250 per cent of GDP.

The Department of Finance does not escape criticism for its role in the inflating of the property bubble. The report states “there is no evidence that the department was particularly concerned with prudential matters or in assessing any possible financial stability concerns”.

Speaking at a press conference to launch the report, Mr Nyberg said that only a handful of people warned of the risks of excessive bank lending.

He said there was approximately one person per institution. The report also states that in the Central Bank there were “ a small number of contrarians at board level”.

The failure of Northern Rock bank in the UK in 2007 was the trigger for growing concerns. Contingency planning began in the bank and regulator, but this focused on liquidity problems, not on solvency concerns.

The report also says “there is no evidence of a clear understanding at senior management levels” of the links between liquidity and solvency problems.

Although the Central Bank rejected the possible use of a wide-ranging bank liability guarantee in February 2008, by April of that year it advised that there were circumstances in which guarantees “may be unavoidable”.

THE AUTHORITIES: PERFORMANCE

'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.' – Nyberg on the regulatory authorities