THE FINANCIAL Regulator has proposed stringent new rules curbing lending by banks and building societies to directors, senior managers, related parties and shareholders to prevent abuses and conflicts of interest.
Speaking at the Dáil Public Accounts Committee, the head of financial regulation Matthew Elderfield said such loans had “the potential to give rise to conflicts of interest and abuse”.
There needed to be “clear and enforceable rules” in the area of lending by banks and their directors to senior managers, shadow directors or connected individuals.
Without naming former Anglo Irish Bank chairman Seán FitzPatrick and his hidden loans of up to €122 million at the bank, Mr Elderfield referred to “one notorious case” concerning large sums which was “apparently designed to avoid detection”.
“Unfortunately, Ireland has witnessed some of this lending at irresponsible levels,” he said.
Mr Elderfield said he planned to ensure that such lending was “on an arm’s length basis, and subject to appropriate and effective management oversights and limits”.
“Loans to bank directors and senior management have been subject to abuse and excess, if not outright subterfuge,” he said.
The plans would create better checks and balances, tougher limits and clearer reporting to clean up these practices, he said.
Mr FitzPatrick resigned from Anglo in 2008 after admitting he had concealed his loans over eight years using loans from Irish Nationwide Building Society.
Anglo was owed €155 million by former directors at the end of last year, of which it does not expect to recover €108.9 million. Mr FitzPatrick had loans of €85 million at the end of last year, of which it expects €68 million will not be repaid.
The regulator proposes to reduce the scale of borrowing that a bank can make – both individually and in aggregate – to directors, senior managers and related parties, and to large shareholders.
Loan limits for directors or senior managers would be set at 0.5 per cent of “own funds”, essentially a bank’s cash reserves, and 5 per cent for all directors, senior managers and connected people.
Significant shareholders would be limited to loans of 5 per cent of “own funds” and 15 per cent in aggregate for all shareholders.
Such measures would have prevented businessman Seán Quinn and his family, the largest related shareholding group in Anglo, from borrowing €2.8 billion from the bank, amounting to 70 per cent of Anglo’s funds at the time.
The rules will forbid lenders from granting loans to directors, managers and shareholders on more favourable terms, and force them to secure board approval for any variation to loan terms.
Any favourable treatment on loans such as grace periods, rolling up interest or writing off loans must first be approved by bank boards under the new rules.
Bank management must report changes in loan limits, processes or policies to directors, managers, related parties and shareholders on at least a quarterly basis.
