THE GOVERNOR of the Central Bank, Dr Patrick Honohan, has sharply criticised the Financial Regulator, the Central Bank, the senior management of the banks and Government budgetary and fiscal policy for causing the banking crisis.
In a hard-hitting report – one of two published on the causes of the banking crisis – Dr Honohan said there were major failures in regulating the banks and in the maintenance of the State’s financial stability at a systemic level.
There had been a comprehensive failure of bank management and direction “to maintain safe and sound banking practices”.
Instead, the banks incurred huge external borrowing in the international money markets “to support a credit-fuelled property market and construction frenzy”.
The Government’s macroeconomic and budgetary policies “contributed significantly to the economic overheating”, relying to a “clearly unsustainable extent” on the construction sector and other “transient sources” for Government revenue, and encouraging the property boom with incentives geared at the construction sector.
“This helped create a climate of public opinion which was led to believe that the party could last forever,” said Dr Honohan.
The regulation of the banks was “excessively deferential and accommodating” and “insufficiently challenging and not persistent enough”.
The regulator was influenced by pressure from the banks, he said.
“It would have been known within the Financial Regulator that intrusive demands from line staff could be and were set aside after direct representations were made to senior regulators.”
They did not move “decisively and effectively enough against banks with governance issues” and corrective intervention for the system was “delayed and timid”.
There was “undue emphasis” on fears of upsetting the competitive position of the domestic banks and on encouraging the financial services industry “even at the expense of prudential considerations”.
There was an unwillingness to “take on board sufficiently the real risk of a looming problem and act with sufficient decision and force to head it off in time”.
He criticised the Central Bank’s Financial Stability Reports which predicted “a soft landing for the economy” as late as 2007. This was not based on any quantitative calculations or analysis.
“This appears to have been a ‘triumph of hope over reality’. More generally, a rather defensive approach was adopted to external critics or contrarians.”
Concerns raised by commentators should have “raised more warning flags” and prompted a rethink by the bank.
Regulators failed to comprehend the scale of the potential exposure of banks to a fall in the property market, and they appeared unwilling to recognise the real risk and take corrective action to tackle it in time, he said.
“‘Rocking the boat’ and swimming against the tide of public opinion would have required a particularly strong sense of the independent role of a Central Bank in being prepared to ‘spoil the party’ and withstand possible strong adverse public reaction,” Dr Honohan said in his report.
He blamed “an under-resourced approach to bank supervision” that relied on good governance and risk management procedures.
HONOHAN REPORT MAIN POINTS:
- Prima facie evidence of a comprehensive failure of bank management to maintain safe and sound banking practices.
- Weakness of Irish banks not caused by collapse of Lehmans.
- Macroeconomic and budgetary policies contributed significantly to the economic overheating.
- Bank guarantee needed to be put in place in September 2008.
- Government relied to "a clearly unsustainable extent" on the construction sector and other transient sources for tax revenue.
- Glowing IMF assessment in 2006 was misplaced.
- Banks lowered lending criteria and broke from stated policies in bid to protect market share.
- Major failure occurred in terms of bank regulation and maintenance of financial stability.
- Central Bank was unwilling to take on board sufficiently the real risk of a looming problem and act to head it off in time.
- Indications of deferential approach to banking industry by regulator.
