Central Bank code of practice for director loans

THE Central Bank has introduced a new code of practice for directors’ loans aimed at stamping out the kinds of policies that came to light at Anglo Irish Bank, at the time of its nationalisation early last year.

Back then, it was discovered that the controversial bank had nearly €180 million in outstanding loans to its own directors; with its former chairman and chief executive Sean FitzPatrick having amassed loans of over €120m across an eight-year period. Anglo’s former chief executive, David Drumm, currently owes the bank around €8m.

The new code will effectively make such practices far more transparent and, significantly, governs that any loan to a company director which exceeds €1m, in value, cannot be passed without being approved by the Central Bank.

Applying to all financial/lending institutions regulated here – and to all lending, both domestically and overseas – the code is basically targeted at preventing directors from borrowing large amounts from their institutions and benefiting from more favourable terms than are available to ordinary customers.

The Central Bank said: “The Code has been introduced to seek to prevent abuses arising from exposures to related parties and to address possible conflicts of interest in this area. It requires that such lending is on an arm’s length basis, is limited to a percentage of the institution’s own funds, and is subject to appropriate and effective management oversight and limits.

“Loans to related parties shall not be granted on more favourable terms than comparable loans to non-related parties,” it added.

Meanwhile, addressing yesterday’s Irish Banking Federation (IBF) annual conference, the Central Bank’s assistant director general, Jonathan McMahon, reiterated the Regulator will publish its report into remuneration practices at the main banks next month.

“It would be too simplistic to say that banks in Ireland, and elsewhere, fell over because bankers were paid the wrong amounts, at the wrong times, for doing the wrong things; but it wouldn’t be far off the mark, either. No board ought to be making decisions on remuneration unless they’ve concluded what risks they wish to take; and no banker ought to be rewarded today for taking risks which lead to losses in the future,” he said.