Patrick Honohan clarifies bank inquiry queries

The Government should have nationalised Anglo Irish Bank and Irish Nationwide in September 2008, replaced the management teams, and put in place a much more limited guarantee for the two banks, Central Bank governor Patrick Honohan has told the Oireachtas banking inquiry.

Moreover, in a letter to Ciaran Lynch, chairman of the inquiry, Mr Honohan said emergency liquidity assistance should have been provided to both banks, enabling the Irish authorities to consult with European authorities about the possibility of risk sharing among other issues.

Mr Honohan appeared before the inquiry on January 15 and his letter addresses a number of outstanding queries from his testimony. He said that, during his appearance, he outlined a number of different instances of what could and should have been done with Anglo and Irish Nationwide by the Irish authorities in September 2008.

Scenario one was with the benefit of hindsight. Under this scenario, the Government would have known that the collapse of the two banks would eventually cost taxpayers €35bn.

It should therefore not have included these banks in the guarantee and instead advised the ECB and European Commission that it was going to liquidate both banks. This might have prompted the European authorities to agree to risk-sharing so the Government would not have to bail in bank investors.

If the ECB and Commission had not provided such an offer, then the government should have liquidated both banks notwithstanding the reputational damage it would have caused and the effect it would have on confidence in the Irish financial system.

What actually panned out was that the management teams of both banks were left in place, there was no consultation with EU authorities, there was no risk-sharing and there was a blanket guarantee of all liabilities.

Mr Honohan also clarified in the letter a question that was asked on January 15 about whether the Central Bank governor had micro-prudential powers, including credit concentration limits during the time prior to the guarantee.

There were a number of provisions in the Central Bank Act that would have enabled the then governor to impose a wide range of limits on banks, including minimum capital and liquidity requirements. However, it was not the normal operation of the governor or the board of the Central Bank board to second guess the chief executive of the Regulatory Authority about specific policies, he said.

Mr Honohan also clarified a question about a note by the former secretary general of the Department of Finance, David Doyle, to former assistant secretary general, Kevin Cardiff, in September 2008, saying Anglo would need €8.5bn. Mr Honohan did not ask Mr Doyle directly about this note.