A banking inquiry that failed to examine the banks

Eugene McErlean is an expert on banking and corporate governance and he wonders why the improvements seen in aircraft safety which have resulted from disasters over the last 50 years seem like a distant aspiration when it comes to banking. 

A banking inquiry that failed to examine the banks

We are all familiar with the critical nature of safety when it comes to airlines. When an aircraft crashes, the news headlines generally cover the detailed search for the indestructible black boxes.

Despite the recent crashes at Malaysian Airlines and Germanwings, air travel has never been safer with aircraft accident rates at historic lows.

According to a report produced by Boeing, the rate of aircraft accidents per million departures has fallen from a figure of around 40 in the early 1960s to under one today.

Industry insiders will emphasise that one of the main reasons behind this remarkable improvement in safety is the culture of striving to learn from mistakes and making sure that if a failure is found it is rectified.

We have come to expect that the investigation into any aircraft accident will be meticulous, objective and transparent.

All the data will be analysed and a reason for the accident will be determined to make sure that safety procedures can be changed to ensure that the same accident never happens again.

Despite the obvious benefits in adopting this approach as demonstrated by the Boeing report, learning from meticulous and objective investigations into failures doesn’t appear to have been applied to the same extent by other industries.

Take banking, for example.

Ahead of the widely anticipated Oireachtas report into the banking crash there seems little in the way of evidence adduced at the inquiry that would enable the Oireachtas to produce a technical and forensic report akin to an air accident report.

Instead, the predominant priority of the committee appeared to be on the necessity to avoid the possibility of a legal challenge.

We have the benefit of learning from the many boom-and-bust lending cycles where credit experts have identified bad lending practices and developed risk management policies to ensure that the risks of a bank going bust from bad lending has been minimised.

Previously, a sophisticated system of checks and balances operated in Irish banks that produced a conservative lending culture with a good track record of loan losses.

I think you could safely say that up until the boom, the 50 jumbo loans that did all the damage to the Irish banking system would have made it through the risk management system operated by the credit experts in Irish banks.

Loans of a much better quality would have been routinely turned down.

Functions such as credit review and credit risk management would have stepped in to make sure the balance sheet of the bank was protected from loan losses.

Internal and external audits would have made sure the credit control system was working as it was intended.

The most important task for a thorough investigation into the banking crash should be to examine in meticulous detail the black box of each bank to discover the mechanics of how each of the 50 loans went through the credit approval system.

Any investigation should have at its heart a direct comparison between the policies previously applied by Irish banks when such loans would have been blocked, and the policies applied more recently when these loans were approved.

The board of every bank has a core obligation to maintain a safe system of internal control.

In normal circumstances when there has been a breakdown in credit control the directors commission a detailed technical investigation usually led by an external banking expert with the brief to catalogue facts and analyse the breakdown in internal control.

Normally if the board isn’t receptive to such an investigation, the regulator will insist upon it.

This technical report would then form the basis of the inquiries by the Oireachtas.

Unfortunately, no such technical report appears to have been commissioned.

Worse, from the evidence presented at the banking inquiry, there seems little expectation that such a rigorous technical analysis has taken place subsequently.

There should be nothing contentious about such a fact-based investigation.

There should be no need for the inquiry to be hamstrung by the fear of litigation.

That has been the general experience of air accident investigations even in the notoriously litigious US.

With recent reports that the inquiry’s findings are being watered down in the face of legal threats there can be little expectation we will learn meaningful lessons for the future to ensure that the same or similar mistakes do not happen again.

The step change improvement in aircraft safety experienced over the last 50 years seems like a distant aspiration when it comes to banking.

  • Eugene McErlean is an expert on banking and corporate governance

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