Regulatory system blamed

THE governor of the Central Bank, Patrick Honohan, has placed the burden of blame for the catastrophic collapse of the Irish banks on the regulatory system in his report into the crisis.

The Government, directors and senior management of the banks have also been strongly criticised in his findings.

“The key protection in any national system against the emergence of a banking crisis should be the central bank and the bank regulatory function,” he said.

The governor said the Central Bank and the regulatory system failed the banks in their approach to supervising the banks, showed them too much “deference”.

It was not prepared “to second guess” when they said their lending practices did not leave them over-exposed, if they were suddenly confronted with a downturn in the markets.

Part of the difficulty was that the banks were on the crest of a boom and Governor Honohan said the regulatory system became overawed at the pace of growth and the profits being earned by the banks as the property market boomed.

Instead of asking the hard questions, the authorities focused on those in charge of the banks and the way they were being governed, he said. Once they were satisfied on that issue, the regulators assumed the banks would survive intact and kept reassuring the public that the property market would end in a soft landing and not collapse in the shocking way it eventually did.

For that reason the approach to overall financial stability within the sector was totally inadequate.

And that was reflected ultimately in “the failure to undertake decisive and effective remedial action” to pull the banks back form the brink, he said.

Up to the time of the collapse “at no point” did the regulatory authorities “believe that any of the institutions were facing serious underlying difficulties, let alone facing potential insolvency problems – even at a late stage”, he said.

The authorities ignored the threats created by the huge exposure to the property sector and no attempts were made to get them to diversify out of property, he said.

In the second report into the banks, carried out by experts Klaus Reiling and Max Watson, they also identified the excessive commercial lending, in particular undertaken by the banks in Ireland.

That move left them totally exposed to any downward shift in market sentiment, they said.

The authors also referred to the huge bonuses paid to top management in the banks and the incentive schemes that percolated down to middle management and front line lenders.

In the case of Anglo Irish Bank it embraced “unacceptable corporate governance practices” which was a “triggering factor in the nationalisation” of the bank.