Rival banks rushed to copy Anglo practices

LARGE losses were realised at Irish banks when the crisis hit because they were trying to match the profitability of Anglo Irish Bank.

The Nyberg report said Anglo and to a much lesser extent Irish Nationwide Building Society (INBS) were both seen as highly profitable institutions to which other banks should aspire.

It said that as other banks tried to match the profitability of Anglo in particular, their behaviour gradually, and even at times unintentionally, became similar.

“Accordingly, when the crisis broke, large losses were realised not only in Anglo and INBS but in other banks as well,” according to the report.

It said that contrary to public perception at the time, lending at Anglo and INBS had proceeded with “insufficient checks and balances”.

“Relationship lending, high-growth strategies and rapid credit decisions meant that their balance sheets increased as the projects of preferred customers grew,” the report said.

It said traditional risk evaluation procedures and risk mitigants were not implemented in practice and the banks were “very dependent” on wholesale funding due to their rapid asset growth and a lack of sufficient growth in customer deposits.

“As wholesale funding tends to be much more volatile than customer deposits, they were particularly vulnerable to any doubts regarding their own solvency or that of their borrowers,” the report said.

It said governance at the banks also fell short of best practice. It said that while procedures and processes in Anglo existed on paper, in certain cases they were not properly implemented or followed in practice.

“It appears that, at least in the latter years, only a handful of management was aware of all activities of the bank.

“At INBS, a number of essential, independent functions either did not effectively exist or were seriously under-resourced,” it said.

The report said that the Financial Regulator was clearly aware of many of the problems in the two banks. It raised significant concerns regarding governance at INBS and also submitted a comprehensive list of procedural and portfolio problems to Anglo, the report said. It also said it raised minimum capital ratios for both banks.

“However, such remedies did not prove effective to ensure sufficiently greater prudence and accountability in either of the banks.

“The system-wide increase in capital charges on certain property loans in 2006, while appropriate in principle, proved too modest in a situation where property lending appeared hugely profitable,” the report read.

“As a result, to outsiders, the two banks may have appeared to operate in ways broadly acceptable to the FR [Financial Regulator]. This may have increased their importance as role models for other Irish banks.

“It must also have given comfort to leadership in the two banks themselves and encouraged them to continue with these practices.”