Ireland still a ‘sitting duck’ unless bank rules change

Ireland will remain a “sitting duck” for another economic crash unless it instigates new rules to personally fine and jail bankers who break regulatory law.

The damning prediction was made by US banking and fraud expert Professor Bill Black during the latest hearing of the Oireachtas bank inquiry.

Speaking during a three-hour meeting with the cross-party group, the author of The Best Way to Rob A Bank Is To Own One repeatedly lashed out at Ireland’s decision to guarantee subordinate debt, blatant holes in our banking regulation defences, and a bonus culture that ensures bankers will deliberately push mountains of poor-quality loans on unsuspecting customers to feather their own nests.

The associate professor of economics and law at the University of Missouri-Kansas City, who played a key role in prosecutions after the US Savings and Loans scandal two decades ago, described Ireland’s September 30, 2008 blanket guarantee as the “most destructive own goal in history” and accused the then regulators of being “incapable” and “preposterous”.

Insisting that, to date, the only message top bankers have received is that repeating the situation again is a “sure thing” that will make them rich while ensuring the country is “sunk”, he said the only way Ireland can protect itself is if we stop just attacking firms and start fining and jailing people who are personally responsible.

“You only get deterrents when you go after senior executives who made the decisions,” Prof Black said.

In his view, the bonus culture across the global banking sector must be changed as it is contributing to the development of “liar loans” that are sold at high prices despite being of poor quality because they are linked to bonuses for top officials.

Prof Black said the only way to cure the system is to stop paying bonuses after one or two years, and instead keep them until stable and sensible growth is shown to be taking place for a decade or more.

Prof Black said auditors should be able to pick up on issues like this and the massive growth at Anglo Irish and Nationwide during the boom years which, he said, was a clear sign of a growing crisis. They failed to do so because in the current system, banks effectively pick the “right” auditor at “dog show” line-ups which will give them a clean bill of health.

On the blanket bank guarantee, Prof Black called it “the most destructive own goal in history” and an “insane” move because it “sunk an entire nation”.

He said nobody in history has ever guaranteed subordinate loans — the official term for junior bondholders — as they are subordinate for the very reason those holding them have better interest rates in the knowledge “they will die” if the bank fails.

Stressing the Irish public is “so low on the list” in terms of responsibility that they “don’t much matter”, Prof Black said officials aiming to prevent a repeat of the crisis must watch out for the “recipe” of a banking scandal, which involves firms “growing like crazy”, making “terrible” loans, employing “extreme leverage”, and setting aside “no loss reserves”.