Banking inquiry report: Another in a long list of missed opportunities

You may remember the agony of Ronan O’Gara’s last-minute penalty miss in the 2000 Heineken Cup final.

Or perhaps some of the many missed penalties taken by the cream of English strikers against Germany in the World Cup. Unfortunately, we can now add to the list of missed opportunities the Oireachtas banking inquiry report.

We are entitled to expect that such an extensive and time-consuming investigation would deliver a set of recommendations that copper-fastens public confidence in the banking system.

We should feel reassured that as a result of the committee’s findings we will never be left exposed to such a fundamental breakdown in banking controls ever again. I don’t think even the most ardent advocates of the banking inquiry could claim that it passes this test.

We should expect the Oireachtas to produce a technical and forensic report akin to an air accident report. Instead the predominant impression left by the report is that the committee was overly concerned with the necessity to avoid the possibility of a legal challenge.

Banking inquiry report: Another in a long list of missed opportunities

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.

Lenders would have had their finger on the pulse of their credits; risk managers would analyse and fret over tiny details in a credit proposal; auditors and credit reviewers would make sure that all of the policies and procedures were being adhered to in meticulous detail.

We know that in a very short space of time Irish banks lent €43bn to 57 customers in the property sector. In the lending culture I have described above, I think you could safely say that none of those jumbo loans that did all the damage to the Irish banking system would have made it through the risk management system practiced by the credit experts in Irish banks in the old days.

Functions such as credit review and credit risk management would have stepped in to make sure that the balance sheet of the bank was protected from the risk of over exposure to the property sector and to the risk of over exposure to such a small number of customers.

Both these risks were well known to Irish bankers. Internal and external audits would have made sure that the credit control system was working as it was intended.

Banking inquiry report: Another in a long list of missed opportunities

So 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 the loan approval and monitoring system changed so radically in such a short period of time.

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.

Overall it is difficult to see how the recommendations of the committee would have made a difference to the final outcome of the crisis. For example, the committee has recommended that a property register be introduced.

Senator Marc MacSharry and committee chairman Ciarán Lynch during the report launch. Picture: Gareth Chaney/Collins
Senator Marc MacSharry and committee chairman Ciarán Lynch during the report launch. Picture: Gareth Chaney/Collins

However, since the existing tried and tested controls for assessing security were routinely ignored and bypassed it is very probable that a property register would have been ignored and bypassed as well.

One of the more telling findings from the 2011 Nyberg report was that regulatory sector credit limits were exceeded by large margins and that insistence on observing these limits in itself would have reduced the Irish banks’ exposure to the property market by some €62bn.

This amount is similar to the €64bn cost of the bailout. The obvious inference is that had this one control been applied properly, then it is possible Ireland would have avoided the worst ravages of the banking collapse.

In light of Nyberg’s report the committee should have produced findings that explained how a credit control system that had operated successfully for many decades was left powerless and ineffective to do its basic job.

It should have produced recommendations to ensure that the policemen whose job it was to shout ‘stop’ are empowered to do their job.

I fear that in contradiction of Churchill’s quote we have let a good crisis go to waste.

Eugene McErlean is an expert on the banking industry and corporate governance

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