On the face of it, Frank Browne’s statement to the Oireachtas banking inquiry is deeply disturbing. It points to a blinkered attitude to financial risk at the apex of the Central Bank as the property boom spiralled and unsustainable pressures built up in the commercial banks.
Retired governor John Hurley and others who held senior posts in Dame Street strongly dispute the thrust of the submissions from Browne, who was head of financial stability at the bank from 2003-2010. But the sorry fact remains that the concerns he cites proved correct. Disaster followed.
Browne highlights instances in which deepening anxieties were diluted, waved away and, ultimately, removed from the bank’s stability reports. As early as 2004, he says, warnings from the monetary policy and financial stability department in the Central Bank were “subordinated” to more rosy pronouncements from the commercial banks themselves. “This is despite the fact one cannot expect anything other than a self-serving and overly optimistic assessment coming from the banks themselves about their own state of prudential health,” he says.
Frailties
One example, of a “traffic light” warning system in the bank, typifies the frailties Browne sets out in the course of 90 pages of closely argued text. “Recall that in 2004, this system had a red light for the housing market, in 2005 it was downgraded to amber, while in 2006 the traffic light warning system seems to have been suspended completely. I think its discontinuation may have the effect of clouding the issues in relation to the risks in the housing market. This occurred at a time when the risks in the market were actually increasing.”
Browne writes of the bank’s reluctance to countenance dissent from the “right” message; of concerns “censored”; of the “selective” use and adjustment of data; of “bias” against warnings; and of management’s failure to acknowledge the weight of research to support the view house prices were woefully misaligned. “Senior management adhered so strongly to the soft landing belief that it felt that it did not need any evidence for it – it certainly never asked for evidence.”
Biro strike
He writes of a “biro strike” through findings that property prices were overvalued by 39 per cent, in a draft of the 2007 stability report. Browne says the executive summary for that report was at odds with such findings, saying the trends in price developments did not imply a sharp correction. He says an amendment was made at 8.48am on the day of a key board meeting to delete from the draft report the reference to a 39 per cent overvaluation.
His frustrations are clear. “The risks and vulnerabilities from emerging imbalances in the financial system were identified clearly by those conducting research and analysis, and were presented to senior management at the financial stability committee. However, they were toned down or even ignored completely by the senior management of the [Central Bank and Financial Services Authority of Ireland].”
Hurley said he stood by his statement he was unaware of contrarian views in the bank which differed significantly from its public reports. He said Browne did not speak up at meetings in which the reports were finalised to express any disagreement.
In follow-up questions from the committee, Browne was asked whether he took steps in 2006 and 2007 to complain about changes made to the stability reports. His reply, in which he noted the finalisation of the reports was the sole preserve of senior management, was telling.
"Since all members of senior management seemed to be ad idem on financial stability issues, any complaints would effectively constitute a complaint to senior management about senior management."
