Central Bank governor Patrick Honohan goes before the Oireachtas banking inquiry next Thursday. The aim of the hearing, which will revisit abundant pre-crash failings in Dame Street, is to provide a grounding for the cross-examination of crisis protagonists. So what might the panel ask of the governor?
Honohan took charge of the Central Bank in September 2009, one year after the guarantee. At the request of then finance minister Brian Lenihan in 2010 he submitted a report on a multitude of regulatory and other lapses. We already know what he thinks of the debacle.
As a member of the European Central Bank governing council, he also seems likely to face questions about the “ Trichet letter” just before the EU-IMF bailout and the ECB’s refusal to compel senior bondholders to take losses on their investments in Irish banks.
Senior managers
Honohan found in 2010 that the major responsibility for the crisis lay with the directors and senior managers of those banks. Yet he went on to criticise the “excessively deferential and accommodating” approach of the Central Bank and Financial Regulator, saying they were “insufficiently challenging and not persistent enough”.
He further chastised their unwillingness to take on board sufficiently the growing risk of a looming problem and act with force to head it off.
“‘Rocking the boat’ and swimming against the tide of public opinion would have required a particularly strong sense of the independent role of a central bank in being prepared to ‘spoil the party’ and withstand possible strong adverse public opinion.” Alas not.
The matter of political opinion also arises. Honohan found no evidence to suggest senior figures in the Central Bank or Financial Regulator shied off aggressive intervention because of bankers’ political connections. Yet this merits scrutiny, as does the question as to whether the timidity exercised in Dame Street was rooted in concern to avoid antagonising anyone in Merrion Street.
Honohan reports that Central Bank board minutes and those of the regulator are sparse, saying they do not describe debate “and often significant differences of opinion” in relation to financial stability.
The question still arises as to whether the persistent failure to take corrective action flowed from any desire to avoid a political kickback from government, regardless of links with bankers and developers.
A public intervention by then taoiseach Bertie Ahern in 2006 comes to mind. In April that year the Financial Regulator warned banks to set more money aside for mortgage defaults. Days later, however, Ahern went to great lengths to make light of the relentless rise in property borrowing and told reporters there was no sign of a downturn. He also criticised analysts predicting a downturn, saying similar predictions the previous year were wrong.
The regulator’s action came far too late, but the response from the top of government was telling. This played out in public too, which begs questions as to the tenor and thrust of engagements behind the scenes over the years.
Did the Central Bank, Financial Regulator or any figure within them convey private messages – in writing or otherwise – about the rampant accumulation of risk in the banking system to the Department of Finance, the then taoiseach or anyone else in the cabinet?
Did anyone in the Department of Finance itself ever express concern – written or verbal – to the Central Bank about the banking situation and the evolution of policies which fanned the build-up of risk?
Responsibility
After all, it was within this nexus – and this nexus only – that the State had the power to restrain the banks. This is to say nothing of the responsibility to act.
Still, another 2010 report by consultants Klaus Regling and Max Watson points to serious flaws in the Central Bank’s analysis of financial stability. “This reporting noted worrying features, but it failed to trace their interactions vividly or to warn (in public or, it seems, in private) how severe were the emerging vulnerabilities in the banking system; the risks of a hard landing; and thus the danger, ultimately, to the living standards of the ordinary citizen.
“In the core macro-prudential analysis of the Central Bank, and it seems also in its private advice to government, the risks of a ‘hard landing’ for the commercial property market, the banking system, and the economy – even without a savage external liquidity shock – were seriously underestimated.”
Whatever Honohan says, his observations next week seem unlikely to shed flattering light on those fateful times.
