Government macroeconomic and budgetary policies, poor regulation and lax bank lending standards contributed to an overheating of the economy and the banking crisis, according to two reports into the Irish banking crisis.
One of the reports, written by Central Bank governor Patrick Honohan, made severe criticisms of govenment policies, during the years leading up to the banks guarantee in September 2008, which he said contributed significantly to the economy overheating.
Mr Honohan was commissioned by the Government to explain the roots of the crisis, which has led to the recapitalisation of most major Irish financial institutions at a cost of billions of euro and the nationalisation of Anglo Irish Bank.
His report found domestic macroeconomic imbalances had built up in the Irish economy, with government policy contributing to "economic overheating". This led government to narrow the income tax base and lower taxes, making the public finances highly vulnerable.
"The Government's procyclical fiscal policy stance, budgetary measures aimed at boosting the construction sector and a relaxed approach to the growing reliance on construction related and other insecure sources of tax revenue were significant factors contributing to the unsustainable structure of spending in the Irish economy," he said.
Commenting on the role of bank management, Mr Honohan said there was evidence of a "comprehensive failure of bank management and direction to maintain safe and sound banking practices”.
He said banks incurred "huge external liabilities in order to support a credit-fuelled property market and construction frenzy".
The second report, by two former International Monetary Fund officials Klaus Regling and Max Watson, also found domestic policy mistakes contributed to the crisis, saying in their report many aspects of the crisis were “homegrown”.
Mr Regling and Mr Watson were given the task of examining the Irish financial crisis in an international context.
Responding to the findings of the report at a press conference in Government Buildings this afternoon, Taoiseach Brian Cowen said mistakes had been made by successive governments but added he had, during his period as minister of finance between 2004 and 2008, taken steps to try and cool the property market.
However, he fully accepted in hindsight these actions were insufficient.
The Taoiseach said the Government had made mistakes but since 2008 had taken action to rectify the problems. He said Ireland’s fiscal reforms had become a model followed internationally. "Hard lessons have been learnt, and difficult decisions have had to be taken," he said.
Minster for Finance Brian Lenihan said both reports and the terms of reference for a banking inquiry would be put before the Oireachtas Finance Committee before the end of June.
A commission of inquiry into the banking crisis will then be established and would have a six-month timeframe to produce findings, Mr Lenihan said. The reports by Mr Honohan, Mr Regling and Mr Watson will be used as a basis for this inquiry.
While Mr Honohan is critical of the government’s budgetary policies, he said it is "hard to argue" against an extensive guarantee given the "hysterical" state of investors at the point.
The move "placed some direct competitive funding pressure on banks in the UK, where the liquidity position of some leading banks was much more critical than was known to the Irish authorities at the time," Mr Honohan said.
Fine Gael finance spokesman Richard Bruton said the reports outlined a series of systemic failures in regulation and Government policy.
Welcoming the two reports, the Irish Bank Officials’ Association said they will be "of little more than academic value unless the Government follows up wholeheartedly with the necessary reforms".
Labour Party deputy leader Joan Burton said the Regling-Watson report highlighted the role played by Government tax incentives in creating and sustaining the reckless scale of bank lending for property.
"The Taoiseach has belatedly acknowledged his mistake in allowing these tax measures to remain in place for an extended period when it was clear that they served no economic or social purpose," she said.