BANKING:THE MAJOR responsibility for the banking crisis lies with the directors and senior management of the financial institutions, the report of the Central Bank governor Patrick Honohan concludes.
“They are the first line of defence to protect those who have entrusted them with their funds,” Dr Honohan says in his report.
Heavy borrowing by the Irish banks in the international financial markets to fuel the growing property boom greatly increased their vulnerability and “ultimately triggered their downfall”, he said.
Dr Honohan dismissed the “interruption in the flow of cheap money from abroad” caused by the failure of US bank Lehman Brothers as a cause of the crisis.
At that point Anglo Irish Bank and Irish Nationwide Building Society were “well on the road towards insolvency”, he said.
Heavy losses on development loans sold at the peak of the market were “becoming inevitable” as residential property prices were falling for more than 18 months and were still declining.
Allied Irish Banks and Bank of Ireland, might have been able to manage emerging loan losses without a State bailout, had international markets remained calm, by raising additional capital and with a few more years of profits from other lines of business.
Dr Honohan found that as a result of the two biggest banks’ anxiety to protect market share against increased competition from Anglo Irish Bank and the UK-based retail banks, their management tolerated “a gradual lowering of lending standards”.
This included “decisions to authorise numerous exceptions to stated policies”, he said. The implementation of policies to ensure adequate documentation and the quality of security, turned out to have been “defective”, he said.
“The result was a much greater accumulation of risk than the bankers had envisaged or indeed that they seemed to recognise.”
Dr Honohan said the last four years of the boom, from late 2003 onwards, were driven by the banks as new and existing lenders in the Irish market competed aggressively offering innovative products such as 100 per cent mortgages.
There was “a distinct decline in loan appraisal quality for residential mortgages”, he said. Lending to developers soared, much of which has turned out to be “unrecoverable”, he said.
Property loans as a share of overall bank assets grew to more than 60 per cent by 2006 from less than 40 per cent before 2002.
Competitive pressure in banking was driven by one bank, Anglo Irish Bank whose share of the banking sector soared to 18 per cent from 3 per cent in a decade as the bank’s loans grew at an average annual rate of 36 per cent.
Dr Honohan found that the regulator’s inspection teams at Anglo discovered governance issues, including non-compliance with internally approved policies. They also commented on the bank’s reliance on borrowers’ personal guarantees on loans, the high percentage of interest-only loans and aspects of loan approval process.
“The severity of those problems was not deemed to be such as to warrant high priority,” he said, adding that it was not until an Anglo inspection in April 2008 that issues were raised to this level.
Foreign-controlled banks, including Bank of Scotland Ireland, part of UK group HBOS, also increased competition, he said.
Supervisors very frequently allowed exceptions to proper internal lending policies, he said.
At one bank in the mid-2000s it was found that 35 per cent of development loans “represented exceptions to policy”, he said. Two-thirds of these loans exceeded a 80 per cent loan-to-value ceiling, with some exceeding 100 per cent.
