PROFILE: PATRICK NEARYThe financial regulator has not kept up with seismic changes in the economy, and is being blamed for losing his grip on the banks' reins
PATRICK NEARY IS the man in the eye of the financial storm. In charge of policing Irish banks, he has come under heavy fire for not stress-testing the sector hard enough and downplaying the risk of rising bad debts on substantial property loans.
On Tuesday, he endured his own personal stress test at a hearing of the Oireachtas economics committee when TDs and senators rounded on him for his supervision of the banks. One committee member, business journalist and senator Shane Ross, called for Neary's resignation, saying investors and depositors had lost confidence in him.
Neary joined the Central Bank in 1971 after spending a year studying Latin and Greek at UCD and has plenty of crisis management experience under his belt in his long career. He started at the very bottom and rose to the position of head of securities and exchanges supervision before he left in 2003 to join the newly established office of the finanical regulator as prudential director.
Two scandals at AIB - overcharging and tax evasion involving former senior executives - fell during his watch as the prudential director, the post he held before taking over as financial regulator in February 2006.
Neary also knows all about excessive lending to the property sector, having worked on two of only three Irish bank collapses, both due in no small part to over-exuberant property investment. They were the 1976 collapse of Irish Trust Bank, the Dublin bank set up by London businessman Ken Bates (later owner of Chelsea and Leeds United football clubs), and Merchant Banking, owned by the late developer Patrick Gallagher, which went bust in 1982.
He also worked on the salvage job that was First New Hampshire Bank, the US bank purchased by Bank of Ireland in 1988, which suffered a heavy exposure to a declining property market. It cost the Irish bank hundreds of millions.
Born in Kilkenny, he is married with three adult sons, and lives in Ballinteer, Co Dublin. Friends say golf is his passion and he is a member of South County Golf Club in Brittas, where he regularly plays (off a handicap of 13) with his close friend Adrian Byrne, the former head of banking supervision at the Central Bank. Byrne, now retired, led an investigation in 1976 into suspicious practices at Guinness & Mahon, which later became Ansbacher, but the Central Bank failed to act on Byrne's warnings and depositors continued evading tax through Des Traynor's secret bank for 20 more years.
Neary was educated at St Kieran's in Kilkenny, about 11 miles from his home in Ballyragget near Castlecomer. After a year at UCD he took a job in the Central Bank in 1971 after seeing a newspaper advert. One former Central Bank colleague remembers Neary as "level-headed and well capable of taking pressure".
"He would have a huge amount of experience and would have seen a lot of change, but the game is changing fast now and you have to have a cool head." Bankers say Neary is not afraid to roll up his sleeves when he needs to.
"Nice guy, unenviable job," is how one senior banker described Neary, saying the brief of his office was "all over the place".
On one hand, it has to represent the interests of the consumer, and on the other, it is heavily under-resourced to cope with the massive expansion of the multi-billion euro funds industry in the IFSC, he said.
The regulator supervises 13,000 "entities" with a staff of 355 and an annual budget of €55 million, though 20 more bank supervisors are being hired to handle the massive workload set out under the State bank-guarantee scheme. Regulation so far has been based on a light touch or, to cite jargon used by Neary in speeches, "principles-based regulation". Codes of practice, rather than severe fines or reprimands, are held up as guides for bankers.
Neary admitted this week that only one bank has ever been fined by the regulator since the authority was established in 2003. That happened last week when Irish Nationwide was ordered to pay €50,000 after the son of the building society's chief executive sent an e-mail touting for deposits using the lure of the State bank guarantee, contrary to a command from Government when the scheme was announced.
A SENIOR BANKING source said the regulator had been set up to improve banking supervision, following the fallout from the Ansbacher tax-evasion scandal, but that it has been kept on a tight leash by the Central Bank and the Department of Finance.
"He has not covered himself in glory," said the source, "but I really feel he is a fall guy in all of this. The Government is going to have to look at regulation more closely."
Neary has become the whipping boy for a litany of far deeper concerns: the failure to curb 10 years of insatiable demand for housing; property and builder-friendly Government policies; generous tax incentives; an over-reliance on the construction sector for economic growth; low borrowing rates; frenzied property lending; and rising prices.
Shortly after Neary became the regulator's chief executive in 2006, Con Horan, who replaced him as prudential director, knocked on his door and warned that something had to be done to restrain property speculators as house prices reached new highs on spiralling land values and the market was awash with 100 per cent mortgage offers.
Neary later set new rules forcing banks to increase the amount of capital they set aside for risky property lending to curtail speculative land purchases and high loan-to-value mortgages. More stringent stress-tests were created for borrowers, but intense competition between banks kept the market saturated with cheap money.
The country's debt exposure to property spiralled. About 60 per cent of €400 billion in total private debt owing in the State relates to residential mortgages and loans to builders, developers and property investors.
Just two days after the previously unthinkable collapse of US investment bank Lehman Brothers, Neary told the Institute of Directors on September 17th: "Irish banks are resilient and have good shock absorption capacity to cope with the current situation."
Less than two weeks later, Minister for Finance Brian Lenihan had to step in with the guarantee to safeguard the Irish banking system amid plummeting Irish bank shares and state bailouts of banks across Europe. The guarantee, which has been increased to cover liabilities totalling €485 billion at 11 banks, left Neary facing difficult questions.
NEARY CAME ACROSS as overly defensive during a seven-minute interview on RTÉ's Prime Time two days later. He didn't regret his earlier comments, he said, and repeated that the banks were "resilient". Pressed on the over-exposure of Irish banks to the property market, Neary stated categorically that bad lending by Irish banks had nothing to do with the current international crisis which was all about liquidity. He said the banks had plenty of capital to absorb any losses on property loans, but he refused to speculate on the scale of those losses.
Fine Gael finance spokesman Richard Bruton later said he was astonished at his comments. Neary's performance and perceived head-in-sand position drew sharp criticism.
On Tuesday Neary bowed to pressure at the Oireachtas committee hearing and provided for the first time overall figures for the banks' speculative loans to construction and property development. He said that this lending accounted for €39 billion and that €15 billion of this was secured on the properties which Neary identified as being "vulnerable", though he said the banks had a buffer of €42 billion in reserve to protect them against an estimated €2.1 billion to be written off on "impaired" loans of €3.6 billion.
Neary has since instructed Price Waterhouse Coopers to carry out a full review of the loan books of six Irish-owned instituions to assess the true extent of the bad debts on property loans.
International moves have created further difficulties for Neary. The UK, France and Germany have gone a step further than a bank guarantee by injecting taxpayer money into banks - in return for stakes - to provide even stronger protection.
Investors gauge all banks on an international scale and Irish banks would need about €10 billion to bring them up to parity with the state-supported UK banks on capital ratios, a key measure of financial strength. Neary admitted this on Tuesday when he said the rules of the game were changing.
ONCE AGAIN, the regulator is struggling to keep up. Being one step behind has been a feature of Neary's stewardship over the 14-month-old credit crisis. In March the regulator launched an investigation into unusual share trading in Anglo Irish Bank only after the UK regulator first launched an inquiry into unusual share trading in UK bank HBOS. This is despite the fact that both banks suffered heavy falls on the same day.
The regulator has not yet issued a report on its investigation, seven months on.
One banking source was unimpressed by Neary's handling of the current crisis and events leading up to the bank guarantees. "This was a case of typical civil service inertia and the banks had to turn to the government to impress the stress that was on the banking system."
Neary was paid €260,857 last year but, like his colleague down the corridor in the Central Bank, governor John Hurley, is taking a 10 per cent pay cut in line with other Government ministers and senior public servants.
Neary's pay cut comes at a time when his job becomes even more intense as he grapples with greater State control in the banks under the bank guarantee scheme and the fallout from the bursting property and credit bubble.
CV: PATRICK NEARY
Who is he?He is chief executive of the Financial Regulator, the banking watchdog.
Why is he in the news?He has come under intense pressure over his handling of the banking crisis.
Most appealing characteristic: His friends say he is cool under fire, which will help as the bullets are flying.
Most annoying characteristic: His critics, and there appear to be many at the current time, say he has exuded a "business as usual" attitude in the midst of the worst financial crisis in Irish history.
Most likely to say:"Irish banks are resilient and have good shock absorption capacity to cope with the current situation."
Least likely to say: "I don't know what a tracker mortgage is."