Post date: Feb 06, 2016 4:21:27 PM
After almost two years’ work, 49 days of public testimony and 131 witnesses, the Irish Banking Inquiry reported on January 27, 2016. It was set up by the Oireachtas (the two houses of the Irish Parliament) as an eleven person inter-party committee to establish the reasons for the recent banking and economic catastrophe in the country. The background and development of the property, banking, fiscal and financial crises that emerged in 2008 were recorded in a number of reports and all these were well synthesised by Donal Donovan and Antoin Murphy in their book The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis (2013, Oxford University Press). None of the previous reports were based on evidence collected in public. While the Oireachtas Banking Inquiry had to operate under a tight time constraints because it had to be concluded before the general election was called on February 3, 2016, and various legal restrictions, including some court cases in progress, it was conducted in public, which was a necessary catharsis to see most of the main people involved explain their policies and decisions. This inquiry concluded that the crisis arose from the cumulative effect of a wide range of causes, some international, but most domestic. It was critical of huge failings in the banks, the regulatory system, the Government and the European Central Bank.
From 2002 to 2007, there was rapid growth in the Irish economy, generated by a booming construction sector and big consumer spending, fuelled by cheap credit from the international money markets as a result of membership of the euro-zone, reckless bank lending and ‘principles-based light touch regulation’, with no regard for ethical considerations. During this period, the Irish banks increased their loan books by a staggering €250 billion. In 2008, economic growth came to an abrupt halt following the collapse of Lehman Brothers in September 2008, which led to a global banking and credit crisis as interbank lending dried up, as well as the crumbling of the Irish housing and personal credit bubbles. This resulted in a swift and deep recession in the country, with growth declining by three per cent in 2008 and seven per cent in 2009, and unemployment tripling to almost 14 per cent by the end of 2010, resulting in a huge reduction in State revenue, increased taxation, increased payments in welfare and a large fiscal deficit. The Government had to guarantee deposits and most of the debts in six Irish financial institutions on September 30, 2008, and later provide capital to keep the banks in existence. The Inquiry found that the possibility of a guarantee was under consideration from January 2008 and that the Government was advised at the time it was given that the bank were solvent, and had only liquidity problems. The National Asset Management Agency (NAMA) was established to take over most of the toxic debts of big developers in Irish banks in an initiative designed to facilitate their recapitalisation and enable them to resume responsible lending. The country had to receive a bailout from the European Commission, the European Central Bank, and the International Monetary Fund in November 2010. All this resulted in an enormous burden on State finances, leading to cutbacks, pay reductions and new taxation in what are generally called austerity measures.
The banking Inquiry was very critical of the policies of senior management in the Irish banks. Senior bankers broke every rule in prudent banking, lending too much finance to a small number of developers, too much to one industry, a general disregard for recommended deposit-lending ratios and general irresponsibility. There was a culture of excessive remuneration with bonuses in operation for senior staff.
The report was highly critical of the Irish Central Bank and the Financial Regulator. They had the powers to intervene in a more intrusive manner to get the banks to operate within the agreed norms. However, the banks were allowed to breach sectoral limits on property lending with impunity, with each chasing market share regardless of the consequences. Banks and almost all State bodies had accepted the soft landing theory as the most likely outcome, even though there was no evidence for it. With a few exceptions, group think prevailed everywhere.
Excessive expenditure by the Fianna Fail/Green Government exacerbated the economic position, financed by unsustainable property-based taxation revenue and big consumer spending. They were slow to phase out tax incentives for construction during that time and eroded the tax base in the lead up to the crisis at a time when significant long term spending commitments were made. The main opposition parties also supported pro cyclical policies, advocating higher spending and lower taxes.
The report was critical of the European Central Bank, which threatened to pull emergency liquidity to the country if the country did not enter a bailout in November 2010, or imposed losses on senior bond holders in March 2011. Their policy came at a big cost for Irish taxpayers.
The general Irish government debt to GDP ratio, which stood at only 25 per cent increased in 2007, increased to 105/100 in 2011, peaking at 128/100 in 2015 despite all the cutbacks and the various austerity measures undertaken. About €64 billion of this increase arose from support to the banks (some of which has been recouped with further repayments promised) and over €100 billion from successive budget deficits.
There was a lot of anger in the country at the manner the crisis developed and how the State and Europe institutions reacted to it. It that context, a public inquiry served a useful function and was generally welcomed. While the Banking Inquiry came up with little new material, it was an important to hear explanations from many of those in senior positions in banking, state and construction enterprises prior to and during the crisis. The inquiry had to operate within tight legal constraints where they could not apportion individual guilt and some key officials did not participate because of impending legal cases. Despite this and other reports, the traumatic Irish banking and economic collapse, which affected everyone in the country directly or indirectly with big economic and social costs, will reverberate for years with a lot of pain in society.
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