Northern Ireland

Reports slam Irish bank failures

Anglo Irish Bank
Image caption The Anglo Irish bank was among those hit by the financial crisis

Two reports into the bank crisis in the Irish Republic have been critical of government economic policy, the financial regulation system and the lending policies of banks.

Central Bank Governor Patrick Honohan's report said the system of regulation was characterised by "excessive deference" to the banks.

The Regling Watson report said the government's fiscal policy increased the dangers to the economy of a crash in the property and banking sectors.

It said this led to a recession that was "deeper and longer than necessary".

Mr Honohan said inspections discovered numerous problems with the banks, but the regulator did not follow up with rigorous actions that could have headed off the banking crisis.

He added that the collapse of Lehman Brothers did not cause the Irish banking crisis.

The governor said bad lending choices and falling property values meant that at least two banks - Anglo Irish and the Irish Nationwide Building Society - were going to go bust anyway.

He said the decision to guarantee the banks' liabilities in September 2008 was justified, but should probably not have included subordinate bonds.

The report by international banking experts Klaus Regling and Max Watson said that by the middle of the decade, the financial and property boom in Ireland presented features in which financial stability analysis should have sounded alarm bells loudly.

It said domestic financial stability reporting by the Central Bank had failed in this regard.

It said it had noted worrying features but it had failed to trace their interactions vividly or to warn how severe the emerging risks were to bank soundness and, ultimately, to the living standards of the ordinary citizen.

Warnings

The report's authors said external surveillance sources had fared little better however, with the International Monetary Fund's (IMF) major financial system stability assessment of 2006 not sounding the alarm.

It said there was no evidence private warnings had done so either.

The Irish Prime Minister Brian Cowen told a press conference on Wednesday that the reports "vindicated" the approach taken by the Irish government to deal with the financial crisis and confirmed the need for a bank guarantee scheme.

He highlighted a finding by Governor Honohan that the collapse of the Anglo Irish Bank would have cost far more than the guarantee.

Mr Cowen said the reports also showed that the advice given by bodies such as the Central Bank and IMF before the crisis was that the banks had enough capital and that a "soft landing" in the property market was expected.

He said he agreed that a more restrictive budgetary policy would have helped.

The Irish finance minister, Brian Lenihan, emphasised that the reports were "preliminary, scoping reports", which would point the way to a more detailed examination by a Commission of Investigation.

He said the commission would have a six-month time limit to bring its work to the government.

The two reports were not being debated in the Irish parliament on Wednesday.

The Irish government has ordered business for Wednesday and Thursday to allow for statements and discussion of legislation, but no questions to the Irish cabinet.

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