Statement by An Taoiseach, Mr Brian Cowen, T.D., on the Publication of the Banking Reports, Wednesday 9th June, 2010.
The report by the Governor of the Central Bank, Mr Patrick Honohan, and the reports by the two international experts, Mr Klaus Regling and Mr Max Watson contain in-depth and incisive examinations of the banking crisis. On behalf of the Government, I want to convey our gratitude to the authors of these reports for their insight and their robust analysis.
The reports add to our understanding of the root causes of the crisis. They confirm some of the previously known failures but also shatter a number of myths including many concerning the Government's response to the crisis and the role of other players.
The reports:
- confirm the need for an extensive Guarantee;
- confirm that Bank failure would have been disastrous for our economy;
- confirm that the timing in the nationalisation of Anglo did not result in higher costs;
- confirm that steps have been taken to correct main issues relating to regulation;
- confirm that the advice given by the Central Bank, the IMF, the OECD and others was that the Banks had adequate capital and that a soft landing was expected;
- recognise that capital requirements on speculative property loans was increased from 100% to 150% at the start of 2007 despite opposition from the banks;
- conclude that major responsibility lies with the directors and senior management of the banks.
Before touching on some of these issues, I think it is essential for Ireland's international reputation that the message goes out that strong action has already been taken to deal with the failures identified. This is made clear in the last paragraph of the conclusion of the Governor's report where it is pointed out that "Steps have been taken since the onset of the crisis to correct the main issues identified relating to the Central bank and the Financial Regulator." He also notes that new legislation has been prepared by the Government to strengthen and reform the overall approach to regulatory matters.
In this, as in the firm, balanced and timely way in which we have moved to address the fiscal challenge - in a way now being followed by many others across Europe - this Government has shown the capacity and determination to lead our country through this extremely difficult period.
I believe the reports strongly vindicate the approach taken by this Government in dealing with the banking crisis. The Governor's report, demolishes the contention that a widespread guarantee was not necessary and highlights the enormous damage which would have resulted if a bank was let fail.
In particular, Mr Honohan notes that:
"As regards the substance of the guarantee itself, it is hard to argue with the view that an extensive guarantee needed to be put in place, since all participants (rightly) felt that they faced the likely collapse of the Irish banking system within days in the absence of decisive immediate action."
The Honohan report finds that Anglo Irish Bank was systemically important as this Government has contended all along. Opposition parties have strongly argued that Anglo was not a systemic institution. Governor Honohan confirms that a disorderly failure of that bank would have brought down the whole banking system.
The report goes on to say that:
"Closure of all, or a large part, of the banking system would have entailed a catastrophic immediate and sustained economy-wide disruption involving very significant, albeit extremely difficult to quantify, social costs."
Some commentators have suggested that by not nationalising Anglo on the night of 29/30th Sept that this may have cost the State a lot of additional money.
This thesis is rejected by Governor Honohan. He asks :
"Would nationalisation of Anglo on 30th September - compared with its nationalisation five months later - have made a significant difference to the overall cost of the bank bail out of the taxpayer? Here the answer is "probably not."
The reports make clear that mistakes were made by Banks and Regulators. Mistakes were also made by successive Governments, some of which reflected fundamental errors in projections by the Central Bank, the IMF, the OECD and others. As Messrs Regling and Watson say :
"The true burden of responsibilities emerges as quite broad, and it extends to insufficiently critical external surveillance institutions".
As a former Minister for Finance, I want to respond to the criticisms of fiscal policy in the report and especially where this relates to the role of property based tax incentives.
I want to emphasise that prior to the crisis, the Government tool action to reduce the vulnerabilities of the banking sector to the property market, although I fully accept that, in hindsight, it was not sufficient. The independent reports identify four main areas where actions were taken as follows:
A) The decision in the Budget I presented to Dail Eireann in December 2005 to abolish a very wide range of property based tax incentives.
B) The refusal by the Government to abolish or dramatically reduce stamp duty.
C) The decision of the Regulator at the start of 2007 to increase the capital requirements on banks for speculative property lending from 100% to 150%.
D) The decision by the Government to allocate every year 1 per cent of GNP into a National Pensions Reserve Fund.
Without these actions the crisis in the Irish economy would have been far worse and I believe this is consistent with the analysis of causes contained in the two independent reports.
Nevertheless, the Government accepts that there are independent policy lessons to be drawn from our experience, and in particular, we accept those set out in Part IV of the Regling and Watson Report.
I agree with the assessment in the reports that a more restrictive fiscal policy would have helped in slowing the economy. Hindsight is always clear and obviously we would have taken such a course if we had known of the scale of the property collapse which was facing the country. I deeply regret that.
It is, however, important to note that the tax revenues raised during these years were used to engage in unprecedented capital investment to provide key infrastructure such as roads, public transport projects, schools and third-level research facilities. This infrastructure has greatly increased our productive capacity and will be essential in returning the economy to a sustainable growth rate when global conditions improve. These investments benefit the quality of life of our citizens and strengthen the prospects of recovery.
We have made real progress in battling through this crisis but this should not allow the banks to deflect from their responsibility. The Governor points out at the start of his report that, "the major responsibility lies with the directors and senior management of the banks that got into trouble". He also noted that "It may also be the case that auditors and accountants should have been more alert to the weaknesses in the banks lending and financial position". The Regling and Watson report also states that: "bank governance and risk management were weak - in some cases disastrously so". They suggest that "there is a need to probe more widely the scope of governance failings in banks, whether they were of a rather general kind or connected with very serious specific lapses, and whether auditors were sufficiently vigilant in some episodes". These are issues which will be considered by the Government and the Oireachtas.
In conclusion, we have taken decisive action to deal with the mistakes which have been made but we need to ensure that the banks now start to deliver on their commitments to the Irish public and to economic recovery. The country cannot tolerate any slippage by the banks on these commitments. This Government has a plan for economic recovery. That plan is to :
To repair the banking system
To restore order to the public finances;
To regain competitiveness;
and
To support enterprise to create jobs.
We have learned hard lessons and have taken difficult decisions. Our economy is now emerging from recession and Ireland is strongly fighting back. We now need to continue with our programme of work. That is the best way that together we can and will secure Ireland's future.
ENDS.