It was a game of two halves at the banking inquiry yesterday. The first involved engaging testimony from Prof Gregory Connor, professor of finance at the department of economics, finance and accounting at NUI Maynooth, on the collapse of the Irish financial sector in 2008 and the bank guarantee.
The second was a technical session by Éamonn Walsh, professor of accounting at UCD, on international accounting standards and how a bank audit works. You could see eyes glazing over during his testimony.
Connor said there were two key factors in the crash – a ramping up of net foreign borrowings by Irish banks (it represented 88 per cent of our GDP) and an over-concentration of lending to developers.
The Central Bank and financial regulator at the time should have blocked both and had the tools, he argued.
According to Connor, economic and monetary union worked “too well” after the establishment of the euro in 1999, with credit easily flowing to Ireland. Such was the political enthusiasm for the union, many economists “overlooked” its potential structural problems.
On the subject of the government’s bank guarantee, Connor said the information provided by some banks may have been “embellished deliberately to disguise their real capital positions”.
Connor had one other interesting insight. The State injected €64 billion into Irish banks, after which they only had Tier-1 equity of €13 billion. “That is a minus of €51 billion somewhere”, he said.
“In September 2008, the Irish government provided a blanket liability guarantee to an insolvent banking sector. It was a very costly error.”
Political angle
Connor reckons there was also a “political angle” to the guarantee. “It was a wrong decision . . . and I suspect the thing that tipped it into the wrong category was probably the political benefits they saw from the policy.”
Walsh’s core message was the limitations of bank audit rules in Europe around how and when potential loan losses are recognised mean it is often well after the event before losses appear in financial statements.
Regulators can require banks and auditors to make additional disclosures but auditors cannot demand this of a bank.
Walsh told the committee that, in spite of the crash, the audit rules have yet to be changed. Walsh isn’t convinced rotating audit firms or requiring joint auditors would make much of a difference.
