The increased reliance of Irish Nationwide Building Society (INBS) on lending to property developers through profit-share agreements during the boom exceeded its normal appetite for risk and left it more exposed to the downturn, an inquiry heard on Wednesday.
While INBS had an internal guideline that commercial loans should not exceed 75 per cent of the value of a project, it routinely offered up to 100 per cent loans where developers agreed to share profits with the society, said Brian O’Moore, SC, of the legal team assisting the inquiry into alleged regulatory breaches at the failed lender.
Such loans typically entitled INBS to between 25 per cent and 50 per cent of profits, he said, citing figures given to the inquiry by John Stanley Purcell, INBS’s former finance director, one of three men subject to the investigation.
KPMG report
Profit-sharing loans differed from normal commercial property credit in that interest and principal payments were put on hold until a project was completed, Mr O’Moore said, drawing from a KPMG report completed in 2004 on INBS’s commercial lending practices.
They typically involved higher loan-to-value amounts and a lack of reliance on personal guarantees from borrowers, according to the report. The borrowing entities under such agreements were usually special purpose vehicles with no recourse to the developer behind the project. All of these factors gave rise to a higher risk of a borrower defaulting, it added.
The inquiry heard last week that INBS had €6 billion of commercial property loans tied to profit-share agreements by 2008. Its total loan book peaked at just under €11 billion that year.
"These were very high-risk loans," Central Bank official Yvonne Madden, who led a team that supervised INBS in the run-up to the 2008 crash, told the inquiry on Wednesday. "They considered very little of the downside risks. They borrower had very little skin in the game and the risk was mainly taken on by the society."
Breaches
The inquiry, which began public hearings in December 2017, is looking into whether INBS's former managing director Michael Fingleton, Mr Purcell and its one-time head of UK lending, Gary McCollum, participated in a series of alleged regulatory breaches between 2004 and 2008.
Mr Fingleton (81) has been excluded from proceedings due to ill health since April, and witnesses are precluded from referring to him during public hearings. A stay has been put on hearings in relation to the former managing director until he is well enough to take part again.
The current phase of the investigation is looking into profit-share agreements, and allegations that they were not subject to a formal credit risk policy.
Former INBS executive Tom McMenamin, who was previously subject to the inquiry but reached a settlement agreement with the Central Bank last December, told the hearing on Wednesday that the society had no credit-risk policy for profit-sharing arrangements.
Mr McMenamin said that such agreements were agreed above his level and that a “senior official” would typically inform him that INBS was planning to enter into a profit-share arrangement with a customer that was coming into the society to seek a development loan. “I was basically the note taker,” he said.
