The Nyberg report into the causes of the Irish banking crisis has said the regulatory authorities were aware that banks were engaging in "risky" behaviour ahead of the recession but did little to stop it.
The 156-report, entitled Misjudging Risk: Causes of the systemic banking crisis in Ireland, which was published this afternoon, said both the Central Bank and the Financial Regulator avoided forcing action on the banks.
The Nyberg commission said the regulatory authorities should have done more to dampen bank lending during the boom and criticised the introduction of 100 per cent mortgages. It also said regulatory authorities should have capped the amount of money lent by banks.
Both the Financial Regulator and the Central Bank either failed to detect or “seriously misjudged” the risks associated with the property boom. Both regulatory bodies were aware of the "macroeconomic risks" and of risky bank behaviour but appear to have judged them “insufficiently alarming” to take major restraining policy measures, his report concluded.
Mr Nyberg’s report found that the then financial regulator Patrick Neary chose to trust bank bosses to make proper and prudent decisions.
“There was almost an element of the Financial Regulator being ‘fobbed off’ by banks that had particularly full confidence in the quality and sophistication of their models and systems.”
The commission also says the Central Bank did little during the period 2005 - 2006 when it was becoming obvious the economy was overheating. It said that rather than take forceful measures to address this, the Central Bank largely confined itself to providing reminders of existing risks."
"The need to avoid spooking the market appears to have been an increasingly common reason to do and say little," the report says. "Trust in a soft landing was consistent and though not very well founded, continued up until and including the crisis management phase of the period."
"Warnings of stability risks appear to have been sidestepped internally or, when made public especially in the Financial Stability Reports, toned down in the policy conclusions," it adds.
The report notes that only a small number of individuals working in regulatory authorities saw the risks taken by banks as significant and actively argued for stronger measures to be introduced. However, it says that in all cases they failed to convince their colleagues or superiors of the need to take action.
The Nyberg report says that bank management and board members interviewed about the role of the financial regulator "could not recall any meaningful engagement" with it on prudential matters.
"According to bank management, prudential issues were tick-the-box checks that formal procedures were in place, not checks on how they worked in practice," the report says.
The financial regulator and the Central Bank are also criticised for failing to consider the implications fo a possible interruption in the flow of foreign funding.
The Commission says that if such a scenario had been considered, the link betwwen such funding, property market developments and bank solvency may have been uncovered before the banking crisis occurred.
External organisations such as the IMF, the EU and OECD are also noted for being at most, "modestly critical and often complimentary" regarding Irish developments and institutions.
