Belfast Telegraph

Irish crash 'home-made'

Damning report lays blame for crisis at Republic's front door

By Brian Hutton and Sarah Stack

The Republic's banking meltdown was a result of "home-made" decisions rather than the global economic crisis, a damning report by international experts has declared.

Former International Monetary Fund officials investigating the lead-up to the Irish crash said the government's Budgets designed to win over the electorate during the boom years left the country vulnerable.

The findings by former IMF officials Klaus Regling and Max Watson, in one of two reports that will inform an official inquiry into the banking crisis, deliver a major blow to Taoiseach Brian Cowen, who was finance minister ahead of the economic nosedive.

The authors of the report said: "Ireland's banking crisis bears the clear imprint of global influences, yet it was in crucial ways 'home-made'."

They found that careful management and supervision of the public finances and banking sector could have helped steer the country towards a "soft landing" when the recession came.

But rather than keeping a tight control on the boom, the government spent the money - from taxes on property and consumer spending - as it came in with giveaway Budgets.

Along with that, tax cuts left the state coffers in an "increasingly fragile" position, according to the investigation.

"Fiscal policy heightened the vulnerability of the economy," the experts said.

Mr Regling and Mr Watson said it was clear that bank governance and risk management were weak and "in some cases disastrously so".

Addressing his role as former finance minister, Mr Cowen insisted that the government took action ahead of the crisis to reduce the vulnerability of the banks to the property bubble.

"Although I fully accept that, in hindsight it was not sufficient," he added.

Mr Cowen said there were lessons to be learned about government policy decisions from the independent report, as well as another by Irish Central Bank governor Patrick Honohan.

"I agree with the assessment in the reports that more restrictive fiscal policies would have helped in slowing the economy.

"Hindsight is always clear, and obviously we would have taken such a course if we had known the scale of the property collapse which was facing the country.

"I deeply regret that."

But the Taoiseach insisted that public money was well spent on roads, public transport, schools, hospitals and third level research facilities, which will help Ireland return to economic growth.

Mr Regling and Mr Watson also outlined a number of areas where further investigation is recommended, adding that the most important issues are those that seem to have involved very serious specific breaches of corporate governance. "It seems important to identify how such very serious governance failures were initiated; how and why internal checks and balances failed in restraining the management of certain banks; whether there were failures of auditorial vigilance; whether supervisors knew of the events (and if no, who not); and why the response of supervisors was not more forceful," they added.

Other key findings included:

  • Errors of judgment in bank management and governance contributed centrally to Ireland's financial crisis.
  • Alarm bells should have sounded when the property boom and lending trends in the banking sector expanded at such a pace - from as far back as 2003.
  • Credit risk control failed to prevent severe concentrations in lending on property - including notably on commercial property.
  • The culture of supervising banks was insufficiently intrusive, while staff resources were seriously inadequate for the more hands-on approach that was needed.
  • Reporting domestic financial stability by the Central Bank failed and financial vulnerabilities were underestimated.