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TUARASCÁIL ón gComhchoiste Fiosrúcháin i dtaobh na Géarchéime Baincéireachta An tAcht um Thithe an Oireachtais (Fiosrúcháin, Pribhléidí agus Nósanna Imeachta), 2013 REPORT of the Joint Committee of Inquiry into the Banking Crisis Houses of the Oireachtas (Inquiries, Privileges and Procedures) Act, 2013 Volume 1: Report Volume 2: Inquiry Framework Volume 3: Evidence January 2016 Finalised by the Joint Committee of Inquiry into the Banking Crisis on the 26 January 2016 and sent by the Chairman, on behalf of the Joint Committee, to the Clerks of both Houses of the Oireachtas, for circulation to the members of Dáil Éireann and Seanad Éireann in accordance with Standing Orders 107G and 103L of Dáil Éireann and Seanad Éireann respectively, to enable the tabling of motions in both Houses to order the publication of this Report pursuant to section 40(1) (a) of the Houses of the Oireachtas (Inquiries, Privileges and Procedures) Act, 2013. Table of Contents Introduction by the Chairman of the Joint Committee of Inquiry into the Banking Crisis 3 Findings and Recommendations 7 1. The Banks 19 2. The Role of External Auditors 69 3. The Property Sector 85 4. State Institutions 99 5. Government Policy and the Oireachtas 161 6. Preparation for the Crisis: July 2007 – 29 September 2008 197 7. The Guarantee 243 8. Post-Guarantee Developments 279 9. Establishment, Operation and Effectiveness of NAMA 311 10. Ireland and the Troika Programme 329 11. Burden Sharing 357 Appendix List 1. Inquiry Framework Overview 375 2. Members of the Joint Committee 377 3. Orders of Reference of the Joint Committee 379 4. Terms of Reference of the Banking Inquiry 381 5. Public Hearings Witness Lists 385 6. Witness Profiles 389 7. Legislation sponsored by the Minister for Finance within the broad scope of the Inquiry Terms of Reference: 2000-2013 395 8. Powers of the Central Bank and the Financial Regulator: 1992-2013 407 9. Key Roles: 2000-13: State, Regulators, Banks 415 10. European Responses to the Crisis: Budgetary, Fiscal and Banking Changes 421 11. Structural and Cultural Changes in the Central Bank and the Department of Finance 431 12. Glossary of Technical Terms and Acronyms 443 13. List of Abbreviations 453 Volume 1: Report Table of Contents 1 2 Volume 1: Report Introduction by the Chairman of the Joint Committee of Inquiry into the Banking Crisis The banking crisis will be seen as a defining event in Irish history. Its dark cloud still lingers over every home in Ireland and many are still suffering from its impact today. Unemployment, emigration, unsustainable debt, negative equity and home repossession are among the legacies of the crisis. As the Celtic Tiger fell, our confidence and belief in ourselves as a nation was dealt a blow and our international reputation was damaged. One description of this recent crisis was that it was a systemic misjudgement of risk; that those in significant roles in Ireland, whether public or private, in their own way got it wrong; that it was a misjudgement of risk on such a scale that it lead to the greatest financial failure and ultimate crash in the history of the State. That is one part of the story. The failure to identify the potential risk posed to the overall financial stability of the State by the banking system is another key lesson which must be learned. Recognition must also be given to the lack of an overall framework, at a European level, for dealing with the financial crisis. The refusal to allow successive Irish governments to achieve burden sharing with senior bondholders undoubtedly increased the overall cost of the crisis for the Irish people. Each crisis has at its origin a belief, that ‘this time is different’ or ‘this could never happen to us again.’ For the Inquiry to achieve its full value it must not just look at the past to learn what happened but it must also provide lessons that minimise risk into the future. These lessons must resonate with us, in order that we will be aware that it may happen again, should we start to believe that everything is different now. The purpose of this Report is to set out the key issues surrounding the crisis, what has been done to respond to it and what remains to be done. There have already been a number of reports into the crisis, commissioned by Government and carried out in private. In this Inquiry, the Joint Committee went beyond previous reports. Its brief was to consider the political, economic, social, cultural, financial and behavioural factors and policies which may have impacted on or contributed to the crisis. What sets this Inquiry apart is that it is the first time that the actions and decisions that visited the financial crisis on the Irish people have been examined in public, allowing us for the first time to hear the story, in their own words, from those who were involved. The Inquiry heard oral evidence from 131 witnesses over the Context and Nexus Phases. We heard from experts who placed Ireland’s crisis in a world context. We heard from those who were at the helm when Ireland ran aground, as well as from those who were in the engine room. The Inquiry also sought documents from the key players, including politicians, the banks, the Central Bank and the Department of Finance, and received over half a million pages as a result. Volume 1: Report Introduction by the Chairman 3 The Inquiry was asked to examine the reasons why Ireland experienced a systemic banking crisis. We considered evidence on relevant matters relating to: n banking systems and practices n regulatory and supervisory systems and practices n crisis management systems and policy responses as well as the preventative reforms implemented in the wake of the crisis. We concluded that there was in reality two crises, a banking crisis and a fiscal crisis. These were directly caused by four key failures; in banking, regulatory, government and Europe. The crisis in the banks was directly caused by decisions of bank boards, managers and advisors to pursue risky business practices, either to protect their market share or to grow their business and profits. Exposures resulting from poor lending to the property sector not only threatened the viability of individual financial institutions but also the financial system itself. Even though they were aware of the changing behaviour in the banking sector, regulators did not respond fully to the systemic risk. In particular, the Financial Regulator adopted a principles-based ‘light touch’ and non-intrusive approach to regulation. The Central Bank, the leading guardian of the financial stability of the state, underestimated the risks to the Irish financial system. The Government presided over a period of unprecedented growth in tax revenues, but adopted a fiscal policy where significant, long-term expenditure commitments were made on the back of unsustainable cyclical, construction and transaction-based revenue. When the banking crisis hit and the property market crashed, the gulf between sustainable income and expenditure commitments was exposed and the result was a hard landing laying bare a significant structural deficit in the State finances. The almost universal adoption of the ‘soft landing’ theory until 2008, without any substantial test or challenge, must be regarded as a key failing for the Government, Central Bank and the Department of Finance; this theory was also adopted by many international monitoring agencies. The failure to take action to slow house price and credit growth must also be attributed to those who supported and advocated this fatally flawed theory. The “night of the guarantee” has become a thing of myth. The idea of a guarantee was not conceived on a single Monday night in September 2008; Department of Finance documents show that it was considered as part of a range of options as early as January 2008. Decision-makers, however, were forced to decide on a course of action in the absence of accurate information about the underlying health of financial institutions; no independent in-depth ‘deep dive’ investigation of the banks had been commissioned by the authorities before September 2008. Over the following two years, Ireland’s entry into a Troika programme of assistance became inevitable. The ECB nevertheless put the government under undue pressure to enter a programme, but also insisted that there would be no burden sharing with bondholders. 4 Volume 1: Report Introduction by the Chairman These were all actions for which the Irish people ultimately paid and are still paying a heavy price. Even though the major decisions and events of the crisis, including the Guarantee and the Troika Programme, are a few years behind us, they cannot yet be consigned to history. This Report’s findings and recommendations show that lessons must be learned and applied. There is no certain formula to avoid another crisis but constant vigilance and early preventative action is critical. This Report along with the oral testimony and documents submitted are the Joint Committee’s primary legacy. However there is another part to that legacy. As the first Committee to carry out an inquiry under the 2013 Act, we have road-tested the legislation and set out the framework for future parliamentary inquiries. The lessons we have learned from running this inquiry will serve future committees and we have made a number of recommendations in Volume 2 for changes to the legislation and for the running of future inquiries. This is also the first time that documents relevant to all elements of the crisis have been collated and examined in one place at one time. In Volume 3, the Joint Committee has published all of the documentary evidence considered in preparing this Report.

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