Irish regulatory authorities “seriously misjudged” risks from the country’s property bubble and didn’t have sufficient oversight of bank lending, a government-appointed investigator said.
“Risks went undetected or were at least seriously misjudged by the authorities whose actions and warnings were modest and insufficient,” Peter Nyberg, a former director general for financial markets at Finland’s finance ministry, said in a report published today in Dublin. There was “unhindered expansion of the property bubble,” supported by “government policies and pronouncements.”
Ireland may spend as much as 100 billion euros ($145 billion) to solve Europe’s worst banking crisis, including 29 billion euros injected into Anglo Irish Bank Corp., which was nationalized in 2009 as loan losses soared. The country, forced into an international bailout in November, is struggling to convince investors its debt is sustainable after the collapse of a domestic real-estate bubble in 2007.
“Banks appear to have emphasized loan sales skills above risk, credit skills,” said Nyberg, who was hired in July to lead an investigation into the crisis. The problems causing the crisis were the result “of domestic Irish decisions.”
The report also said that expansion by bank lending during the property boom wasn’t matched by a “corresponding necessary strengthening of governance.”
The crisis pushed Ireland’s budget deficit to about 32 percent of gross domestic product last year, 10 times the European Union limit. Fitch Ratings said yesterday that Ireland’s solvency is “fragile” and forecast that national debt may rise to 116 percent of GDP in 2013 to 2014.
“Ireland as a whole used up money from elsewhere and lived above its means,” Nyberg said at a press conference in Dublin. “Paying money back means it will have to live below its means” for some time.
He also said it is “quite remarkable” that fiscal policy didn’t react to a “very heated property market,” and that bondholders of banks were “among the gullible” during the banking boom. Irish Prime Minister Enda Kenny said yesterday that Anglo Irish senior bondholders may be treated differently than those at Allied Irish Banks Plc (ALBK) and Bank of Ireland Plc, which the government says won’t have losses imposed on them.
Irish Finance Minister Michael Noonan said today the report “represents a thoughtful and multi-faceted analysis into the causes of the banking crisis.” It “bears careful and measured consideration by all concerned,” he said.
Nyberg said bank auditors fulfilled their duties “to the letter but to a quite narrow framework” and that it would have been “useful” if they had held discussions with their clients “on emerging risks.”
On Anglo Irish, Nyberg’s report said credit management structures “were in practice deficient.” It called credit management at Irish Nationwide Building Society “unusual in many respects” with policies applied “very flexibly.”
Nyberg’s document follows two reports last year, one by Irish Central Bank Governor Patrick Honohan, who concluded macro-economic and budgetary policies “contributed significantly to economic overheating.” The second said that the country’s banking crisis “was in crucial ways home-made.”
The central bank instructed the country’s four so-called viable lenders, Bank of Ireland, Allied Irish, Irish Life & Permanent Plc and EBS Building Society, on March 31 to raise 24 billion euros after a third round of stress tests. The government, which has already injected 46.3 billion euros into the banks over the past two years, will provide whatever capital they can’t generate by sharing losses with subordinated bondholders, asset sales or share sales.
Ireland has also paid more than 30 billion euros in the past year for banks’ risky real-estate loans.
“The crisis was created because of very widespread lack of prudence in Irish society,” Nyberg said. Ireland was part “of a more general trend” and there was the “same kind of happy- go-lucky” attitude elsewhere.
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